-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DvbKshbZBm5vhA8yiZBgkohsqTbOSh4F4o+8UOl2QwuVn5Jbjq8WypTprvkOhe0D vyaIDniGe0lSCQgFvwKKgQ== 0000893220-99-000409.txt : 19990403 0000893220-99-000409.hdr.sgml : 19990403 ACCESSION NUMBER: 0000893220-99-000409 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA CORP CENTRAL INDEX KEY: 0000096638 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 231462070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14120 FILM NUMBER: 99583760 BUSINESS ADDRESS: STREET 1: P.O. BOX 844 STREET 2: WELSH & MCKEAN ROADS CITY: SPRING HOUSE STATE: PA ZIP: 19477 BUSINESS PHONE: 2156574000 MAIL ADDRESS: STREET 1: BRANDYWINE CORPORATE CENTER STREET 2: 650 NAAMANS ROAD CITY: CLAYMONT STATE: DE ZIP: 19703 FORMER COMPANY: FORMER CONFORMED NAME: TSO FINANCIAL CORP DATE OF NAME CHANGE: 19880306 FORMER COMPANY: FORMER CONFORMED NAME: TEACHERS SERVICE ORGANIZATION INC DATE OF NAME CHANGE: 19850812 10-K 1 FORM 10-K FOR ADVANTA CORP. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-14120 ADVANTA CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 23-1462070 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF ORGANIZATION) IDENTIFICATION NO.) WELSH & MCKEAN ROADS, P. O. BOX 844, SPRING HOUSE, PENNSYLVANIA 19477 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- NONE N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK, $.01 PAR VALUE CLASS B COMMON STOCK, $.01 PAR VALUE 6 3/4% CONVERTIBLE CLASS B PREFERRED STOCK, SERIES 1995 (STOCK APPRECIATION INCOME LINKED SECURITIES (SAILS)(SM)) CLASS A RIGHT CLASS B RIGHT (TITLE OF EACH CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) $89,443,466 as of March 18, 1999 which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by officers and directors of the Company (however, this does not constitute a representation or acknowledgment that any of such individuals is an affiliate of the Registrant). (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 18, 1999 there were 10,467,548 shares of the Registrant's Class A Common Stock, $.01 par value, outstanding and 16,351,480 shares of the Registrant's Class B Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
DOCUMENT FORM 10-K REFERENCE - -------- ------------------- Definitive Proxy Statement relating to the Registrant's 1999 Part III, Items 10-13 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A not later than 120 days following the end of the Registrant's last fiscal year, and referred to herein as the "Proxy Statement".
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS. OVERVIEW Advanta Corp. and its subsidiaries (the "Company," the "Registrant" or "Advanta") provide consumers and small businesses with innovative products and services via direct and indirect, cost effective delivery systems. In 1998, the Company's business consisted primarily of originating and servicing mortgages, business credit cards, small-ticket equipment leases, credit insurance and deposit products. The Company utilizes customer information attributes including credit assessments, usage patterns and other characteristics enhanced by proprietary information to match customer profiles with appropriate products. At year-end 1998 managed assets totaled $12.4 billion and an additional $8.3 billion in assets were serviced for third parties. On February 20, 1998, Advanta Corp. and certain of its subsidiaries contributed substantially all of the assets of its consumer credit card business to a newly formed Rhode Island limited liability company, Fleet Credit Card, LLC (the "LLC") controlled by Fleet Financial Group, Inc. ("Fleet"). Subsequently, Fleet Credit Card Services, LP ("Fleet LP"), a limited partnership became the successor in interest to the LLC (references herein to the "LLC" include Fleet LP as the successor in interest to the LLC). In the transaction (the "Fleet Transaction"), completed under the terms of a Contribution Agreement between Advanta Corp. and Fleet dated as of October 28, 1997, as amended February 20, 1998 (the "Contribution Agreement"), each of Advanta Corp. and certain of its subsidiaries and Fleet and certain of its subsidiaries contributed substantially all of the assets of their respective consumer credit card businesses, subject to liabilities, to the LLC. Advanta Corp. acquired a minority interest in the LLC of 4.99% at the date of the closing of the Fleet Transaction. Following the Fleet Transaction, the Company continues to operate its mortgage, business credit card, leasing services and insurance businesses, including its depository institutions, Advanta National Bank ("ANB") and Advanta Bank Corp. ("ABC"). In addition, the Company retained certain non-material assets of its consumer credit card business which are not required in the operation of such business and certain liabilities related to its consumer credit card business, including, among others, all reserves relating to its credit insurance business and any liability or obligation relating to certain consumer credit card accounts generated in specific programs which comprise a very small portion of the Company's consumer credit card receivables. Subsequent to the consummation of the Fleet Transaction, certain interim services were to be provided by each of the Company and Fleet to the other in accordance with the terms of the Contribution Agreement. The Company was incorporated in Delaware in 1974 as Teachers Service Organization, Inc., the successor to a business originally founded in 1951. In January 1988, the Company's name was changed from TSO Financial Corp. to Advanta Corp. The Company's principal executive office is located at Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477-0844. The Company's telephone number at its principal executive office is (215) 657-4000. References to Advanta or the Company in this Report include its consolidated subsidiaries unless the context otherwise requires. ADVANTA MORTGAGE Advanta Mortgage, a business unit of Advanta, capitalizes on numerous niche opportunities in the home equity industry by offering a broad range of services to consumers, brokers and other originators of home equity loans throughout the country. Advanta Mortgage originates, purchases, securitizes, and services non- conforming credit first and second lien home equity loans, and home equity lines of credit, directly through subsidiaries of Advanta, including ANB, ABC and Advanta Mortgage Corp. USA ("AMCUSA"). Loan production is generated through multiple distribution channels. Home equity loans and home equity lines of credit are originated directly from consumers using targeted direct mail and direct response television and radio techniques, and through a branch office system ("Advanta Finance") consisting of 57 branches throughout the country. First and second home equity loans are also originated through a broker network, 1 3 correspondent relationships and purchases from other financial institutions. In 1998, loans originated and purchased by Advanta Mortgage amounted to $5.3 billion compared to $3.7 billion in 1997. In addition to servicing and managing the loans it originates, Advanta Mortgage contracts with third parties to service their home equity loans on a subservicing basis. Advanta Mortgage's portfolio of third party loans serviced for a fee totaled $8.3 billion at year-end 1998, compared to $9.2 billion at year-end 1997. The Company bears no risk of credit loss on this portfolio. Subserviced loans are not included in the Company's managed portfolio of receivables. During 1998, Advanta Mortgage funded the loans it originated and purchased primarily through securitizations. In a securitization, Advanta Mortgage typically sells receivables to a trust for cash while retaining an interest in the loans securitized. The cash purchase price is generated through an offering of pass-through certificates by the trust. The purchasers of the pass-through certificates are generally entitled to the principal and a portion of the interest collected on the underlying loans while Advanta Mortgage retains the servicing and an interest-only strip. Accordingly, Advanta Mortgage securitizations typically result in the removal of the related mortgage loans from the Company's balance sheet for financial and regulatory accounting purposes. The retained interest-only strip represents the remaining interest collected from the borrowers on the underlying loans after the payment of pass-through interest to the certificate holders and the payment of a servicing fee to AMCUSA in its role as servicer and is partially offset by the estimated fair value of the Company's recourse obligation for anticipated charge-offs. During 1998, $4.9 billion of Advanta Mortgage loans were securitized and sold compared to $3.4 billion in 1997. "Advanta Mortgage loans" include home equity and auto loans and exclude loans which were never owned by the Company, but which the Company services for a fee ("contract servicing" or "subservicing"). The cash flows from the interest-only strips are received over the life of the loans. However, in accordance with generally accepted accounting principles ("GAAP"), Advanta Mortgage recognizes a gain at the time of the sale equal to the excess of the fair value of the assets obtained, principally cash, over the allocated cost of the assets sold and transaction costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. Cash flows from the interest-only strip are first used to accelerate principal payments to investors to build up over-collateralization in the trust to a certain level, after which amounts are remitted to the Company. Other basic sources of income to Advanta Mortgage are net interest income on loans outstanding and loan servicing income, including subservicing of loans which are never owned by the Company. On October 27, 1998, Advanta announced that beginning in the fourth quarter of 1998, it would report income for Advanta Mortgage that is essentially equal to that of a portfolio lender. Since gain on sale accounting is required under generally accepted accounting principles for securitizations structured as sales, the Company has begun to accomplish this change by increasing its use of on-balance sheet funding. Over time, the Company expects to decrease its reliance on securitizations structured as sales and increase its use of deposits at ANB and ABC and secured borrowings, including borrowings from other financial institutions, to fund its mortgage loans. Advanta Mortgage's managed portfolio of receivables includes owned loans and the loans it services in which it retains an interest. At December 31, 1998, Advanta Mortgage's owned loans receivables totaled $838 million while total managed receivables were $8.3 billion. In contrast to the subserviced loans described above, the performance of the managed portfolio, including loans securitized by the Company, can materially impact the Company's ongoing income. See Note 1 to Consolidated Financial Statements. At December 31, 1998, the total serviced portfolio, including the "subserviced" portfolio, was $16.6 billion compared to $14.5 billion at December 31, 1997. Approximately 92% of the managed mortgage loan portfolio is secured by first lien position loans and the balance is secured by second lien position loans. Approximately 65% of the managed portfolio is comprised of fixed rate loans. The remainder represents intermediate rate loans which bear interest at a fixed rate for a period of two to three years and an adjustable rate thereafter and adjustable rate loans. The following table shows the geographic distribution by state for the top five states of total managed and non-performing Advanta Mortgage loans at December 31, 1998. 2 4
PERCENT PERCENT OF NON- ADVANTA PERCENT OF OF NON- PERFORMING MORTGAGE TOTAL PORTFOLIO PERFORMING TO TOTAL ($ IN MILLIONS) LOANS NONPERFORMING BY STATE BY STATE LOANS - ------------------------------------------------------------------------------------------------------- California $1,049.1 $ 39.1 12.7% 10.4% 0.5% Michigan 774.2 28.1 9.3 7.5 0.3 Pennsylvania 442.9 20.5 5.3 5.5 0.2 Florida 430.9 25.3 5.2 6.8 0.3 Ohio 422.2 20.7 5.1 5.5 0.3 Other 5,165.9 241.8 62.4 64.3 2.9 - ------------------------------------------------------------------------------------------------------- TOTAL $8,285.2 $375.5 100.0% 100.0% 4.5% - -------------------------------------------------------------------------------------------------------
Geographic concentration carries a risk of increased delinquency and/or loss if a specific area suffers an economic downturn. Advanta Mortgage monitors economic conditions in those regions through market and trend analyses. A Credit Policy Committee meets throughout the year to update lending policies based on the results of analyses, which may include abandoning lending activities in economically unstable areas of the country. The Company believes that the concentrations of nonperforming loans reflected in the preceding table are not necessarily reflective of general economic conditions in each region, but rather reflect the credit risk inherent in the different grades of loans originated in each area. The interest rate charged and the maximum loan-to-value ratio permitted with respect to each grade of loans are adjusted to compensate for the credit risk inherent in the loan grade. Advanta Mortgage also engages in the indirect financing of automobile purchases by consumers in the near-prime market to borrowers who have experienced credit problems, are attempting to re-establish credit, may not yet have sufficient credit history or do not wish to deal with traditional sources of financing. In 1998, approximately 57% of the Company's total revenues, net of credit losses and excluding the gain on the transfer of the consumer credit card business pursuant to the Fleet Transaction, were derived from Advanta Mortgage. ADVANTA BUSINESS SERVICES Advanta Business Services, a business unit of Advanta ("ABS" or "business loans and leases"), offers flexible lease financing programs on small-ticket equipment and MasterCard(R)* business credit cards to small businesses. MasterCard licenses banks and other financial institutions, such as Advanta Bank Corp., to issue business credit cards using its trademark and to utilize its interchange network. ABS is one of the nation's leading providers of these products to small businesses. The commercial equipment leasing business is generated primarily through third party referrals from manufacturers or distributors of equipment as well as independent brokers. Most contact with these referral sources is made from ABS's headquarters using extensive direct marketing operations. These operations include a staff of telephone sales representatives who are assigned to specific industries, and are backed by the Company's direct mail marketing program. Additional business is also generated from direct contact with customers through these same channels. The primary markets of the leasing business include office machinery, security systems and computers. ABS also has expanded its presence into additional market segments. Additionally, ABS has expanded its National Accounts program which seeks referral business from larger distributors and manufacturers. Managed lease receivables at December 31, 1998 totaled approximately $670 million, an increase of approximately $70 million from year end 1997. The managed portfolio of the business credit card operation grew from approximately $663 million at December 31, 1997 to $815 million as of December 31, 1998. Direct marketing techniques, primarily direct - --------------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc. 3 5 mail to prospective customers, are the source of new accounts. This marketing program is the result of extensive and ongoing testing of various campaigns, with the success of each campaign measured by both the cost of acquisition of new business and the credit performance of the resulting business. The "Advanta Business Card" is marketed by ABS and issued by its affiliate, ABC (see "Depository Institutions"). In 1998, approximately 20% of the Company's total revenues, net of credit losses and excluding the gain on the transfer of the consumer credit card business pursuant to the Fleet Transaction, were derived from Advanta Business Services. ADVANTA INSURANCE COMPANIES Advanta's insurance subsidiaries ("Advanta Insurance") make available, through unaffiliated insurance carriers, specialty credit related insurance products and services to Advanta's existing customer base. The focus of these products is on the customers' ability to repay their debt in the event of certain circumstances. These products include a combined credit life, disability and unemployment program, an accidental death program and equipment insurance. Enrollment in these programs is achieved through Advanta's direct mail or telemarketing distribution channels. In consideration, the lending subsidiary of Advanta that extends the loan to Advanta's customers receives, as an expense reimbursement, a percentage of insurance premiums collected by the unaffiliated insurance carriers. In certain circumstances, Advanta Insurance reinsures all or a portion of certain risks associated with these products or services. Advanta Insurance's reinsurance agreements provide for a proportional quota share of 100% of these risks from the insurance carriers. In consideration for assumption of these risks, Advanta Insurance receives reinsurance premiums equal to 100% of the net premiums collected by the insurance carriers, less a ceding fee as defined by the reinsurance treaties, and all acquisition expenses, premium taxes and loss payments made by the carriers on these risks. Through a strategic alliance formed in 1996 with Progressive Casualty Insurance Company ("Progressive"), Advanta Insurance is providing its direct marketing expertise to market Progressive's automobile insurance policies nationwide. As part of the alliance, Advanta Insurance and Progressive entered into a quota share reinsurance agreement that provides that Advanta's insurance subsidiary assumes 50% of all risks and expenses on automobile policies written by Progressive under the insurance programs being marketed. Generally, automobile policies underwritten by Progressive provide for automobile liability protection up to $500,000 and automobile physical damage protection up to $100,000 as defined under specific policy and customer requirements. Pursuant to a strategic alliance formed in 1998 with UNUM Corporation, Advanta Insurance is developing and test marketing certain critical illness insurance products for the Company's leasing and business card customers. In addition, prior to the closing of the Fleet Transaction on February 20, 1998, ANB (and its predecessors by merger) made available to Advanta's consumer credit card customers in certain states the option to purchase debt cancellation products called Credit Protection Plus(R) and Credit Protector(R). ANB (and its predecessors by merger) had purchased from Advanta Insurance insurance protection against certain "excess losses" incurred from providing these services. Following the Fleet Transaction, Advanta Insurance continues to make its insurance products available to the customers of Advanta Mortgage and ABS. In connection with the Fleet Transaction, all of ANB's credit card customer relationships underlying the insurance risks reinsured by Advanta Insurance were transferred to Fleet or its subsidiaries. Following the closing of the Fleet Transaction on February 20, 1998, Advanta Insurance no longer reinsures these insurance risks and will not recognize any reinsurance revenues as provided under the reinsurance agreements. Advanta Insurance is, however, obligated to reimburse the unaffiliated insurance carriers for losses and loss adjustment expenses paid and maintain loss and loss expense reserves on losses incurred on risks assumed on or prior to February 20, 1998. ANB continues to be responsible for customers who request activation of their debt cancellation agreements for events covered under these agreements occurring on or prior to February 20, 1998. 4 6 ANB is responsible for all reserves for expenses related to these activations. Advanta Insurance terminated its excess of loss insurance policy with ANB as a result of the Fleet Transaction. ADVANTA PARTNERS Advanta Partners LP ("Advanta Partners") is a private equity investment firm formed in 1994. The firm focuses primarily on growth capital financings, restructurings and management buyouts in the financial services and information services industries. The investment objective of Advanta Partners is to earn attractive returns by building the long-term values of the businesses in which it invests. Advanta Partners combines transaction expertise, management skills and a broad contact base with strong industry-specific knowledge. DEPOSITORY INSTITUTIONS Advanta owns two depository institutions, ANB and ABC. ANB is a national banking association organized under the laws of the United States of America. The headquarters and sole branch of ANB are currently located in Wilmington, Delaware. ABC is an industrial loan corporation organized under the laws of the State of Utah. ABC's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Its principal offices are located in Salt Lake City, Utah. In 1982, the Company acquired Colonial National Bank USA, the name of which was changed to Advanta National Bank USA ("AUS") in May 1996. In 1995, the Company chartered Advanta National Bank ("Old ANB") to complement the credit card activities of AUS. Old ANB was a limited purpose national bank known as a "credit card bank" and its lending activities were limited to consumer credit card lending. Effective June 30, 1997, Old ANB was merged into AUS and AUS was renamed Advanta National Bank (previously defined herein as ANB). As a national bank, ANB has the ability to make loans to consumers without many of the restrictions found in various state usury and licensing laws, to negotiate variable rate loans and to generate funds economically in the form of deposits insured by the FDIC. The Company currently conducts a large portion of Advanta Mortgage's business and, prior to February 20, 1998, it conducted a large portion of its consumer credit card business through ANB (and its predecessors by merger). The Company also offers a range of insured deposit products through ANB. In January 1992, ABC opened for business and began accepting deposits. Currently, ABC's principal activities consist of small ticket equipment lease financing, issuance of the "Advanta Business Card" credit card marketed by ABS and originating and servicing home equity loans. At December 31, 1998, ABC had deposits of $206.2 million and total assets of $269.0 million. The Company anticipates that ABC's managed receivables base will continue to grow in 1999. DEPOSIT, SAVINGS AND INVESTMENT PRODUCTS The Company offers a range of insured deposit products through ANB and ABC. Bank deposit products offered through ANB include demand deposits, money market savings accounts, statement savings accounts, retail certificates of deposit and large denomination certificates of deposit (certificates of $99,000 or more). Deposit products offered through ABC include retail certificates of deposit and large denomination certificates of deposit (certificates of $99,000 or more). Consumer deposit business is generated from repeat sales to existing depositors and from new depositors attracted by newspaper and other media advertising and direct mail solicitations. The Company also offers uninsured investment products of Advanta Corp. through both direct and underwritten sales of debt securities. ADVANTA PERSONAL PAYMENT SERVICES Prior to the closing of the Fleet Transaction on February 20, 1998, the Company offered consumer credit cards through Advanta Personal Payment Services, a business unit of Advanta ("APPS" or "consumer credit cards"). The Company, which had been in the consumer credit card business since 1983, issued gold (i.e., 5 7 premium) and standard MasterCard(R)* and VISA(R)* credit cards nationwide. APPS had built a substantial cardholder base which, as of December 31, 1997, totaled 5.9 million accounts and $11.2 billion in managed receivables. APPS generated interest and other income from its credit card business through finance charges assessed on outstanding loans, interchange income, cash advance and other credit card fees, and securitization income. A credit card securitization involves the transfer of the receivables generated by a pool of credit card accounts to a securitization trust. Certificates issued by the trust and sold to investors represent undivided ownership interests in receivables transferred to the trust. Accordingly, the credit card securitizations resulted in removal of the related credit card receivables from the Company's balance sheet for financial and regulatory accounting purposes. For tax purposes, the investor certificates were characterized as a collateralized debt financing of the Company. Credit card income also included fees paid by credit card customers for product enhancements they selected, and revenues paid to ANB (and its predecessors by merger) by third parties for the right to market their products to the APPS consumer credit card customers. Since 1988, APPS, through ANB (and its predecessors by merger), had been active in the consumer credit card securitization market. Through 1997 and up to the closing of the Fleet Transaction, the Company recognized income on a monthly basis from the securitized receivables. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Consolidated Financial Statements. On February 20, 1998, in connection with the Fleet Transaction, the assets and liabilities relating to ANB's consumer credit card securitizations and servicing capabilities and obligations were transferred to the LLC and Fleet and its subsidiaries assumed ANB's obligations as seller and servicer with respect to each of the credit card securitization trusts. In 1998 approximately 20% of the Company's total revenues, net of credit losses and excluding the gain on the transfer of the consumer credit card business pursuant to the Fleet Transaction, were derived from APPS. In 1997, approximately 59% of the Company's total revenues net of credit losses were derived from APPS. GOVERNMENT REGULATION THE COMPANY The Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company indirectly owns ANB, which is a "bank" as defined under the BHCA as amended by the Competitive Equality Banking Act of 1987 ("CEBA"). However, under certain grandfathering provisions of CEBA, the Company is not required to register as a bank holding company under the BHCA because ANB, which takes demand deposits but does not make commercial loans, did not come within the BHCA's definition of the term "bank" prior to the enactment of CEBA. Under CEBA, ANB is subject to certain restrictions, such as limiting its activities to those in which it was engaged prior to March 5, 1987 and, prior to September 30, 1996, limiting its growth rate to not more than 7% per annum. In September 1996, the growth cap of 7% was eliminated under CEBA by amendment of the BHCA, creating substantial new flexibility for the Company with respect to asset liability management at ANB. Continuing CEBA restrictions also prohibit ANB from cross-marketing products or services of an affiliate that are not permissible for bank holding companies under the BHCA. In addition, the Company complies with certain other restrictions set forth in CEBA, such as not acquiring control of more than 5% of the stock or assets of an additional "bank" or "savings association" as defined for these purposes under the BHCA. Because the Company is not a bank holding company, it is not subject to examination by the Federal Reserve Board (other than for purposes of assuring continued compliance with the CEBA restrictions referenced in - --------------- * MasterCard(R) is a federally registered servicemark of MasterCard International, Inc.; VISA(R) is a federally registered servicemark of VISA, U.S.A., Inc. 6 8 this section). Should the Company or ANB cease complying with the restrictions set forth in CEBA, registration as a bank holding company under the BHCA would be required. Registration as a bank holding company is not automatic. The Federal Reserve Board may deny an application if it determines that control of a bank by a particular company will cause undue interference with competition or that a company lacks the financial or managerial resources to serve as a source of strength to its subsidiary bank. While the Company believes that it meets the Federal Reserve Board's managerial standards and that its ownership of ANB has improved the bank's competitiveness, should the Company be required to apply to become a bank holding company the outcome of any such application cannot be certain. Registration as a bank holding company would subject the Company and its subsidiaries to inspection and regulation by the Federal Reserve Board. Although the Company has no plans to register as a bank holding company at this time, the Company believes that registration would not restrict, curtail, or eliminate any of its activities at current levels, except that some portions of the current business operations of the Company's insurance subsidiaries would have to be discontinued, the effects of which would not be material. Under CEBA, ABC is not considered a "bank" for purposes of the BHCA. Accordingly, the Company's ownership of it does not impact the Company's exempt status under the BHCA. ADVANTA NATIONAL BANK ANB is subject to regulation and periodic examination primarily by the Office of the Comptroller of the Currency (the "OCC"). Such regulation relates to the maintenance of reserves for certain types of deposits, the maintenance of certain financial ratios, transactions with affiliates and a broad range of other banking practices. As a national bank, ANB is subject to provisions of federal law which restrict its ability to extend credit to its affiliates or pay dividends to its parent company. See "Dividends and Transfers of Funds." ANB is subject to capital adequacy guidelines issued by the Federal Financial Institutions Examination Council ("FFIEC"). These guidelines make regulatory capital requirements more sensitive to differences in risk profiles among banking organizations and consider off-balance sheet exposures in determining capital adequacy. Under the rules and regulations of the FFIEC, at least half of the total capital is to be comprised of common equity, retained earnings and a limited amount of non-cumulative perpetual preferred stock ("Tier I capital"). The remainder may consist of other preferred stock, certain hybrid debt/equity instruments, a limited amount of term subordinated debt or a limited amount of the reserve for possible credit losses ("Tier II capital"). The FFIEC has also adopted minimum leverage ratios (Tier I capital divided by total average assets) for national banks. Recognizing that the risk-based capital standards address only credit risk (and not interest rate, liquidity, operational or other risks), many national banks are expected to maintain capital in excess of the minimum standards. In addition, pursuant to certain provisions of the FDIC Improvement Act of 1991 ("FDICIA") and regulations promulgated thereunder with respect to prompt corrective action, FDIC-insured institutions such as ANB may only accept brokered deposits without FDIC permission if they meet certain capital standards, and are subject to restrictions with respect to the interest they may pay on deposits unless they are "well-capitalized." To be "well-capitalized," a bank must have a ratio of total capital (combined Tier I and Tier II capital) to risk-weighted assets of not less than 10%, Tier I capital to risk-weighted assets of not less than 6%, and a Tier I leverage ratio of not less than 5%. As of December 31, 1998 and December 31, 1997, ANB's total capital ratio (combined Tier I and Tier II capital) was 12.12% and 16.39%, respectively. In each case, ANB met the capital requirements of FDICIA, and was categorized as well-capitalized under the regulatory framework for prompt corrective action. ADVANTA BANK CORP. Advanta Bank Corp. ("ABC"), a Utah-chartered industrial loan corporation ("ILC"), is a depository institution subject to regulatory oversight and examination by both the FDIC and the Utah Department of Financial Institutions. Under its banking charter, ABC is permitted to make consumer and commercial loans and to accept all FDIC insured deposits with the exception of demand deposits (i.e., checking accounts). 7 9 ABC is subject to the same regulatory and supervisory processes as commercial banks; however, as an industrial loan corporation ABC's activities and powers are not as restricted as those of commercial banks. ABC is subject to provisions of federal law which restrict and control its ability to extend credit and provide or receive services between affiliates. See "Dividends and Transfers of Funds." ABC is subject to the same FFIEC capital adequacy guidelines as ANB. See "Advanta National Bank." In addition, the FDIC has regulatory authority to prohibit ABC from engaging in any unsafe or unsound practice in conducting its business. Although ABC is not subject to specific limitations on its ability to pay dividends, it is possible, depending upon the financial condition of ABC and other factors, that the FDIC could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. In such event, ABC would be limited in its ability to pay dividends to its parent company. As of December 31, 1998 and December 31, 1997, ABC's combined total capital ratio (combined Tier I and Tier II capital) was 14.13% and 18.02%, respectively. In each case, ABC met the capital requirements of FDICIA, and was categorized as well-capitalized under the regulatory framework for prompt corrective action. LENDING AND LEASING ACTIVITIES The Company's activities as a lender are also subject to regulation under various federal and state laws including the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Community Reinvestment Act, the Electronic Funds Transfer Act, the Real Estate Settlement Practices Act and the Fair Credit Reporting Act. Provisions of these statutes and related regulations require, among other things, disclosure to borrowers of finance charges in terms of an annual percentage rate, prohibit certain discriminatory practices in extending credit, require the Company's FDIC-insured depository institutions to serve the banking needs of their local communities and regulate the dissemination and use of information relating to a borrower's creditworthiness. Certain of these statutes and regulations also apply to the Company's leasing activities. In addition, Advanta Mortgage, and certain of its direct and indirect subsidiaries are subject to licensure and regulation in various states as mortgage bankers, mortgage brokers, and originators, sellers and servicers of mortgage loans. DIVIDENDS AND TRANSFERS OF FUNDS There are various legal limitations on the extent to which ANB can supply funds through dividends to the Company and its affiliates. The prior approval of the OCC is required if the total of all dividends declared by ANB in any calendar year exceeds that institution's net profits (as defined) for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus accounts. In addition, ANB is not permitted to pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. The OCC also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in any unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the OCC could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. Although ABC is not subject to specific limitations on its ability to pay dividends, it is possible, depending upon the financial condition of ABC and other factors, that the FDIC could claim that a dividend payment might under some circumstances be an unsafe or unsound practice. In such event, ABC would be limited in its ability to pay dividends to its parent company. ANB and ABC are also subject to restrictions under Sections 23A and 23B of the Federal Reserve Act. These restrictions limit the transfer of funds by the depository institution to the Company and certain other affiliates, as defined in that Act, in the form of loans, extensions of credit, investments or purchases of assets. They also require generally that the depository institution's transactions with its affiliates be on terms no less favorable to the bank than comparable transactions with unrelated third parties. These transfers by any one institution to the Company or any single affiliate are limited in amount to 10% of the depository institution's capital and surplus, and transfers to all affiliates are limited in the aggregate to 20% of the depository institution's capital and surplus. Such loans and extensions of credit are also subject to various collateral 8 10 requirements. In addition, in order for the Company to maintain its grandfathered exemption under CEBA, ANB is not permitted to make any loans to the Company or any of its subsidiaries. REGULATION OF INSURANCE The Company's insurance subsidiaries are subject to the laws and regulations of, and supervision by, the states in which they are domiciled or have obtained authority to transact insurance business. These states have adopted laws and regulations which govern all insurance policy underwriting, rating, licensing, marketing, administration and financial operations of an insurance company, including dividend payments and financial solvency. In addition, the insurance subsidiaries have registered as an Arizona Holding Company which requires an annual registration and the approval of certain transactions between all affiliated entities. The maximum dividend that any of the insurance subsidiaries can distribute to its parent in any twelve month period without prior approval of the State of Arizona Department of Insurance is the lesser of 10% of the subsidiary's statutory surplus or for any given twelve-month period, its net income (if a life insurance company) or, net investment income (if a property and casualty insurance company). In 1998, Advanta Insurance declared and paid dividends in the amount of $38.7 million to Advanta Corp. of which $35.0 million was classified as an extraordinary dividend. Advanta Insurance applied for and received approval from the Arizona Department of Insurance before the payment of the $35.0 million extraordinary dividend to Advanta Corp. The State of Arizona has adopted minimum risk-based capital standards as developed by the National Association of Insurance Commissioners. Risk-based capital is the quantification of an insurer's investment, underwriting, reserve and business risks in relation to its total adjusted capital and surplus. The ratio of an insurer's total adjusted capital and surplus, as defined, is compared to various levels of risk-based capital to determine what intervention, if any, is required by either the insurance company or an insurance department. The Company's insurance subsidiaries meet all risk-based capital standards and require no intervention by any party. The Company's insurance subsidiaries reinsure risks pursuant to underwriting insurance practices and rates, which are regulated in part or fully by state insurance departments. These rates are continually being reviewed and modified by the state insurance departments based on prior historical experience. Any modifications may impact the future profitability of the Company's insurance subsidiaries. GENERAL Because the banking and finance businesses in general are the subject of such extensive regulation at both the state and federal levels, and because numerous legislative and regulatory proposals are advanced each year which, if adopted, could affect the Company's profitability or the manner in which the Company conducts its activities, the Company cannot now predict the extent of the impact of any such new laws or regulations. Various legislative proposals have been or will be introduced in Congress, including, among others, proposals that would permit affiliations between banks and commercial or securities firms and statutory changes to the Real Estate Settlement Procedures Act, the Truth in Lending Act and the Competitive Equality Banking Act of 1987. It is impossible to determine whether any of these proposals will become law and, if so, what impact they will have on the Company. COMPETITION As a marketer of credit products, the Company faces intense competition from numerous providers of financial services. Many of these companies are substantially larger and have more capital and other resources than the Company. Competition among lenders can take many forms including convenience in obtaining a loan, customer service, size of loans, interest rates and other types of finance or service charges, duration of loans, the nature of the risk the lender is willing to assume and the type of security, if any, required by the lender. Although the Company believes it is generally competitive in most of the geographic areas in which it offers its services, there can be no assurance that its ability to market its services successfully or to obtain an 9 11 adequate yield on its loans will not be impacted by the nature of the competition that now exists or may develop. In seeking investment funds from the public, the Company faces competition from banks, savings institutions, money market funds, credit unions and a wide variety of private and public entities that sell debt securities, some of which are publicly traded. Many of the Company's competitors are larger and have more capital and other resources than the Company. Competition relates to such matters as rate of return, collateral, insurance or guarantees applicable to the investment (if any), the amount required to be invested, convenience and the cost to and conditions imposed upon the investor in investing and liquidating the investment (including any commissions which must be paid or interest forfeited on funds withdrawn), customer service, service charges, if any, and the taxability of interest. EMPLOYEES As of December 31, 1998, the Company had 2,568 employees, down from 4,498 employees at the end of 1997. On February 20, 1998, 2,204 employees of the Company became employed by the LLC in connection with the Fleet Transaction. The Company believes that it has good relationships with its employees. None of its employees are represented by a collective bargaining unit. CAUTIONARY STATEMENTS Information or statements provided by the Company from time to time may contain certain "forward-looking information" including information relating to anticipated earnings per share, anticipated returns on equity, anticipated growth in loans outstanding and business credit card accounts, anticipated net interest margins, anticipated operations costs and employment growth, anticipated prepayment rates of outstanding loans, anticipated marketing expense or anticipated delinquencies and charge-offs. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the "Securities Litigation Reform Act") and with the intention of obtaining the benefits of the "safe harbor" provisions of the Securities Litigation Reform Act for any such forward-looking information. The Company cautions readers that any forward-looking information provided by the Company is not a guarantee of future performance and that actual results may differ materially from those in the forward-looking information as a result of various factors, including but not limited to: - Increased credit losses and collection costs associated with a worsening of general economic conditions, declining real estate values, rising delinquency levels, increases in the number of customers seeking protection under the bankruptcy laws, resulting in accounts being charged off as uncollectible, and the effects of fraud by third parties or customers. - Intense and increasing competition from numerous providers of financial services who may employ various competitive strategies. The Company faces competition from national, regional and local originators of non-conforming mortgages, business credit cards and business equipment leases, some of which have greater resources than the Company. - The effects of increased competition and changes in economic conditions including interest rate fluctuations resulting in higher than anticipated prepayments of outstanding loans. - The effects of interest rate fluctuations on the Company's net interest margin and the value of its assets and liabilities; the continued legal or commercial availability of techniques (including interest rate swaps and similar financial instruments, loan repricing, hedging and other techniques) used by the Company to manage the risk of such fluctuations and the continuing operational viability of those techniques and the accounting and regulatory treatment of such instruments. - Difficulties or delays in the securitization of the Company's receivables and the resulting impact on the cost and availability of such funding. Such difficulties and delays may result from changes in the availability of credit enhancement in securitizations, the current economic, legal, regulatory, accounting and tax environments and adverse changes in the performance of the securitized assets. 10 12 - The amount, type and cost of secured financing available to the Company to fund its owned loans, and any changes to that financing including any impact from changes in the current economic, legal, regulatory, accounting and tax environments, adverse changes in the performance of the owned portfolio, any impact from changes in the Company's debt ratings and the activities of parties with which the Company has agreements or understandings, including any activities affecting any investment. - Changes in the Company's aggregate accounts or loan balances and the growth rate thereof, including changes resulting from factors such as shifting product mix, amount of actual marketing investment made by the Company, prepayment of loan balances and general economic conditions and other factors beyond the control of the Company. - The impact of "seasoning" (the average age of a lender's portfolio) on the Company's level of delinquencies and losses which may require a higher allowance for loan losses for on-balance sheet assets and may adversely impact mortgage and business loan and lease securitization income. The addition of account originations or balances and the attrition of such accounts or balances could significantly impact the seasoning of the overall portfolio. - The amount of and rate of growth in, the Company's expenses (including employee and marketing expenses) as the Company's business develops or changes and the Company expands into new market areas; the acquisition of assets (interest-earning, fixed or other); the effects of changes within the Company's organization or in its compensation and benefit plans; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. - The amount, type and cost of financing available to the Company, and any changes to that financing including any impact from changes in the Company's debt ratings; and the activities of parties with which the Company has agreements or understandings, including any activities affecting any investment. - Difficulties or delays in the development, production, testing and marketing of products or services, including, but not limited to, a failure to implement new product or service programs when anticipated, the failure of customers to accept these products or services when planned, losses associated with the testing of new products or services or financial, legal or other difficulties that may arise in the course of such implementation. - The effects of, and changes in, monetary and fiscal policies, laws and regulations (financial, consumer, regulatory or otherwise), other activities of governments, agencies and similar organizations, and social and economic conditions, such as inflation, and changes in taxation of the Company's earnings. - The costs and other effects of legal and administrative cases and proceedings, settlements and investigations, claims and changes in those items, developments or assertions by or against the Company or its subsidiaries; adoptions of new, or changes in existing, accounting policies and practices and the application of such policies and practices. - The impact of the Company's costs to comply with requirements of the Year 2000 Issue described herein as well as the effects of the compliance or lack thereof by the Company's customers, suppliers and partners. ITEM 2. PROPERTIES. At December 31, 1998, the Company owned two buildings totaling 198,000 square feet in the Pennsylvania suburbs of Philadelphia. The Company leased an additional 148,714 square feet in three buildings in the Pennsylvania suburbs of Philadelphia, including the Company's principal executive offices located in Spring House, Pennsylvania. In the adjoining states of New Jersey, Delaware and New York the Company owned one building with 56,196 square feet and leased an additional 62,352 square feet in three buildings. The Company also leased 258,650 square feet of office space in four buildings located in California and Utah. In 11 13 summary, at December 31, 1998 the Company occupied 723,912 square feet of leased and owned space in 13 buildings located in six states. In addition, the Company leased office space which averaged approximately 1,100 square feet per branch for each of its 57 Advanta Finance branches. In connection with the Fleet Transaction, the Company contributed to the LLC three owned buildings totaling 218,278 square feet and leases on four buildings totaling 129,387 square feet in the Pennsylvania suburbs of Philadelphia. In addition, the Company contributed to the LLC one owned building totaling 121,000 square feet in Delaware and a lease on one building totaling 155,655 square feet in Colorado. ITEM 3. LEGAL PROCEEDINGS. On June 30, 1997, purported shareholders of the Company who are represented by a group of law firms filed a putative class action complaint against the Company and several of its current and former officers and directors in the United States District Court for the Eastern District of Pennsylvania. A second, similar complaint was filed in the same court a few days later by a different group of law firms. Both complaints allege that the Company made misrepresentations in certain of its public filings and statements in violation of the Securities Exchange Act of 1934. The complaints seek damages of an unspecified amount. On July 10, 1998, the complaints, which had previously been consolidated, were dismissed by the Court for failing to state a claim. The plaintiffs determined not to attempt to amend their complaints. Rather, they have appealed the District Court's decision to the United States Court of Appeals for the Third Circuit. The appeal has been fully briefed and is awaiting decision. The Company believes that the District Court's ruling will be affirmed and that the allegations in the complaints are without merit. In the opinion of management, the ultimate resolution of these complaints is not expected to have a material adverse effect on the financial position or future operating results of the Company. Between August 25, 1997 and September 10, 1998, the Company and certain of its subsidiaries were named as defendants in lawsuits by certain consumer credit cardholders claiming to represent consumer credit cardholders in a specific program. The class action complaints alleged that consumer credit cardholder accounts in a specific program were improperly repriced to a higher percentage rate of interest. The complaints asserted various violations of federal and state law with regard to such repricings, and each sought damages of an unspecified amount. On June 3, 1998, the Judicial Panel on multidistrict litigation ordered that all of the federal court actions be consolidated into one proceeding for pretrial purposes in the United States District Court for the Eastern District of Pennsylvania. On November 5, 1998, the Company and counsel for plaintiffs in two of the actions pending in the Superior Court of the State of Delaware and in the consolidated litigation in the United States District Court for the Eastern District of Pennsylvania entered into a Settlement Agreement and Stipulation in the Delaware State Court to settle the claims relating to the specific program referred to above. Pursuant to the Settlement Agreement and Stipulation, which was approved by the Court on December 30, 1998, the Company paid $7.25 million to the plaintiffs. With the exception of the claims of persons who opted out of the settlement and certain class members who are debtors in bankruptcy cases, all the claims in the other lawsuits related to the specific program referred to above have been released. On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against Advanta Corp. and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which the Company denies, center around Fleet's assertions that the Company has failed to complete certain post-closing adjustments to the value of the assets and liabilities the Company contributed to the LLC in connection with the Fleet Transaction. Fleet seeks damages of approximately $141 million. The Company has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that the Company contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities the Company has already assumed. The Company also has filed a countersuit against Fleet for approximately $101 million in damages the Company believes have been caused by certain actions of Fleet following closing of the Fleet Transaction. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of the Company. 12 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Each of the executive officers of the Company listed below was elected by the applicable Board of Directors, to serve at the pleasure of the Board in the capacities indicated.
NAME AGE OFFICE DATE ELECTED - -------------------------------------------------------------------------------------------- Dennis Alter 56 Chairman of the Board and Chief 1972 Executive Officer William A. Rosoff 55 Vice Chairman and Director 1996 Olaf Olafsson 36 President and Director 1998 and 1997 Philip M. Browne 39 Senior Vice President and Chief 1998 Financial Officer Charles H. Podowski 52 President and Chief Executive 1998, 1997 and 1995 Officer, Advanta Business Cards and President and Director, Advanta Insurance Companies George O. Deehan 56 Chief Executive Officer, Advanta 1998 Leasing Services
Mr. Alter became Executive Vice President and a Director of the Company's predecessor organization in 1967. He was elected President and Chief Executive Officer in 1972, and Chairman of the Board of Directors in August 1985. Mr. Alter has remained as Chairman of the Board since August 1985. In February 1986, he relinquished the title of President, and in August 1995 he relinquished the title of Chief Executive Officer. In October 1997, Mr. Alter reassumed the title of Chief Executive Officer. Mr. Rosoff joined the Company in January 1996 as a Director and Vice Chairman. Prior to joining the Company, Mr. Rosoff was a long time partner of the law firm of Wolf, Block, Schorr and Solis-Cohen LLP, the Company's outside counsel, where he advised the Company for over 20 years. While at Wolf, Block, Schorr and Solis-Cohen LLP he served as Chairman of its Executive Committee and, immediately before joining the Company, as a member of its Executive Committee and Chairman of its Tax Department. Mr. Rosoff is a Trustee of Atlantic Realty Trust, a publicly held real estate investment trust. Mr. Olafsson joined the Company in September 1996 as Vice Chairman of Advanta Information Services, Inc. ("AIS") and was elected as a Director of AIS in October 1996. In December 1997, Mr. Olafsson became a Director of the Company and in March 1998 he was elected as President of the Company. Prior to joining the Company, he was president and chief executive officer of Sony Interactive Entertainment, Inc., a business unit of Sony Corporation, which he founded in 1991. Mr. Browne joined the Company in June 1998 as Senior Vice President and Chief Financial Officer. Prior to joining the Company, he was an Audit and Business Advisory Partner with Arthur Andersen LLP where, for over sixteen years, he audited public and private companies and provided business advisory and consulting services to financial services companies. Mr. Browne had served as the Arthur Andersen engagement partner for the Company since 1994. Mr. Podowski was elected President of the Advanta Insurance Companies in April 1995, Chief Executive Officer and President of Advanta Business Services in September 1997 and President and Chief Executive Officer of Advanta Business Cards in December 1998. Prior to joining the Company, Mr. Podowski served CIGNA Corporation in various capacities for seventeen years, most recently as Senior Vice President in their International Division, with responsibility for CIGNA's life insurance subsidiaries in Asia, Australia and New Zealand. Prior to joining CIGNA, Mr. Podowski worked for The Chase Manhattan Bank, N.A. Mr. Deehan was elected President and Chief Executive Officer of Advanta Leasing Services in December 1998. Prior to joining the Company, from 1992 to 1998, Mr. Deehan served AT&T Capital in 13 15 various capacities, including serving as President of Information Technology Services for AT&T Capital, President and Chief Operating Officer of NCR Credit Corporation, and Senior Vice President of Marketing and Sales of AT&T Capital, Canada. Prior to joining AT&T Capital, Mr. Deehan held numerous positions with financial services companies. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the National Market System of The Nasdaq Stock Market, Inc. under the symbols ADVNB (Class B non-voting common stock) and ADVNA (Class A voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED - ------------------------------------------------------------------------------------------------ CLASS B: March 1997 $53.63 $25.50 $25.88 $.1320 June 1997 36.25 18.88 35.69 .1320 September 1997 36.50 24.75 27.25 .1320 December 1997 37.63 23.38 25.38 .1320 March 1998 $31.25 $19.69 $21.00 $.0756 June 1998 24.25 17.50 19.88 .0756 September 1998 20.56 8.25 10.50 .0756 December 1998 12.00 5.25 11.06 .0756 CLASS A: March 1997 $54.75 $26.63 $26.88 $.1100 June 1997 37.25 20.00 36.75 .1100 September 1997 37.50 26.19 29.13 .1100 December 1997 38.75 24.25 26.25 .1100 March 1998 $32.75 $21.00 $22.50 $.0630 June 1998 26.25 19.25 21.94 .0630 September 1998 22.75 9.38 12.88 .0630 December 1998 14.88 7.13 13.25 .0630
At December 31, 1998, the Company had approximately 775 and 338 holders of record of Class B and Class A common stock, respectively. Since its initial public offering, the Company has paid regular and uninterrupted dividends. Although the Company currently anticipates that comparable cash dividends will continue to be paid in the future, the payment of future dividends by the Company will be at the discretion of the Board of Directors and will depend on numerous factors including the Company's cash flow, financial condition, capital requirements and such other factors as the Board of Directors deems relevant. 14 16 ITEM 6. SELECTED FINANCIAL DATA. FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Noninterest revenues(1) $ 421,642 $ 827,481 $ 765,750 $ 532,380 $ 369,988 Interest revenues 241,090 435,274 354,927 249,566 172,607 Interest expense 184,275 324,558 269,700 166,032 94,758 Gain on transfer of consumer credit card business 541,288 0 0 0 0 Provision for credit losses 67,193 210,826 96,862 53,326 34,198 Operating expenses 388,644 630,841 523,174 350,685 266,784 Other charges(2) 125,072 0 0 0 0 Income before income taxes 438,836 96,530 264,761 211,903 165,207 Net income 447,880 71,625 175,657 136,677 106,063 - --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Net Income Basic Combined(3) $ 16.65 $ 1.52 $ 4.15 $ 3.38 $ 2.72 Class A 16.62 1.45 4.08 3.34 2.70 Class B 16.68 1.57 4.19 3.42 2.75 Diluted Combined(3) 15.71 1.50 3.89 3.20 2.58 Class A 15.69 1.43 3.86 3.18 2.56 Class B 15.73 1.54 3.91 3.22 2.60 Cash dividends declared Class A .252 .440 .380 .290 .217 Class B .303 .528 .456 .348 .260 Book value -- combined 21.26 19.01 18.06 14.35 11.12 Closing stock price Class A 13.25 26.25 42.75 38.25 26.25 Class B 11.06 25.38 40.88 36.38 25.25 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION -- YEAR END Investments and money market instruments(4) $ 1,654,929 $ 2,092,292 $ 1,653,384 $ 1,089,317 $ 671,661 Gross receivables Owned 1,159,791 3,398,090 2,656,641 2,762,927 1,964,444 Securitized 8,628,291 14,460,114 13,632,552 9,452,428 6,190,793 --------------------------------------------------------- Managed 9,788,082 17,858,204 16,289,193 12,215,355 8,155,237 Total serviced receivables(5) 18,066,410 27,039,669 19,981,285 12,838,272 8,155,237 Total assets Owned 3,795,750 6,686,132 5,583,959 4,524,259 3,113,048 Managed 12,424,041 21,146,246 19,216,511 13,976,687 9,303,841 Deposits 1,749,790 3,017,611 1,860,058 1,906,601 1,159,358 Long-term debt 652,758 1,438,358 1,393,095 587,877 666,033 Stockholders' equity 560,304 926,950 852,036 672,964 441,690 Capital securities(6) 100,000 100,000 100,000 0 0 Stockholders' equity, long-term debt and capital securities 1,313,062 2,465,308 2,345,131 1,260,841 1,107,723 - --------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS Return on average assets 11.95% 1.09% 3.16% 4.06% 4.47% Return on average common equity 82.76 8.47 25.31 26.15 26.97 Return on average total equity(7) 64.81 8.12 22.07 24.75 26.97 Equity/managed assets(7) 5.33 4.86 4.95 4.81 4.75 Equity/owned assets(7) 17.40 15.36 17.05 14.87 14.19 Dividend payout 1.62 33.34 10.75 9.97 9.24
15 17
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- As a percentage of managed receivables: Total loans 30 days or more delinquent(8) 7.7 6.0 5.4 3.3 2.7 Net charge-offs(8) 2.5 5.3 3.2 2.2 2.3 Operating expenses 3.7 3.4 2.9 2.9 3.7 - ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes gains on sales of credit card relationships in 1996 and 1994. (2) Other charges represents the following: severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Fleet Transaction/Tender Offer; expense associated with exited business/product; and asset impairment. (3) Combined represents a weighted average of Class A and Class B (see Note 1 to Consolidated Financial Statements). (4) Includes restricted interest-bearing deposits and subordinated trust assets. (5) Represents total managed plus Advanta Mortgage contract servicing. (6) Represents Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company. (7) In 1998, 1997 and 1996, return on average total equity, equity/managed assets and equity/owned assets include capital securities as equity. The ratios without capital securities for 1998 were 74.75%, 4.52%, and 14.76%, respectively, for 1997 were 8.33%, 4.38% and 13.86%, respectively, and for 1996 were 22.31%, 4.43%, and 15.26%. (8) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to consumer credit card bankruptcies. (see "Management's Discussion and Analysis -- Asset Quality"). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS OVERVIEW For the year ended December 31, 1998, the Company reported net income of $447.9 million or $15.71 per combined common share, assuming dilution, compared to $71.6 million or $1.50 per combined diluted common share for 1997 (see Note 1 to Consolidated Financial Statements). The earnings reported for 1998 reflect the $541.3 million gain on the Fleet Transaction (see Notes 1 and 2 to Consolidated Financial Statements), a $62.3 million pretax charge for severance and outplacement costs associated with workforce reduction, option exercises and other employee costs associated with the Fleet Transaction/Tender Offer (See Note 2 to Consolidated Financial Statements), a $54.1 million pretax charge for expenses associated with exited businesses and products, $41.8 million of equity securities losses and an $8.7 million pretax charge for facility impairments. For the year ended December 31, 1998, net income for Advanta Mortgage and Advanta Business Services was $25.1 million and $10.3 million, respectively. In addition, included in the net income for 1998 is $10.2 million contributed by the consumer credit card unit prior to the Fleet Transaction. Net income for 1997 for Advanta Mortgage, Advanta Business Services and the consumer credit card unit was $33.3 million, $14.7 million and $22.9 million, respectively. During 1998, net income for Advanta Mortgage reflects a $51.0 million pretax charge to adjust the retained interest-only strips ("IO Strips") to fair value reflecting increases in prepayment speeds experienced during the year. The Company announced that beginning in the fourth quarter of 1998, it will report income for its mortgage business that is essentially equal to that of a portfolio lender, rather than the front-ended income typically reported through gain on sale accounting. Since gain on sale accounting is required under generally accepted accounting principles for securitizations structured as sales, the Company has begun to accomplish this change by increasing its use of on-balance sheet funding over time and decreasing its degree of reliance on securitizations structured as sales. 16 18 For the year ended December 31, 1997, the Company reported net income of $71.6 million or $1.50 per combined common share, assuming dilution, compared to $175.7 million or $3.89 per combined diluted common share for the full year of 1996. The earnings reported for 1997 reflect an increase in provision for credit losses of $114.0 million over 1996. This increase resulted from a higher level of charge-offs and delinquencies primarily in the consumer credit card portfolio. In addition, 1996 earnings reflected a $33.8 million gain on the sale of credit card relationships. ADVANTA MORTGAGE Net income for Advanta Mortgage was $25.1 million for the year ended December 31, 1998 as compared to $33.3 million and $25.0 million for 1997 and 1996, respectively. During 1998, net income for Advanta Mortgage reflects a $51.0 million pretax charge recorded to adjust its IO Strip to fair value reflecting increases in prepayment speeds experienced during the year. The decrease in net income was partially a reflection of the Company's decision to report income for Advanta Mortgage that is essentially equal to that of a portfolio lender, rather than the front-ended income typically reported through gain on sale accounting. In the fourth quarter of 1998, Advanta Mortgage recognized gains of $32.9 million from the securitization and sale of approximately $1.1 billion of loans. These gains were substantially equal to the amortization of its IO Strip and Contractual Mortgage Servicing Rights ("CMSR"). GAIN ON SALE OF RECEIVABLES Advanta Mortgage securitized loans with an aggregate principal balance of $4.0 billion for the year ended December 31, 1998. In addition, Advanta Mortgage sold $274 million in whole loans and increased its portfolio of loans held in off-balance sheet Commercial Paper conduit facilities by approximately $564.0 million. Total Advanta Mortgage sales/securitization volume increased 43.3% over the year ended December 31, 1997. The increase in sales/securitization volume resulted primarily from the increase in mortgages originated during the year. Advanta Mortgage originated $5.3 billion in new loans during the year, an increase of 44.9% over 1997. In 1998, Advanta Mortgage recognized gains of $118.7 million, or approximately 2.5% on loans sold and securitized, as compared to $72.0 million, or approximately 2.1% recognized in 1997. The increase in gain as a percentage of loans sold is primarily due to the mix of loans sold during the year. The gain realized varies for each of Advanta Mortgage's products and origination channels. Typically, the gain realized from loans directly originated is higher than the gain from indirect origination channels. Due to the significant drop in interest rates during 1998, the hedge contracts used to manage interest rate risk between origination and sale of the loans generated losses of approximately $44 million. These losses were generally offset by the higher than normal gains that occur from the sale of loans in a decreasing rate environment. In 1997, Advanta Mortgage recognized gains of $72.0 million, resulting from the securitization and sale of $3.4 billion of receivables, as compared to $77.5 million, from the securitization of $1.4 billion receivables in 1996. The 1997 amount is net of a $42.4 million pretax charge to adjust the IO Strip to fair value. The FASB is currently addressing several implementation issues relating to Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". One of these issues relates to an exception SFAS No. 125 currently makes for FDIC-insured institutions. The FDIC, upon reclamation of assets from an FDIC-insured institution, would not be required by law to pay interest between the date of reclamation and the date of payment, which could indicate that they would not meet the isolation from creditors criterion established in SFAS No. 125. In January 1998, the FASB staff announced that it would study the issue and said that, in the interim, FDIC-insured institutions need not conclude that the FDIC receivership powers preclude sale accounting. The FDIC Board recently issued a proposed "Statement of Policy Regarding the Treatment of Securitizations and Loan Participations Following the Appointment of the FDIC as Conservator or Receiver." Under this proposed policy, the FDIC has determined that subject to certain conditions, it will not seek to reclaim, recover, or re- characterize as property of the institution or the receivership estate, the financial assets or undivided interest in 17 19 a loan transferred by the institution to a special purpose entity in connection with a securitization. As receiver of a failed institution, the FDIC has the authority to repudiate contracts and reclaim assets transferred. Comments on the proposed policy are due in March 1999. The timing and ultimate resolution of this matter is still uncertain at this time. PORTFOLIO LENDER ANALYSIS Beginning in the fourth quarter of 1998, the Company began to report income for Advanta Mortgage that is essentially equal to that of a portfolio lender, rather than the front-ended income typically reported through gain on sale accounting. Since gain on sale accounting is required under generally accepted accounting principles for securitizations structured as sales, the Company is accomplishing this by increasing its use of on-balance sheet funding over time and decreasing its degree of reliance on securitizations structured as sales. In this regard, the Company began to analyze and evaluate Advanta Mortgage's financial results from a portfolio lender's perspective as well as under generally accepted accounting principles. The following table presents the Company's reported results adjusted to approximate the results of a portfolio lender for the year ended December 31, 1998.
PRO FORMA PRO FORMA PORTFOLIO AS REPORTED ADJUSTMENTS LENDER - ------------------------------------------------------------------------------------------------- REVENUES: Gain on sale of receivables $ 148,641 $(118,638) $ 30,003 Interest income 241,090 593,601 834,691 Servicing revenues 143,829 (44,747) 99,082 Gain on transfer of consumer credit card business 541,288 -- 541,288 Other revenues, net 129,172 -- 129,172 - ------------------------------------------------------------------------------------------------- Total revenues 1,204,020 430,216 1,634,236 - ------------------------------------------------------------------------------------------------- EXPENSES: Operating expenses 388,644 8,302 396,946 Interest expense 184,275 389,386 573,661 Provision for credit losses 67,193 46,074 113,267 Costs associated with Fleet Transaction/Tender Offer and exited business/products 125,072 -- 125,072 - ------------------------------------------------------------------------------------------------- Total expenses 765,184 443,762 1,208,946 - ------------------------------------------------------------------------------------------------- Income before income taxes $ 438,836 $ (13,546) $ 425,290 - -------------------------------------------------------------------------------------------------
With respect to the portfolio lender results, individual line items are stated as if the securitized mortgages were still owned by the Company and remained on the balance sheet. The pro forma adjustment to gain on sale of receivables represents the reclassification of net gains recognized on the sale of Advanta Mortgage loans for the year ended December 31, 1998. The pro forma adjustment to provision for credit losses represents the amount by which the provision would have increased had the securitized Advanta Mortgage loans remained on the balance sheet and the provision for credit losses on the securitized Advanta Mortgage loans been equal to actual reported charge-offs. The actual provision for credit losses of a portfolio lender could differ from the recorded charge-offs depending upon the age and composition of the portfolio and the timing of charge-offs. The proforma presentation results in a reduction of approximately $13.5 million in pretax income reflecting the estimated net impact the new funding strategy would have had if it had been in place since January 1, 1998. LOAN ORIGINATIONS Advanta Mortgage loan production is generated through multiple distribution channels. Home equity loans and lines of credit are originated directly from consumers using targeted direct mail and direct response television and radio techniques, and through a branch office system("Advanta Finance") of 57 branches throughout the country (collectively "Direct" originations). First and second mortgage loans are also 18 20 originated through a broker network ("Broker") and correspondent relationships, and purchased from other financial institutions ("Conduit" and "Corporate Finance"). Auto finance contracts are purchased from correspondent originators on a flow basis or in bulk purchases. "Advanta Mortgage loans" include home equity and auto loans and exclude loans which were never owned by the Company, but which the Company services for a fee ("contract servicing" or "subservicing"). Originations for Advanta Mortgage were as follows ($ in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Direct $1,655,399 $ 865,001 $ 419,745 Broker 475,427 266,002 286,809 Conduit 1,752,968 1,238,339 650,258 Corporate Finance 1,325,447 1,103,083 39,804 Auto 104,350 194,807 103,736 - ----------------------------------------------------------------------------------------------- $5,313,591 $3,667,232 $1,500,352 - -----------------------------------------------------------------------------------------------
Total 1998 originations for Advanta Mortgage increased 44.9% over 1997. Direct mortgage originations for 1998 increased 91.4% over originations for 1997 and indirect mortgage originations for 1998 increased 30.5% from the prior year. The increase in direct originations reflects the Company's focus on capitalizing on its direct marketing experience and centralized telemarketing and processing capabilities. In conjunction with the change in the Company's funding strategy, management is projecting managed receivables growth to be approximately 20% to 30% in 1999. The decrease in auto originations was attributable to the Company's decision to originate auto volume in a controlled manner, while pricing appropriately for risk. Total 1997 originations for Advanta Mortgage increased 144.4% over the twelve months ended December 31, 1996. This increase resulted from the implementation of the Company's strategy to build market share in the nonconforming home equity market. SERVICING REVENUES Servicing revenues increased to $100.2 million for the year ended December 31, 1998 as compared to $61.8 million for the year ended December 31, 1997. The increase in servicing revenues was the result of the $2.6 billion increase in Advanta Mortgage's averaged securitized receivables. The Company's contract servicing portfolio was $8.3 billion at December 31, 1998 versus $9.2 billion at December 31, 1997. The decrease in contract servicing receivables resulted from the withdrawal of business by certain customers who have begun servicing their own portfolios, and from higher prepayments in contract servicing portfolios. Servicing revenues in 1997 increased 167% over $23.1 million for 1996. This increase resulted from the growth in the contract servicing portfolio from $3.7 billion at December 31, 1996 to $9.2 billion at December 31, 1997. ADVANTA BUSINESS SERVICES Advanta Business Services offers flexible lease financing programs on small-ticket equipment and business credit cards. Net income for Advanta Business Services was $10.3 million for the year ended December 31, 1998 as compared to $14.7 million and $19.8 million for 1997 and 1996, respectively. The decrease in net income resulted from increases in costs to originate, service and manage the Company's leasing products, and from a change in the mix of lease receivables originated by the Company. In 1998, the Company originated a higher proportion of direct finance leases and a lower proportion of operating leases as compared to lease originations for 1997. GAIN ON SALE OF RECEIVABLES Advanta Business Services recognized $30.0 million in securitization income in 1998, as compared to $31.5 million and $30.6 million for the years ended December 31, 1997 and 1996, respectively. These amounts include approximately $11.7 million, $19.2 million and $21.9 million in gains from the securitization of $299.2 19 21 million, $275.6 million and $258.6 of leases in 1998, 1997 and 1996, respectively. The remainder represents gains on the sale of new business card receivables, which are sold to the securitization trust on a continuous basis to replenish the investors' interest in trust receivables, which have been repaid by the cardholders. BUSINESS CARD AND LEASE ORIGINATIONS Advanta Business Services issues non-cancelable leases and business credit cards to small businesses. Leases are issued for "small ticket" equipment such as computers, copiers, fax machines, telephone systems and other office equipment. Lease originations are primarily generated through third party referrals from manufacturers or distributors of equipment as well as through independent brokers and direct mail marketing. The Advanta Business Card is a MasterCard(R) which has generally been issued to small businesses which have been in operation for at least two years. Business card accounts are generated through targeted direct marketing techniques, primarily direct mail to prospective customers. Originations for Advanta Business Services were as follows ($ in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Leases $ 335,030 $ 322,302 $337,264 Business card 1,386,347 1,073,886 518,504 - ---------------------------------------------------------------------------------------------- $1,721,377 $1,396,188 $855,768 - ----------------------------------------------------------------------------------------------
For the year ended December 31, 1998, total originations for business cards and leases increased 23.3% when compared to 1997. For 1997, business card and lease originations increased 63.2% over 1996 levels. The increases in business card receivables resulted from programs designed to increase market penetration and encourage existing customers to increase the use of the business cards. ADVANTA CORP. INTEREST INCOME AND EXPENSE Interest income on receivables and investments decreased $194.2 million for the year ended December 31, 1998 as compared to 1997. During the same period, interest expense decreased $140.3 million. The decreases in interest income and interest expense were mainly attributable to the decrease in interest bearing assets and liabilities owned by the Company subsequent to the Fleet Transaction and Tender Offer. Also impacting interest income on receivables during 1998 were consumer credit card securitization transactions prior to the Fleet Transaction as well as the mix of receivables. Both periods reflect suppressed margins as a result of carrying higher cash, cash equivalent and investment balances as a percent of owned assets for liquidity purposes. Interest income of $435.3 million for 1997 increased $80.3 million as compared to 1996. During the same period, interest expense increased $54.9 million. The increase in interest income was principally the result of an increase in the average yield on interest earning assets to 8.15% for 1997 as compared to 7.83% for 1996, which primarily resulted from the repricing of the consumer credit card portfolio. The increase in the owned net interest margin was negatively impacted by the mix of interest earning assets reflecting the conservative position in cash and cash equivalents on the balance sheet. The increase in interest expense reflects both higher average balances of interest bearing liabilities and an increase in the average rate paid on those liabilities. Advanta Mortgage, business card, lease and consumer credit card receivable securitization activity shifts revenues from interest income to non-interest revenues. This activity reduces the level of higher-yielding receivables on the balance sheet while proportionately increasing the balance sheet levels of new lower-yielding receivables and short-term, high quality investments earning money market rates. The owned average cost of funds decreased to 6.26% in 1998 from 6.31% in 1997. The owned average cost of funds was 6.12% in 1996. The Company has utilized derivatives to manage interest rate risk (see discussion under "Derivatives Activities"). 20 22 The following table provides an analysis of owned interest income and expense data, average balance sheet data, net interest spread (the difference between the yield on interest-earning assets and the average rate paid on interest-bearing liabilities), and net interest margin (the difference between the yield on interest-earning assets and the average rate paid to fund interest-earning assets) for 1996 through 1998. Average owned loan and lease receivables and the related interest revenues include certain loan fees. INTEREST RATE ANALYSIS
YEAR ENDED DECEMBER 31, ($ IN THOUSANDS) ----------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------- -------------------------------- -------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ------------------------------------------------------------------------------------------------------------------------------- ON-BALANCE SHEET - ------------------------ Interest-earning assets: Receivables: Advanta Mortgage loans $ 778,257 $ 77,312 9.93% $ 586,228 $ 58,704 10.01% $ 242,946 $ 25,812 10.62% Leases and business cards 283,857 28,068 9.89 333,080 36,776 11.04 200,052 21,009 10.50 Consumer credit cards(1) 384,697 23,457 6.10 1,728,039 179,732 10.40 2,594,997 220,547 8.50 Other loans 15,724 1,858 11.82 31,810 2,639 8.30 12,270 1,045 8.52 ---------- -------- ------ ----------- -------- ------ ----------- -------- ------ Total receivables(2) 1,462,535 130,695 8.94 2,679,157 277,851 10.37 3,050,265 268,413 8.80 Federal funds sold 203,485 10,933 5.37 345,404 18,659 5.40 166,454 8,853 5.32 Restricted interest- bearing deposits 474,958 30,248 6.37 893,773 55,116 6.17 524,505 34,154 6.51 Trading investments 172,084 10,374 6.03 -- -- 0.00 -- -- 0.00 Tax-free securities(2) 4,992 407 8.15 3,926 307 7.82 8,052 502 6.23 Taxable investments 673,239 37,850 5.62 1,213,897 66,663 5.49 704,641 36,808 5.22 ---------- -------- ------ ----------- -------- ------ ----------- -------- ------ Total interest-earning assets(3) $2,991,293 $220,507 7.37% $ 5,136,157 $418,596 8.15% $ 4,453,917 $348,730 7.83% ========== ======== ====== =========== ======== ====== =========== ======== ====== Interest-bearing liabilities: Deposits Savings $ 202,943 $ 10,916 5.38% $ 402,893 $ 22,850 5.67% $ 302,125 $ 15,728 5.21% Time deposits under $100,000 909,132 54,941 6.04 1,018,163 63,473 6.23 582,887 34,430 5.91 Time deposits of $100,000 or more 329,001 20,078 6.10 1,035,366 63,841 6.17 999,613 60,721 6.07 ---------- -------- ------ ----------- -------- ------ ----------- -------- ------ Total deposits 1,441,076 85,935 5.96 2,456,422 150,164 6.11 1,884,625 110,879 5.88 Debt 1,337,508 87,204 6.52 2,452,166 156,524 6.38 2,092,913 132,641 6.34 Other borrowings 102,372 7,067 6.90 232,820 17,870 7.68 427,650 26,180 6.12 ---------- -------- ------ ----------- -------- ------ ----------- -------- ------ Total interest-bearing liabilities 2,880,956 180,206 6.26 5,141,408 324,558 6.31 4,405,188 269,700 6.12 Net noninterest-bearing liabilities 110,337 (5,251) 48,729 ---------- ----------- ----------- Sources to fund interest-earning assets $2,991,293 $180,206 6.02% $ 5,136,157 $324,558 6.32% $ 4,453,917 $269,700 6.06% ========== ======== ====== =========== ======== ====== =========== ======== ====== Net interest spread 1.11% 1.84% 1.71% ====== ====== ====== Net interest margin(4) 1.35% 1.83% 1.77% ====== ====== ====== OFF-BALANCE SHEET: - ------------------------ Average balance on securitized: Advanta Mortgage loans $5,958,762 $ 3,332,012 $ 1,890,101 Leases & business cards 1,069,534 729,976 403,745 Consumer credit cards(1) 1,461,412 9,628,905 9,574,549 ---------- ----------- ----------- Total average securitized receivables $8,489,708 $13,690,893 $11,868,395 ========== =========== =========== Total average managed receivables $9,952,243 $16,370,050 $14,918,660 - -------------------------------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998. (2) Interest and average rate for tax-free securities, loans, and leases are computed on a tax equivalent basis using a statutory rate of 35%. (3) Includes assets held and available for sale and nonaccrual loans and leases. (4) Managed net interest margin for 1998 was 2.73%, representing a combination of owned interest-earning assets/owned interest-bearing liabilities and securitized Advanta Mortgage assets/liabilities. 21 23 INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET The following table presents the effects of changes in average volume and interest rates on individual financial statement line items on a tax equivalent basis and including certain loan fees. Changes not solely due to volume or rate have been allocated on a pro rata basis between volume and rate. The effects on individual financial statement line items are not necessarily indicative of the overall effect on net interest income.
1998 VS. 1997 1997 VS. 1996 ($ IN THOUSANDS) ---------------------------------- ------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ---------------------------------- ------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL - --------------------------------------------------------------------------------------------------------- Interest income from: Loan and lease receivables: Advanta Mortgage loans $ 19,080 $ (472) $ 18,608 $ 34,455 $(1,563) $ 32,892 Leases and business cards (5,104) (3,604) (8,708) 14,635 1,132 15,767 Consumer credit cards(1) (102,016) (54,259) (156,275) (83,534) 42,719 (40,815) Other loans (1,642) 861 (781) 1,622 (28) 1,594 Federal funds sold (7,632) (94) (7,726) 9,671 135 9,806 Restricted interest-bearing deposits (26,603) 1,735 (24,868) 22,835 (1,873) 20,962 Trading investments 10,374 -- 10,374 -- -- -- Tax-free securities 86 14 100 (301) 106 (195) Taxable investments (30,378) 1,565 (28,813) 27,860 1,995 29,855 --------- -------- --------- -------- ------- -------- Total interest income(2) (143,835) (54,254) (198,089) 27,243 42,623 69,866 --------- -------- --------- -------- ------- -------- Interest expense on: Deposits: Savings (10,814) (1,120) (11,934) 5,631 1,491 7,122 Time deposits under $100,000 (6,666) (1,866) (8,532) 27,080 1,963 29,043 Time deposits of $100,000 or more (43,074) (689) (43,763) 2,136 984 3,120 Debt (72,675) 3,355 (69,320) 23,039 844 23,883 Other borrowings (9,150) (1,653) (10,803) (13,884) 5,574 (8,310) --------- -------- --------- -------- ------- -------- Total interest expense (143,389) (963) (144,352) 45,278 9,580 54,858 --------- -------- --------- -------- ------- -------- Net interest income $ (446) $(53,291) $ (53,737) $(18,035) $33,043 $ 15,008
- -------------------------------------------------------------------------------- (1) Includes consumer credit cards through February 20, 1998. (2) Includes income from assets held and available for sale. GAIN ON TRANSFER OF CONSUMER CREDIT CARD BUSINESS The gain of approximately $541.3 million recognized by the Company in 1998 represents the excess of liabilities transferred to the LLC over the net basis of the assets transferred and the Company's retained minority membership interest in the LLC, which at the closing date of the Fleet Transaction was a 4.99% ownership interest in the LLC valued at $20 million. See Note 2 to the Consolidated Financial Statements. 22 24 OTHER REVENUES
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Equity securities (losses) gains $(41,750) $(11,426) $ 6,522 Business card interchange income 20,741 11,617 4,396 Consumer credit card interchange income 11,881 85,208 102,804 Consumer credit card overlimit fees 16,233 46,447 16,465 Mortgage other revenues 22,945 4,535 1,645 Leasing and business card other revenues 18,769 15,865 24,039 Insurance revenues, net 14,408 37,816 38,175 Other 1,149 18,021 3,276 - --------------------------------------------------------------------------------------------- Total other revenues, net $ 64,376 $208,083 $197,322 - ---------------------------------------------------------------------------------------------
Other revenues include equity securities losses of $42.5 million recognized in 1998 reflecting changes in the fair value of Advanta Partners LP investments. Most of the loss relates to investments not publicly traded for which Advanta Partners LP decided to expedite a disposal plan. In 1998, Mortgage other revenues includes an $11.2 million gain on the sale of an investment in affordable housing partnerships, and $6 million from the favorable settlement of certain prior year claims. Insurance revenues, net, and "Other" other revenues were $14.4 million and $1.1 million, respectively, in 1998, decreasing $23.4 million and $16.9 million, respectively, from 1997. The decline is attributable to the transfer of the consumer credit card portfolio in connection with the Fleet Transaction. Other revenues of $208.1 million in 1997 increased $10.8 million or 5.5% from $197.3 million in 1996, primarily due to increases in consumer credit card overlimit and cash advance fees as a result of the Company's risk based pricing strategy on consumer credit cards. These increases were partially offset by decreases in consumer credit card interchange income as a result of lower transaction volume and equity securities losses reflecting a decrease in the carrying value of Advanta Partners LP investments. 23 25 OPERATING EXPENSES ($ IN THOUSANDS)
- --------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Salaries and employee benefits $185,566 $247,287 $182,666 Other operating expenses: Marketing 53,109 53,039 31,975 Equipment expense 23,381 37,712 22,752 Amortization of credit card deferred origination costs, net 22,271 69,344 88,517 External processing 21,908 43,256 42,814 Occupancy expense 16,001 23,097 14,827 Credit and collection expense 15,715 20,017 13,784 Professional/consulting fees 14,767 38,600 40,247 Telephone expense 12,428 21,262 16,116 Postage 8,949 29,039 25,700 Minority interest in income of consolidated subsidiary 8,880 8,880 222 Credit card fraud losses 3,194 22,287 23,611 Other 2,475 17,021 19,943 - --------------------------------------------------------------------------------------------- Total other operating expenses $203,078 $383,554 $340,508 - --------------------------------------------------------------------------------------------- Total operating expenses $388,644 $630,841 $523,174 - --------------------------------------------------------------------------------------------- At year end: Number of accounts Managed (000's) 565 6,342 5,984 Number of employees 2,568 4,498 3,541 For the year: Operating expenses as a percentage of average managed receivables(1) 3.7% 3.4% 2.9% - ---------------------------------------------------------------------------------------------
(1) Excludes amortization of credit card deferred origination costs, net. Operating expenses for 1998 include the operating expenses associated with the consumer credit card business prior to the Fleet Transaction. Salaries and employee benefits decreased $61.7 million for the year ended December 31, 1998 as compared to 1997. This reduction reflects the decrease in the number of employees as a result of the Fleet Transaction as well as workforce reductions and exit and disposition plans associated with business and product offerings not directly associated with the Company's mortgage and business services units. Total other operating expenses of $203.1 million for 1998 were lower by $180.5 million or 47.1% than the $383.6 million in 1997, principally resulting from decreases in operating expenses following the Fleet Transaction. Other operating expenses for 1998 included an increase in marketing expense for Advanta Mortgage associated with the increase in direct mortgage originations. The ratio of operating expenses as a percentage of average managed receivables increased during 1998 due to: lost economies of scale resulting from the downsizing pursuant to the Fleet Transaction; the Company's plan to expand certain aspects of its infrastructure to better position the Company for the future; and the Company's decision to slow receivables growth in the fourth quarter. Total operating expenses increased by $107.6 million or 21% to $630.8 million in 1997 from $523.2 million in 1996. Part of the increase in total operating expenses resulted from a $65 million or 35% increase in salaries and employee benefits. Other factors affecting the increase in operating expenses in 1997 were a $21.1 million or 65.9% increase in marketing expenses related to new business advertising for Advanta Mortgage and Advanta Business Services as well as account retention initiatives for the consumer credit card portfolio. Included in other operating expenses in 1997, was a $19.2 million decrease in the amortization of credit card deferred origination costs due to a decrease in originations experienced in 1996. Other operating expenses 24 26 including equipment and occupancy expenses reflected increases consistent with the increases in serviced customer accounts. PROVISION FOR CREDIT LOSSES The provision for credit losses of $67.2 million in 1998 decreased $143.6 million or 68% from $210.8 million in 1997. The decrease was due to the contribution of the consumer credit card business in connection with the Fleet Transaction. This decrease was partially offset by an increase in the allowance for Advanta Mortgage loan losses resulting from the Company's decision to increase the level of loans that will remain on the balance sheet in connection with its change in funding strategy. The provision for credit losses of $210.8 million in 1997 increased $114.0 million or 117.7% from $96.9 million in 1996. The increase was due to higher charge-offs on owned receivables, which increased 114.3% from $70.6 million in 1996 to $151.2 million in 1997 and higher levels of delinquencies, which continued to increase throughout 1997. A description of the credit performance of the loan portfolio is set forth under the section entitled "Credit Risk Management." CREDIT RISK MANAGEMENT Management regularly reviews the loan and lease portfolio in order to evaluate the adequacy of the allowance for credit losses. The evaluation includes such factors as the inherent credit quality of the loan and lease portfolio, past experience (including frequency of defaults and loss severity), current economic conditions and changes in the composition of the loan and lease portfolio. The allowance for credit losses is maintained for on-balance sheet receivables. The on-balance sheet allowance is intended to cover all credit losses inherent in the owned loan portfolio. With regard to securitized assets, anticipated losses and related recourse liabilities are reflected in the calculations of Gain on Sale of Receivables, Consumer Credit Card Securitization Income, Retained Interest Only Strip, Amounts due from Consumer Credit Card Securitizations and Other Assets. See Notes 1 and 3 to Consolidated Financial Statements. Recourse liabilities are intended to cover all probable credit losses over the life of the securitized receivables. Management evaluates both its on-balance sheet and recourse requirements and, as appropriate, effects changes to these accounts. The allowance for credit losses on a consolidated basis was $33.4 million, or 2.9% of owned receivables, at December 31, 1998, compared to $137.8 million, or 4.1% of owned receivables, at December 31, 1997. The decrease in coverage is a result of an increase in the relative percent of secured receivables in the total loan portfolio. The decline in allowance for credit losses is predominately attributable to the transfer of the consumer credit card allowance in conjunction with the Fleet Transaction. The allowance for credit losses on a consolidated basis was $89.2 million, or 3.4% of owned receivables, in 1996. The increase in the allowance for credit losses from 1996 to 1997 reflects the higher level of charge-offs and delinquencies in 1997 primarily in the consumer credit card portfolio. ASSET QUALITY Impaired assets include both nonperforming assets (Advanta Mortgage loans and credit cards and leases past due 90 days or more; real estate owned; and bankrupt, decedent and fraudulent credit cards) and accruing loans past due 90 days or more on business cards and leases. The Company charges off expected losses on all nonperforming mortgage loans at the earlier of foreclosure or when they have become 12 months delinquent, regardless of anticipated collectibility. Lease receivables are written off no later than when they have become 120 days delinquent. All other loans are generally charged off upon the earlier of approximately 6 months delinquency or after an investigative period for bankrupt and fraudulent accounts. The carrying value for real estate owned is based on fair value, net of costs of disposition and is reflected in other assets. 25 27 Gross interest income that would have been recorded in 1998 for owned nonperforming assets, had interest been accrued throughout the year in accordance with the assets' original terms, was approximately $3.0 million. The amount of interest on nonperforming assets included in income for 1998 was $1.8 million. In the third quarter of 1996, the Company adopted a new charge-off methodology related to bankrupt consumer credit card accounts, providing for up to a 90-day (rather than up to a 30-day) investigative period following notification of the bankruptcy petition prior to charge-off. This methodology is consistent with others in the credit card industry. The 1998, 1997 and 1996 credit statistics set forth in the following tables reflect this change in methodology. Managed impaired assets at December 31, 1998 decreased to $410.6 million from the $532.0 million at December 31, 1997. The levels of managed loans 30 days or more delinquent also decreased to $753.5 million from the $1.1 billion at December 31, 1997. These decreases resulted from the transfer of the consumer credit card portfolio in the Fleet Transaction, partially offset by seasoning in the Advanta Mortgage and Advanta Business Services portfolios. The consolidated managed charge-off rate for the year ended December 31, 1998 was 2.5%, down from 5.3% for 1997 and 3.2% for 1996. The following represents the annual results by product:
AVERAGE MANAGED RECEIVABLES FOR THE YEAR ENDED YEAR ENDED -------------------- 12/31/98 1998 1997 1996 (IN MILLIONS) - ------------------------------------------------------------------------------------------------- Mortgage only 0.56% 0.53% 0.70% $6,509 Auto 9.30 7.25 0.13 228 Business Card 5.88 3.73 2.65 744 Leases 2.66 2.71 2.15 609 - -------------------------------------------------------------------------------------------------
On the total owned portfolio, the charge-off rate was 3.7% in 1998 compared to 5.6% for 1997. The charge-off rate on the owned consumer credit card portfolio decreased to 7.4% from 7.9% in 1997. The charge-off rate on owned Advanta Mortgage loans increased from 1.0% in 1997 to 1.5% in 1998. The 1998 charge-off rate on leases and business cards was 4.8% compared to 2.5% in 1997 and 1.5% in 1996. Past due loans represent accruing loans that are past due 90 days or more as to collection of principal and interest. Loans are put on nonaccrual status when they become 90 days past due. During 1994, the Company implemented a new policy for the charge-off of mortgage loans. Under this policy, when a nonperforming mortgage loan becomes twelve months delinquent, the Company writes down the loan to its net realizable value, regardless of anticipated collectibility. Consequently, in 1994, all mortgage loans that had been twelve or more months delinquent, as well as any mortgages that became twelve months delinquent during the year were written down (through a recorded charge-off) to their net realizable value. 26 28 The following tables provide a summary of reserves, impaired assets, delinquencies and charge-offs for the past five years:
DECEMBER 31, ---------------------------------------------------------- ($ IN THOUSANDS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- CONSOLIDATED -- MANAGED(1) Nonperforming assets $410,584 $ 328,835 $191,668 $ 82,171 $ 61,587 Accruing loans past due 90 days or more 30 203,117 228,845 84,892 40,837 Impaired assets 410,614 531,952 420,513 167,063 102,424 Total loans 30 days or more delinquent 753,521 1,068,183 886,717 404,072 220,390 As a percentage of gross receivables: Nonperforming assets 4.2% 1.8% 1.2% .7% .8% Accruing loans past due 90 days or more .0 1.1 1.4 .7 .5 Impaired assets 4.2 3.0 2.6 1.4 1.3 Total loans 30 days or more delinquent: New methodology(2) 7.7 6.0 5.4 Prior methodology 5.2(3) 3.3 2.7 Net charge-offs: Amount $247,287 $ 860,098 $479,992 $212,865 $139,676 As a percentage of average gross receivables: New methodology(2) 2.5% 5.3% 3.2% Prior methodology 3.5(3) 2.2% 2.3% - --------------------------------------------------------------------------------------------------------- ADVANTA MORTGAGE LOANS -- MANAGED(4)(5) Nonperforming assets $375,520 $ 200,600 $ 93,101 $ 56,743 $ 44,678 Total loans 30 days or more delinquent 656,789 391,929 194,412 106,223 65,966 As a percentage of gross receivables: Nonperforming assets 4.5% 3.8% 3.4% 3.2% 3.3% Total loans 30 days or more delinquent 7.9 7.4 7.1 5.9 4.9 Net charge-offs -- Mortgage Loans: Amount 36,142 19,953 14,970 13,836 20,709 As a percentage of average gross receivables 0.6% .5% 0.7% 0.9% 1.7% Net charge-offs -- Auto Loans: Amount $ 21,238 $ 10,212 $ 11 N/A N/A As a percentage of average gross receivables 9.3% 7.3% .1% - --------------------------------------------------------------------------------------------------------- LEASES AND BUSINESS CARDS -- MANAGED(6) Nonperforming assets $ 34,826 $ 26,782 $ 9,503 $ 4,912 $ 2,682 Impaired assets 34,833 26,817 9,503 4,912 2,682 Total loans 30 days or more delinquent 96,054 81,675 59,880 35,274 20,972 As a percentage of gross receivables: Nonperforming assets 2.4% 2.1% 1.2% 1.3% 1.0% Impaired assets 2.4 2.1 1.2 1.3 1.0 Total loans 30 days or more delinquent 6.5 6.5 7.3 9.3 7.9 Net charge-offs -- Leases: Amount 16,220 15,074 9,567 5,846 $ 3,747 As a percentage of average gross receivables 2.7% 2.7% 2.2% 1.9% 1.9% Net charge-offs -- Business Cards: Amount $ 43,732 $ 18,928 $ 4,210 N/A N/A As a percentage of average gross receivables 5.9% 3.7% 2.6% - --------------------------------------------------------------------------------------------------------- CONSUMER CREDIT CARDS -- MANAGED Nonperforming assets N/A $ 101,298 $ 89,064 $ 20,516 $ 14,227 Accruing loans past due 90 days or more N/A 203,069 228,822 84,878 40,721 Impaired assets N/A 304,367 317,886 105,394 54,948 Total loans 30 days or more delinquent N/A 594,403 632,083 262,299 133,121 As a percentage of gross receivables: Nonperforming assets N/A .9% .7% .2% .2% Accruing loans past due 90 days or more N/A 1.8 1.8 .8 .6 Impaired assets N/A 2.7 2.5 1.1 .8 Total loans 30 days or more delinquent: New methodology(2) N/A 5.3 5.0 Prior methodology 4.6(3) 2.6 2.0 Net charge-offs: Amount $129,955 $ 795,928 $451,239 $193,160 $115,218 As a percentage of average gross receivables: New methodology(2) 7.0% 7.0% 3.7% Prior methodology 4.1(3) 2.5% 2.5% - ---------------------------------------------------------------------------------------------------------
27 29 (1) Includes consumer credit cards through February 20, 1998. (2) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to consumer credit card bankruptcies (see Asset Quality). (3) Pro forma calculation reflecting charge-off of all credit card bankruptcies within 30 days of notification. (4) In 1994, the Company implemented a new mortgage loan charge-off policy (see Asset Quality). (5) Includes mortgage and home equity loans for all years presented and auto loans beginning in 1996. (6) Includes leases for all years presented and business cards beginning in 1996. 28 30 The following tables provide a summary of allowances, impaired assets, delinquencies and charge-offs for the past five years:
DECEMBER 31, ($ IN THOUSANDS) ----------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- CONSOLIDATED -- OWNED(1) Allowance for credit losses $33,437 $137,773 $ 89,184 $53,494 $41,617 Nonperforming assets 49,568 51,149 29,822 21,856 31,949 Accruing loans past due 90 days or more 30 49,458 40,597 17,399 11,354 Impaired assets 49,598 100,607 70,419 39,255 43,303 Total loans 30 days or more delinquent 73,755 201,891 145,613 76,859 67,904 As a percentage of gross receivables: Allowance for credit losses 2.9% 4.1% 3.4% 1.9% 2.1% Nonperforming assets 4.3 1.5 1.1 .8 1.6 Accruing loans past due 90 days or more .0 1.5 1.5 .6 .6 Impaired assets 4.3 3.0 2.7 1.4 2.2 Total loans 30 days or more delinquent: New methodology(2) 6.4 5.9 5.5 Prior methodology 5.3(3) 2.8 3.5 Net charge-offs: Amount $53,107 $151,222 $ 70,576 $42,549 $35,293 As a percentage of average gross receivables: New methodology(2) 3.7% 5.6% 2.3% Prior methodology 2.5(3) 2.3% 2.6% - -------------------------------------------------------------------------------------------------------- ADVANTA MORTGAGE LOANS -- OWNED(4)(5) Allowance for credit losses $20,092 $ 5,822 $ 8,785 $ 3,360 $ 5,164 Nonperforming assets 38,734 23,234 13,005 18,676 27,379 Total loans 30 days or more delinquent 56,131 42,916 28,546 20,348 23,958 As a percentage of gross receivables: Allowance for credit losses 2.4% 1.2% 2.3% 1.0% 3.6% Nonperforming assets 4.6 4.9 3.5 5.8 19.2 Total loans 30 days or more delinquent 6.7 9.0 7.6 6.3 16.8 Net charge-offs -- Mortgage: Amount $ 3,658 $ 2,310 $ 3,049 $ 5,962 $11,689 As a percentage of average gross receivables .5% .4% 1.3% 3.2% 9.7% Net charge-offs -- Auto: Amount $ 7,648 $ 3,524 $ 10 N/A N/A As a percentage of average gross receivables 16.1% 5.8% .1% - -------------------------------------------------------------------------------------------------------- LEASES AND BUSINESS CARDS -- OWNED(6) Allowance for credit losses $ 9,611 $ 9,798 $ 4,241 $ 1,577 $ 1,076 Nonperforming assets 10,596 6,705 2,927 714 1,068 Impaired assets 10,603 6,740 2,927 714 1,068 Total loans 30 days or more delinquent 16,946 17,799 9,462 4,350 8,459 As a percentage of gross receivables: Allowance for credit losses 3.2% 3.3% 2.0% 1.7% 1.3% Nonperforming assets 3.5 2.2 1.4 0.8 1.2 Impaired assets 3.5 2.3 1.4 0.8 1.2 Total loans 30 days or more delinquent 5.6 6.0 4.4 4.6 9.8 Net charge-offs -- Leases: Amount $ 3,491 $ 2,170 $ 833 $ 1,139 $ 914 As a percentage of average gross receivables 2.5% 1.5% .7% 1.4% 1.5% Net charge-offs -- Business Cards: Amount $10,033 $ 6,198 $ 2,169 N/A N/A As a percentage of average gross receivables 6.9% 3.3% 2.5% - -------------------------------------------------------------------------------------------------------- CONSUMER CREDIT CARDS -- OWNED Allowance for credit losses N/A $118,420 $ 76,084 $36,289 $27,486 Nonperforming assets N/A 21,055 13,890 2,466 3,502 Accruing loans past due 90 days or more N/A 49,410 40,574 17,385 11,238 Impaired assets N/A 70,465 54,464 19,851 14,740 Total loans 30 days or more delinquent N/A 141,000 107,263 50,651 35,156 As a percentage of gross receivables: Allowance for credit losses N/A 4.6% 3.7% 1.6% 1.6% Nonperforming assets N/A .8 .7 .1 .2 Accruing loans past due 90 days or more N/A 1.9 2.0 .7 .6 Impaired assets N/A 2.7 2.7 .8 .9
29 31
DECEMBER 31, ($ IN THOUSANDS) ----------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- Total loans 30 days or more delinquent: New methodology(2) N/A 5.5 5.2 Prior methodology 5.0(3) 2.2 2.0 Net charge-offs: Amount $28,278 $137,017 $ 64,521 $35,425 $22,688 As a percentage of average gross receivables: New methodology(2) 7.4% 7.9% 2.5% Prior methodology 2.7(3) 2.2% 1.9% - --------------------------------------------------------------------------------------------------------
(1) Includes consumer credit cards through February 20, 1998. (2) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off methodology in August 1996 relating to consumer credit card bankruptcies (see Asset Quality). (3) Pro forma calculation reflecting charge-off of all credit card bankruptcies within 30 days of notification. (4) In 1994, the Company implemented a new mortgage loan charge-off policy (see Asset Quality). (5) Includes mortgage and home equity loans for all years presented and auto loans beginning in 1996. (6) Includes leases for all years presented and business cards beginning in 1996. COSTS AND EXPENSES ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER Pursuant to the Tender Offer, the Company purchased 7,882,750 shares of its Class A Common Stock and 12,482,850 of its Class B Common Stock at $40 per share net, and 1,078,930 of its SAILS Depositary Shares at $32.80 per share, net. Contingent on the Fleet Transaction, the Company accelerated vesting of 43.15% of outstanding options that were not vested at the time of the closing of the Fleet Transaction. In connection with the Tender Offer, present and former directors and employees who held exercisable options to purchase Class A and Class B Common Stock tendered such options in lieu of first exercising such options and tendering the underlying stock. The Company used approximately $850 million (before taking into account the exercise price of options) to repurchase the shares in the Tender Offer. In addition, the Company also amended the terms of options granted to employees who became employees of the LLC or whose employment with the Company was otherwise terminated in connection with the Fleet Transaction (the "Affected Employees") to extend the post-employment exercise period. Although there was a charge to earnings associated with this amendment, there was no net impact to capital in connection with this amendment. The Company also canceled options issued to certain members of the Board of Directors and replaced the canceled options with stock appreciation rights. In March 1997, the Compensation Committee of the Board of Directors approved the Advanta Senior Management Change of Control Severance Plan (the "Management Severance Plan") which provides benefits to senior management employees in the event of a change of control (as defined) of the Company if, within one year of the date of a change of control, there has been either an actual or constructive termination of the senior management employee. In February 1998, pursuant to the Company's agreement with Fleet, the Compensation Committee approved an amendment to the Management Severance Plan that allows the Office of the Chairman, in its sole discretion, to extend the level of benefits that would otherwise be allowed in the event of a change of control to Affected Employees. The Board of Directors also authorized the Chairman of the Board, in his sole discretion, to pay bonuses to certain key employees in recognition of their efforts on behalf of the Company in the strategic alternatives process. In accordance with the Company's agreement with Fleet, the LLC agreed to assume the Company's Management Severance Plan and 50% of the bonus payments with respect to those Affected Employees who became employees of the LLC in connection with the Fleet Transaction. In May 1997, the Board of Directors adopted the Office of the Chairman Supplemental Compensation Program which entitled the members of the Office of the Chairman to receive benefits in the event of a change of control (as defined) or other similar transaction. In October 1997, the Company announced that the Chief Executive Officer ("CEO") of the Company and the CEO of the consumer credit card business unit were leaving the Company in connection with the Fleet Transaction. These benefits were all 30 32 contingent upon the consummation of the Fleet Transaction and were recognized upon the closing of the transaction. In connection with the Company's evaluation of strategic alternatives and the Fleet Transaction, the Company adopted special retention programs. Under these programs, certain employees are entitled to receive special payments based on their targeted bonuses and contingent upon their continued employment with the Company or a successor entity. The first payments under the special retention programs were made in March 1998. Further, in March 1998, the Company identified employees that would be terminated in connection with the Fleet Transaction as part of the corporate restructuring to reduce corporate expenses. During the first quarter of 1998, the corporate restructuring was approved by the Board of Directors and affected employees were informed of the termination benefits they would receive. Substantially all of these employees ceased employment with the Company prior to April 30, 1998. The Company recorded a $62.3 million pretax charge to earnings in connection with the foregoing plans, plan amendments and workforce reduction activities. EXPENSE ASSOCIATED WITH EXITED BUSINESS/PRODUCTS In connection with the Company's efforts to reduce expenses associated with business and product offerings which are not directly associated with its mortgage and business services units, management approved exit and disposition plans during the first quarter of 1998 related to certain businesses and products previously offered. The Company recorded charges in the quarter ended March 31, 1998 related to costs to be incurred by the Company in executing these plans, including contractual obligations to customers for which no future revenue will be received, and contractual vendor obligations for services from which no future benefit will be derived. The charges also include termination benefits to employees associated with the businesses and products identified in the exit plan. Related to the exit plan, certain assets were identified for disposal and written down to estimated realizable value. In addition, the Company recognized investment banking, professional and consulting fees that were contingent upon completion of the Fleet Transaction as well as other professional and consulting fees associated with the Company's corporate restructuring. During the quarter ended March 31, 1998, the Company recorded a $54.1 million pretax charge to earnings in connection with these exit plans. ASSET IMPAIRMENT/DISPOSAL In connection with the Company's plans to reduce corporate expenses, certain assets were identified for disposal and the carrying cost thereof (approximately $17 million) was written off or written down to estimated realizable value. Approximately $8.3 million was classified as expense associated with exited business/products. These assets consisted principally of leasehold improvements and various other assets. INCOME TAXES In 1998, the Company recorded a consolidated income tax benefit of $9.0 million, as a result of the federal tax treatment of its contribution of assets associated with the Fleet Transaction. The Company's consolidated income tax expense was $24.9 million in 1997, or an effective tax rate of 26%. Tax expense for 1996 was $89.1 million, or an effective rate of 34%. The decrease in the effective tax rate from 1996 to 1997 resulted from a higher level of insurance-related activities, and tax credits from affordable housing investments in combination with a lower level of pretax income. ASSET/LIABILITY MANAGEMENT The Company's financial condition is managed with a focus on maintaining high credit quality standards, disciplined management of market risks and prudent levels of leverage and liquidity. 31 33 MARKET RISK SENSITIVITY Market risk is the potential for loss or diminished financial performance arising from adverse changes in market forces such as interest rates and market prices. Market risk sensitivity is the degree to which a financial instrument, or a company that owns financial instruments is exposed to market forces. The Company regularly evaluates its market risk profile and attempts to minimize the impact of market risks on net interest income and net income. The Company's exposure to equity price risk is immaterial relative to expected overall financial performance. The Company's financial performance can, however, be affected by fluctuations in interest rates, changes in economic conditions, shifts in customer behavior, and other factors. Changes in economic conditions and shifts in customer behavior are difficult to predict, and the financial performance of the Company generally cannot be insulated from such forces. Financial performance variability as a result of fluctuations in interest rates is commonly called interest rate risk. Interest rate risk generally results from mismatches in the timing of asset and liability repricing (gap risk) and from differences between the repricing indices of assets and liabilities (basis risk). The Company attempts to analyze the impact of interest rate risk by regularly evaluating the perceived risks inherent in its asset and liability structure, including securitized instruments and off-balance sheet instruments. Risk exposure levels vary continuously, as changes occur in the Company's asset/liability mix, market interest rates, prepayment trends, and other factors affecting the timing and magnitude of cash flows. Computer simulations are used to generate expected financial performance in a variety of interest rate environments. Those results are analyzed to determine if actions need to be taken to mitigate the Company's interest rate risk. In managing interest rate risk exposure, the Company periodically securitizes receivables, sells and purchases assets, alters the mix and term structure of its funding base, changes its investment portfolio and uses derivative financial instruments. Derivative instruments, by Company policy, are not used for speculative purposes (see discussion under "Derivative Activities"). The Company has measured its interest rate risk using a rising rate scenario and a declining rate scenario. Net interest income is estimated using a third party software model that uses standard income modeling techniques (see Note 18 to Consolidated Financial Statements). The Company estimates that its net interest income over a twelve month period would approximately increase or decrease by 5.0%, respectively, if interest rates were to rise or fall by 200 basis points. Both increasing and decreasing rate scenarios assume an instantaneous shift in rates and measure the corresponding change in expected net interest income over one year. The above estimates of net interest income sensitivity alone do not provide a comprehensive view of the Company's exposure to interest rate risk. The quantitative risk information is limited by the parameters and assumptions utilized in generating the results. Such analyses are useful only when viewed within the context of the parameters and assumptions used. The above rate scenarios in no way reflect management's expectation regarding the future direction of interest rates, and they depict only two possibilities out of a large set of possible scenarios. In addition to interest rate risk, the Company has other financial instruments, namely capitalized servicing rights and interest-only strips, that are subject to prepayment risk. Prepayments are principal payments received in excess of scheduled principal payments. Prepayments generally result from entire loan payoffs due largely to refinancing a loan or selling a home. Actual or anticipated prepayment rates are expressed in terms of a constant prepayment rate ("CPR"), which represents the annual percentage of beginning loan balances that prepay. To a degree, prepayment rates are related to market interest rates and changes in those interest rates. The relationship between them, however, is not precisely determinable. Accordingly, the Company believes it is more relevant to disclose the fair value sensitivity of these instruments based on changes in prepayment rate assumptions rather than based on changes in interest rates. 32 34 The Company's capitalized servicing rights and interest only strips are derived from both fixed and variable rate loans, the majority of which are fixed. Fixed and variable rate loans are currently prepaying at different rates and are expected to continue this behavior in the future. The Company has estimated the impact on the fair value of these assets assuming a change in prepayments of 2.9% CPR for fixed rate loans and 3.8% CPR for variable rate loans. The Company has estimated that these changes in prepayment assumptions could result in a $32 million change in the combined fair value of these assets. These estimates do not factor in the impact of changes in the interest rate environment associated with the changes in the prepayment rates. Changes in interest rates generally affect the level of loan originations. Prepayment assumptions are not the only assumptions in the fair value calculation for these assets, but they are the most influential. Other key assumptions are not directly impacted by market forces as defined earlier. The above prepayment scenarios do not reflect management's expectation regarding the future direction of prepayments, and they depict only two possibilities out of a large set of possible scenarios. The Company currently has securities in a trading portfolio for liquidity purposes (see Liquidity and Capital Resources). The Company estimates that the value of these securities would not materially change assuming a 10% change in market-based investment yields. DERIVATIVES ACTIVITIES The Company uses derivative financial instruments for the purpose of managing its exposure to interest rate risk. The Company has a number of mechanisms in place that enable it to monitor and control both market and credit risk from these derivatives activities. At the broader level, all derivatives strategies are managed under a hedging policy approved by the Board of Directors that details the use of such derivatives and the individuals authorized to execute derivatives transactions. All derivatives strategies must be approved by the Company's senior management. As part of this approval process, a market risk analysis is completed to determine the potential impact on the Company from severe negative (i.e., stressed) movements in market rates. By policy, derivatives transactions may only be used to manage the Company's exposure to interest rate risk or for cost reduction and may not be used for speculative purposes. As such, the impact of any derivatives transaction is calculated using the Company's asset/liability model to determine its suitability. The Company's Investment Committee (a management committee) has a counterparty credit policy. This policy details the maximum credit exposure, transaction limit and transaction term for counterparties based on an internally assigned Investment Committee credit rating. Internal counterparty credit ratings reflect the credit ratings from nationally recognized rating agencies, as well as other significant credit factors where appropriate. Each counterparty's credit quality is reviewed as new information becomes available, and, in any case, at least quarterly. Activities with counterparties will be suspended if there is reason to believe that their credit quality is below the Company's set standards. For each counterparty, credit exposure amounts are calculated in a stressed environment and represent the maximum aggregate credit exposure from derivatives and other capital market transactions the Company is willing to accept from an individually approved counterparty. To manage counterparty exposure, the Company also uses negotiated agreements that establish threshold exposure amounts for each counterparty above which the Company has the right to call for and receive collateral for the amount of such excess, thereby limiting its exposure to the threshold amount. The threshold levels can be fixed or may change as the credit rating of the counterparty changes, and in all cases, the threshold levels are well below the maximum allowable exposure amounts described above. Counterparty master agreements and any collateral agreements, by policy, must be signed prior to the execution of any derivatives transactions with a counterparty. To date, substantially all master agreements with counterparties have included bilateral collateral agreements. As such, the potential exposure from a particular counterparty is limited to the maximum threshold level for that counterparty. The Company has a treasury middle office that is independent of the trading function, which measures, monitors, and reports on credit, market, and liquidity risk exposures from capital markets, hedging and 33 35 derivative product activities. It is the responsibility of this department to ensure compliance with respect to the hedging policy, including the counterparty transaction limits, transaction terms and trader authorizations. In addition, this department marks each derivatives position to market on a weekly basis using both internal and external models. These models have been benchmarked against a sample of derivatives dealers' valuation models for accuracy. Position and counterparty exposure reports are generated and used to manage collateral requirements of the counterparty and the Company. All of these procedures and processes are designed to provide reasonable assurance that prior to and after the execution of any derivatives strategy, market, credit and liquidity risks are fully analyzed and incorporated into the Company's asset/liability and risk measurement models and the proper accounting treatment for the transaction is identified and executed. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. The Company will adopt SFAS No. 133 effective January 1, 2000. The Company anticipates that the adoption of SFAS No. 133 will not have a material effect on the results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's goal is to maintain an adequate level of liquidity, for both long-term and short-term needs, through active management of both assets and liabilities. During 1998, the Company, through its subsidiaries, securitized or sold approximately $4.9 billion of Advanta Mortgage loans and $.4 billion of business card and lease receivables. Cash generated from these transactions was temporarily invested in short-term, high quality investments at money market rates awaiting redeployment to pay down borrowings and to fund future mortgage loan and business card and lease receivable growth. Cash and equivalents exceed amounts normally held to protect against the uncertain liquidity environment during 1998. At December 31, 1998, the Company had approximately $.3 billion of federal funds sold, $.5 billion of loan and lease receivables held for sale, $.5 billion of trading investments, and $.5 billion of investments available for sale which could be sold to generate additional liquidity. The Company's funding strategy for 1999 relies heavily on cash, cash equivalents and investments as well as deposit gathering activity at both Advanta National Bank ("ANB", the successor by merger of Advanta National Bank USA ("AUS") formerly Colonial National Bank USA and Advanta National Bank, a credit card bank chartered in 1995 ("Old ANB")) and Advanta Bank Corp. ("ABC", formerly Advanta Financial Corp., and together with ANB, the "Banks"). As a result of the Fleet Transaction, approximately $1.3 billion in cash, cash equivalents and investments which had previously been held by the Company in connection with its consumer credit card business was no longer required in such business and became available for general corporate purposes. The Company used approximately $850 million of such amount (before taking into account the exercise price of options) to purchase 7,882,750 shares of its Class A Common Stock, 12,482,850 of its Class B Common Stock, and 1,078,930 of its SAILS Depositary Shares through the Tender Offer which was completed on February 20, 1998. After paying down approximately $263 million in long-term debt, the Company closed 1998 with unrestricted cash, cash equivalents and marketable securities of approximately $458 million at the parent company level and $761 million at the Company's two banks. Equity, including capital securities, was approximately $660 million at December 31, 1998. Beginning in the fourth quarter of 1998, the Company commenced efforts to increase the use of on-balance sheet funding over time and decrease its degree of reliance on securitizations structured as sales. This will include greater use of deposit funding through the 34 36 Company's two banks and the use of other funding sources, which are accounted for as debt. During 1999, the Company intends to utilize a portion of its high liquidity to fund on-balance sheet portfolio growth. As of December 31, 1998, ANB's total deposits were $1.5 billion after a significant portion of its deposits were contributed to the LLC in the first quarter of this year in connection with the Fleet Transaction. At December 31, 1998, ABC, a Utah state-chartered, FDIC-insured industrial loan corporation, had total deposits of $206.2 million. Total deposits increased approximately $777.0 million and $37.8 million for ANB and ABC, respectively, from March 31, 1998. This deposit growth reflects the Company's strategy to increase funding at the Banks as the reliance on securitization diminishes. During May of 1998, ANB offered to repurchase its outstanding Bank Notes that were not assumed by the LLC in connection with the Fleet Transaction. ANB repurchased $93.4 million of Bank Notes; $7.4 million of Bank Notes that were not tendered remained outstanding. At December 31, 1998, ANB held $501.6 million of AAA rated classes of Advanta Mortgage Loan Trust 1998-2 and Advanta Mortgage Loan Trust 1998-4 securities as trading investments. These investments are consistent with ANB's liquidity management objectives and its high levels of liquidity. By holding these securities, ANB receives an attractive yield and maintains flexibility for future funding requirements. During the third quarter of 1998, the Board of Directors authorized the repurchase of up to 2.5 million shares of the Company's Class A and Class B common stock and the formation of an Employee Stock Ownership Plan ("ESOP"). At December 31, 1998, the Company had repurchased approximately 1.1 million shares of Class A common stock and approximately 446,000 shares of Class B common stock. Of this total, 1 million Class A shares were purchased for the ESOP. Funding diversification has been an essential component of the Company's liquidity and capital management. The Company and the Banks have utilized both retail and institutional on-balance sheet funding sources issuing a variety of debt and deposit products. The Company and the Banks also have utilized a secured revolving credit facility and off-balance sheet securitization funding (described below). On August 21, 1998, AMCUSA and its subsidiaries and ANB increased their secured revolving credit facility to $750 million from $500 million, and the committed portion was increased from $250 million to $375 million. In December 1998, these same entities entered into a new $250 million commercial paper conduit facility. In the first quarter of 1999, the previously engaged $500 million commercial paper facility secured in December 1997, was reduced to $304 million, and will expire in the second quarter of 1999. During 1998, Advanta Bank Corp. entered into a new commercial paper facility secured by business credit card receivables for $200 million. Also, deposit sources proved readily expandable in 1998 as demonstrated in the growth noted above. In addition, notwithstanding the Company's current liquidity, efforts continue to develop new sources of funding, both through previously untapped customer segments and through development of new financing structures. The following tables detail the composition of the deposit base and the composition of debt and other borrowings at year end for each of the past five years. COMPOSITION OF DEPOSIT BASE
($ IN MILLIONS) AS OF DECEMBER 31, ---------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- -------------- -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------- Demand deposits $ 4.3 0% $ 41.6 1% $ 28.3 1% $ 91.7 5% $ 64.5 5% Money market savings 181.5 10 506.8 17 329.7 18 277.5 14 301.7 26 Time deposits of $100,000 or less 1,445.8 83 2,163.0 72 978.6 53 965.5 51 691.0 60 Time deposits of more than $100,000 118.2 7 306.2 10 523.5 28 571.9 30 102.2 9 - ---------------------------------------------------------------------------------------------------------------- Total deposits $1,749.8 100% $3,017.6 100% $1,860.1 100% $1,906.6 100% $1,159.4 100% - ----------------------------------------------------------------------------------------------------------------
35 37 COMPOSITION OF DEBT AND OTHER BORROWINGS
($ IN MILLIONS) AS OF DECEMBER 31, ---------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- -------------- -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------- Subordinated notes and certificates $ 1.5 0% $ 55.5 2% $ 71.1 3% $ 76.2 4% $ 282.1 20% Senior notes and certificates 145.6 14 151.0 7 208.3 8 200.6 11 0 0 Short-term bank notes 0 0 242.0 11 309.3 13 25.0 1 85.0 6 Medium-term bank notes 7.3 1 669.5 29 835.6 34 322.7 18 0 0 5 1/8% notes, due 1996 0 0 0 0 0 0 150.0 8 149.9 11 Medium-term notes 866.5 81 1,099.5 48 880.8 36 504.7 28 359.7 25 Value notes 9.3 1 30.7 1 0 0 0 0 0 0 Term fed funds 0 0 0 0 10.0 0 443.0 25 309.0 22 Securities sold under agreements to repurchase 0 0 0 0 0 0 0 0 86.5 6 Lines of credit and term funding arrangements 18.5 2 3.9 0 40.0 0 0 0 50.0 4 Other borrowings 17.8 1 48.9 2 107.0 6 81.8 5 80.9 6 - ---------------------------------------------------------------------------------------------------------------- Total debt and other borrowings $1,066.5 100% $2,301.0 100% $2,462.1 100% $1,804.0 100% $1,403.1 100% - ----------------------------------------------------------------------------------------------------------------
At December 31, 1998, ANB's and ABC's combined total capital ratios (combined Tier I and Tier II capital) were 12.12% and 14.13%, respectively. At December 31, 1997, ANB's and ABC's combined total capital ratios (combined Tier I and Tier II capital) were 16.39% and 18.02%, respectively. In each case, ANB and ABC met the requirements of their respective regulatory agencies, and each were categorized as well-capitalized under the regulatory framework for prompt corrective action. In addition, the Company's insurance subsidiaries are subject to certain capital, deposit and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. At December 31, 1998 and 1997, the insurance subsidiaries were in compliance with such rules and regulations. CAPITAL EXPENDITURES The Company spent $45.4 million for capital expenditures in 1998, primarily for the construction of buildings in Pennsylvania for the mortgage division, leasehold improvements, additional space in existing buildings, office and voice communication equipment and furniture and fixtures. This compared to $79.2 million for capital expenditures in 1997 and $84.2 million in 1996. In 1999, the Company anticipates capital expenditures to be lower than the level incurred in 1998. YEAR 2000 READINESS DISCLOSURE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results on or after the year 2000. The "Year 2000 Issue" affects computer and information technology ("IT") systems, as well as non-IT systems which include embedded technology such as micro-processors and micro-controllers (or micro-chips) that have date sensitive programs that may not properly recognize the Year 2000 or beyond. If the systems and products used by the Company are not properly equipped to identify and recognize the Year 2000, the Company's IT systems and non-IT systems could fail or create erroneous results. This could cause the Company to experience a temporary inability to process transactions, originate loans or leases, service the loans of third parties and engage in other normal business activities. Under these circumstances, the Year 2000 Issue could have a material adverse effect on the Company's products, services, operations and financial results. 36 38 In connection with the Year 2000 Issue, the Company has organized a separate Year 2000 Project Office (the "Project Office") managed by a team led by a senior information technology manager to assess whether the computer systems and applications used by the Company are Year 2000 compliant and to implement appropriate responses in the event any of such systems and applications are not compliant. The Project Office has developed standards for its work based on the work of leading authorities in the field. The Project Office reports to the Company's Year 2000 Steering Committee which consists of the Company's Chief Information Officer, head of each of the Company's business units, the General Counsel and other key members of corporate senior management. In addition, the Company's Internal Audit Department has assigned a senior information technology auditor to monitor all Year 2000 Issues and developments for the Audit Committee of the Company's Board of Directors. The Company has also engaged independent consultants to assist in the verification and validation processes to assure the reliability of the Company's risk and cost estimates. The Company is proceeding to implement a Year 2000 compliance program in accordance with applicable guidelines and regulations of the Federal Financial Institutions Examination Council ("FFIEC") as adopted by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). The Company's compliance program consists of the following phases: AWARENESS Define the scope of the Year 2000 problem. Establish a Year 2000 project team. Develop an overall strategy to address the Year 2000 problem. Identify all IT and non-IT systems that may be affected by the Year 2000 Issue. ASSESSMENT Assess the size and complexity of the Year 2000 Issue. Evaluate whether IT and non-IT systems are Year 2000 compliant. Identify and prioritize "mission-critical" systems. RENOVATION Remediate or replace systems that are not Year 2000 compliant. VALIDATION Test of systems to validate that they are Year 2000 compliant. CONTINGENCY PLANNING Develop options in the event that any or all of the IT and non-IT systems fail or cannot be made Year 2000 compliant. IMPLEMENTATION Certify that systems are Year 2000 compliant. Implement contingency plans for any non-compliant system. The Company has completed the Awareness and Assessment phases, and has substantially completed the Renovation, Validation and Contingency Planning phases of its Year 2000 compliance program with respect to both internal mission critical IT and non-IT systems. Each of the Company's business units has completed the evaluation of its systems, applications and vendor lists, including identifying and prioritizing "mission-critical" systems, and is implementing project plans to modify existing computer programs, convert to new programs or replace systems to the extent necessary to address the Year 2000 Issue. On an ongoing basis, the Company is also providing customer awareness training for customer-centered employees that will equip them to respond to customer inquiries about the Company's Year 2000 readiness. The Company has substantially completed testing of its internal mission-critical systems and the development of contingency plans as of the end of 1998. The Company is in the process of completing the Renovation, Validation and Implementation of systems which are provided by third parties, and expects this to be substantially complete by March 31,1999. In addition, all non-mission critical applications are being addressed, and the Company expects the Renovation and Implementation phases to be substantially complete by June 30, 1999. The Company has identified its significant business relationships, including without limitation vendors, customers and asset management and funding counterparties, to assess the potential impact on the Company's operations if those third parties and/or their products or systems fail to become Year 2000 compliant in a timely manner. The Company has mailed questionnaires to third parties with which it maintains a significant business relationship to help identify which of those third parties and/or their products or systems will not be Year 2000 compliant. In addition, the Company regularly reviews Internet websites to monitor and assess the level of Year 2000 compliance of vendors, suppliers and other third parties. Evaluation of questionnaire 37 39 responses, risk assessments, action steps and contingency plans related to significant third party relationships are expected to be complete within the time frames established by the FFIEC guidelines as adopted by the OCC and FDIC. Non-compliant products are being evaluated for remediation, replacement or retirement. To date, the Company is not aware of any material third party business relationship, product or system with a Year 2000 problem that management believes would have a material adverse effect on the Company. However, there can be no assurance that the systems and products used by outside service providers or other third parties upon which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company's Year 2000 compliance program also includes the development of contingency plans for each of the Company's business units in the event that remediation or replacement plans are not successfully implemented. The contingency plans are designed to protect its business and operations from business interruptions related to the Year 2000 Issue and, by way of example, may include back-up procedures or the identification of alternative suppliers, where practical. Each of the Company's business units has developed, and is validating, its contingency plans. Many of the functions performed by the products and systems used by the Company, which operate automatically, can be performed manually. Consequently, in the event these products or systems experience isolated failures as a result of the Year 2000 problem, the disruption caused by such isolated failures should not have a material adverse effect on the Company. There can be no assurances, however, that any of the Company's contingency plans will be sufficient to anticipate or address all of the problems or issues that may arise. The Company has established a two-year budget for 1998 and 1999 of approximately $20.9 million, including capital expenditures, to address the Year 2000 Issue. This budget includes approximately $5.3 million to cover the costs associated with diverted personnel. Of the total budget, the Company has allocated approximately $9.5 million for contingencies. Based on current information, the Company believes that the budget will be sufficient to cover its expenditures associated with the Year 2000 Issue. As of December 31, 1998, exclusive of costs associated with diverted personnel, the Company has spent approximately $3.1 million in operating expenses and approximately $900,000 in capital expenditures. Funding for the project is being provided out of operating revenues. The Company notes that GAAP generally requires that the costs of becoming Year 2000 compliant, including without limitation modifying computer software or converting to new programs, be charged to expense as they are incurred. Therefore, except for the cost of replacement systems or other items that have a future use, the Company will expense the cost of the Year 2000 project as incurred. The Company has deferred development on selected business systems due to Year 2000 priorities. These deferrals are not expected to have a material effect on the financial condition and results of operations of the Company. The Company believes that the Year 2000 Issue will not pose significant operational problems for it and will not have a material adverse effect on its future financial condition, liquidity or results of operations during 1999 and in future periods. The projected costs and expenditures and project completion dates are based on management's best estimates, are subject to the performance of third parties over which the Company has no control and may be updated from time to time as additional information becomes available. 38 40 CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS) DECEMBER 31, ------------------------ 1998 1997 - -------------------------------------------------------------------------------------- ASSETS Cash $ 90,597 $ 57,953 Federal funds sold 267,400 156,500 Restricted interest-bearing deposits 80,028 543,239 Trading investments 501,563 -- Investments available for sale 521,410 1,222,272 Subordinated trust assets 284,528 170,281 Loan and lease receivables, net: Held for sale 527,644 1,452,560 Other 611,289 1,923,986 - -------------------------------------------------------------------------------------- Total loan and lease receivables, net 1,138,933 3,376,546 Retained interest-only strip 247,381 191,868 Premises and equipment (at cost, less accumulated depreciation of $38,377 in 1998 and $83,746 in 1997) 84,396 152,215 Other assets 579,514 815,258 - -------------------------------------------------------------------------------------- TOTAL ASSETS $3,795,750 $6,686,132 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest-bearing $ 4,324 $ 41,595 Interest-bearing 1,745,466 2,976,016 - -------------------------------------------------------------------------------------- Total deposits 1,749,790 3,017,611 Long-term debt 1,030,147 2,248,172 Other borrowings 36,301 52,774 Other liabilities 319,208 340,625 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,135,446 5,659,182 - -------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debentures of the Company 100,000 100,000 STOCKHOLDERS' EQUITY Class A preferred stock, $1,000 par value: Authorized, issued and outstanding -- 1,010 shares in 1998 and 1997 1,010 1,010 Class B preferred stock, $.01 par value: Authorized -- 1,000,000 shares; Issued -- 14,211 shares in 1998 and 25,000 in 1997 0 0 Class A voting common stock, $.01 par value; Authorized -- 214,500,000 shares; Issued -- 10,375,489 shares in 1998 and 18,193,885 shares in 1997 104 182 Class B non-voting common stock, $.01 par value; Authorized -- 230,000,000 shares; Issued -- 16,294,825 shares in 1998 and 26,564,546 shares in 1997 163 266
39 41
($ IN THOUSANDS) DECEMBER 31, ------------------------ 1998 1997 - -------------------------------------------------------------------------------------- Additional paid-in capital 229,304 379,543 Deferred compensation (17,214) (25,353) Unearned ESOP shares (12,550) -- Accumulated other comprehensive income (91) 50 Retained earnings 382,092 585,659 Less: Treasury stock at cost, 55,000 Class A and 972,768 Class B common shares in 1998 and 418,286 Class B common shares in 1997 (22,514) (14,407) - -------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 560,304 926,950 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,795,750 $6,686,132 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 40 42 CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------- REVENUES: Gain on sale of receivables $ 148,641 $ 117,474 $ 106,156 Interest income 241,090 435,274 354,927 Servicing revenues 143,829 249,293 204,206 Consumer credit card securitization income 64,796 252,631 258,066 Gain on transfer of consumer credit card business 541,288 -- -- Gain on sale of consumer credit cards -- -- 33,820 Other revenues, net 64,376 208,083 197,322 - ----------------------------------------------------------------------------------------------- Total revenues 1,204,020 1,262,755 1,154,497 - ----------------------------------------------------------------------------------------------- EXPENSES: Salaries and employee benefits 185,566 247,287 182,666 Other operating expenses 203,078 383,554 340,508 Interest expense 184,275 324,558 269,700 Provision for credit losses 67,193 210,826 96,862 Severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with Fleet Transaction/Tender Offer 62,257 -- -- Expense associated with exited business/product 54,115 -- -- Asset impairment 8,700 -- -- - ----------------------------------------------------------------------------------------------- Total expenses 765,184 1,166,225 889,736 - ----------------------------------------------------------------------------------------------- Income before income taxes 438,836 96,530 264,761 Income taxes (benefit) (9,044) 24,905 89,104 - ----------------------------------------------------------------------------------------------- Net income $ 447,880 $ 71,625 $ 175,657 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Basic earnings per share - ----------------------------------------------------------------------------------------------- Class A $ 16.62 $ 1.45 $ 4.08 Class B 16.68 1.57 4.19 Combined 16.65 1.52 4.15 - ----------------------------------------------------------------------------------------------- Diluted earnings per share - ----------------------------------------------------------------------------------------------- Class A $ 15.69 $ 1.43 $ 3.86 Class B 15.73 1.54 3.91 Combined 15.71 1.50 3.89 - ----------------------------------------------------------------------------------------------- Basic weighted average shares outstanding - ----------------------------------------------------------------------------------------------- Class A 11,174 18,172 17,621 Class B 15,500 24,635 23,174 Combined 26,674 42,807 40,795 - ----------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding - ----------------------------------------------------------------------------------------------- Class A 11,182 18,235 18,031 Class B 17,313 25,266 27,042 Combined 28,495 43,501 45,073
See Notes to Consolidated Financial Statements 41 43 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ($ IN THOUSANDS)
------------------------------------------------------------------------------------- DEFERRED CLASS A CLASS B CLASS A CLASS B ADDITIONAL COMPENSATION COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON PAID-IN & UNEARNED INCOME STOCK STOCK STOCK STOCK CAPITAL ESOP SHARES - ------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1995 $1,010 $0 $175 $ 240 $ 301,931 $(21,637) Net Income $175,657 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax benefit (expense) of $319 (593) Change in unrealized appreciation(depreciation) of investments, net of tax benefit (expense) of $182 (338) -------- Comprehensive Income $174,726 ======== Preferred and common cash dividends declared Exercise of stock options 4 7 7,503 Issuance of stock: Benefit plans 9 36,000 (33,815) Amortization of deferred compensation 11,960 Termination/tax benefit -- benefit plans 5,045 2,263 - ------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1996 $1,010 $0 $179 $ 256 $ 350,479 $(41,229) Net Income $ 71,625 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of ($289) 536 Change in unrealized appreciation(depreciation) of investments, net of tax benefit (expense) of ($251) 466 -------- Comprehensive Income $ 72,627 ======== Preferred and common cash dividends declared Exercise of stock options 3 6 8,468 Issuance of stock: Dividend reinvestment 857 Benefit plans 4 14,524 (11,159) Amortization of deferred compensation 11,343 Termination/tax benefit -- benefit plans 5,215 15,692 - ------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1997 $1,010 $0 $182 $ 266 $ 379,543 $(25,353) Net Income $447,880 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of $109 (202) Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($33) 61 -------- Comprehensive Income $447,739 ======== Tender offer (79) (113) (160,861) Preferred and common cash dividends declared Exercise of stock options 1 2 3,102 Issuance of stock: Dividend reinvestment 89 Benefit plans 13 22,647 (20,605) Amortization of deferred compensation 8,193 Termination/tax benefit -- benefit plans (5) (15,214) 20,551 Stock buyback ESOP stock purchase (12,569) ESOP shares committed to be released (2) 19 - ------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1998 $1,010 $0 $104 $ 163 $ 229,304 $(29,764) - ------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- ACCUMULATED OTHER TOTAL COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' INCOME EARNINGS STOCK EQUITY - ---------------------------------- ---------------------------------------------------- Balance at Dec. 31, 1995 $ (21) $ 391,266 $ 0 $ 672,964 Net Income 175,657 175,657 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax benefit (expense) of $319 (593) (593) Change in unrealized appreciation(depreciation) of investments, net of tax benefit (expense) of $182 (338) (338) Comprehensive Income Preferred and common cash dividends declared (24,588) (24,588) Exercise of stock options 7,514 Issuance of stock: Benefit plans 2,228 4,422 Amortization of deferred compensation 11,960 Termination/tax benefit -- benefit plans (2,270) 5,038 - ------------------------------------------------------------------------------------------------------ Balance at Dec. 31, 1996 $(952) $ 542,335 $ (42) $ 852,036 Net Income 71,625 71,625 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of ($289) 536 536 Change in unrealized appreciation(depreciation) of investments, net of tax benefit (expense) of ($251) 466 466 Comprehensive Income Preferred and common cash dividends declared (28,301) (28,301) Exercise of stock options 8,477 Issuance of stock: Dividend reinvestment 857 Benefit plans 1,297 4,666 Amortization of deferred compensation 11,343 Termination/tax benefit -- benefit plans (15,662) 5,245 - --------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1997 $ 50 $ 585,659 $(14,407) $ 926,950 Net Income 447,880 447,880 Other comprehensive income (loss): Foreign currency translation adjustment net of tax benefit (expense) of $109 (202) (202) Change in unrealized appreciation (depreciation) of investments, net of tax benefit (expense) of ($33) 61 61 Comprehensive Income Tender offer (640,553) (801,606) Preferred and common cash dividends declared (10,894) (10,894) Exercise of stock options 3,105 Issuance of stock: Dividend reinvestment 89 Benefit plans 2,055 Amortization of deferred compensation 8,193 Termination/tax benefit -- benefit plans (3,558) 1,774 Stock buyback (4,549) (4,549) ESOP stock purchase (12,569) ESOP shares committed to be released 17 - ------------------------------------------------------------------------------------------------------------------------- Balance at Dec. 31, 1998 $ (91) $ 382,092 $(22,514) $ 560,304 - -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 42 44 CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 447,880 $ 71,625 $ 175,657 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on transfer of consumer credit card business (541,288) -- -- Noncash expense associated with Fleet Transaction/Tender Offer and other exited business/products 25,539 -- -- Equity securities losses/(gains) 41,750 11,426 (6,522) Depreciation and amortization 21,480 35,280 19,335 Provision for credit losses 67,193 210,826 96,862 Proceeds from sale of trading investments 293,413 -- -- Change in subordinated trust assets (114,247) (95,237) (41,863) Origination of loans held for sale (5,837,505) (4,355,174) (5,849,111) Principal collected on loans held for sale 67,519 75,050 67,388 Proceeds from sales/securitizations of loans held for sale 5,757,960 4,303,710 5,385,055 Change in other assets (126,763) 50,871 (289,632) Change in other liabilities 15,039 47,717 147,276 Change in retained interest-only strip (55,513) (53,603) (46,146) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 62,457 302,491 (341,701) INVESTING ACTIVITIES Change in federal funds sold and interest-bearing deposits (25,675) 4,541 (303,435) Purchase of investments available for sale (44,610,758) (46,510,251) (30,770,841) Proceeds from sale of investments available for sale 1,707,418 1,736,050 1,121,679 Proceeds from maturing investments available for sale 43,591,658 44,263,776 29,388,538 Purchase of lease portfolios/Advanta Mortgage loans (38,190) (141,687) (288,753) Principal collected on Advanta Mortgage loans 53,826 14,881 5,785 Advanta Mortgage loans made to customers (362,000) (47,217) (121,060) Excess of cash collections over income recognized on direct financing leases 92,229 31,967 65,653 Equipment purchased for direct financing leases (71,546) (39,356) (273,180) Change in business card receivables, excluding sales 23,969 (92,956) 77,261 Change in consumer credit card receivables, excluding sales/transfers (121,845) (571,215) 981,621 Net change in other loans (5,995) (20,143) (11,553) Purchases of premises and equipment, net (41,795) (79,003) (83,593) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 191,296 (1,450,613) (211,878) FINANCING ACTIVITIES Change in demand and savings deposits 70,415 190,493 (11,277) Proceeds from sales of time deposits 1,762,747 1,934,081 1,481,557 Payments for maturing time deposits (500,447) (967,021) (1,516,823) Change in repurchase agreements and term federal funds 38,195 (10,000) (433,000) Proceeds from issuance of subordinated/senior debt 401,583 24,787 41,076 Payments on redemption of subordinated/senior debt (936,215) (97,609) (38,541) Proceeds from issuance of medium-term notes -- 511,217 720,545 Payments on maturity of medium term notes (233,035) (261,835) (494,400) Change in notes payable -- (269,612) 837,210 Stock tender offer (801,606) -- -- Stock buyback (4,549) -- -- ESOP stock purchase (12,569) -- -- ESOP debt repayment 17 -- -- Proceeds from issuance of capital securities -- -- 100,000 Proceeds from issuance of stock 5,249 14,000 11,974 Cash dividends paid (10,894) (28,301) (24,581) - ---------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (221,109) 1,040,200 673,740 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 32,644 (107,922) 120,161 Cash at beginning of year 57,953 165,875 45,714 - ---------------------------------------------------------------------------------------------------------- Cash at end of year $ 90,597 $ 57,953 $ 165,875 - ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 43 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS EXCEPT PER SHARE DATA, UNLESS OTHERWISE NOTED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Advanta Corp. (the "Company"), a Delaware corporation, is a financial services company that provides consumers and small businesses a variety of products including mortgages, equipment leases, business credit cards, insurance and deposit products. The Company services approximately 600,000 customers and manages receivables of approximately $9.8 billion. The Company also provides a full range of loan purchasing, contract servicing and securitization services to the mortgage industry. The Company operates through wholly-owned subsidiaries. Advanta Mortgage ("AMC") originates mortgage loans secured by first or junior liens. Advanta Business Services Corp. ("ABS") provides small ticket equipment leases and markets credit cards to businesses. The Company's insurance subsidiaries make available, through unaffiliated insurance carriers, specialty credit-related insurance products and services to the Company's existing customer base. Managed receivables for AMC and ABS totaled approximately $8.3 billion and $1.5 billion, respectively, at December 31, 1998. AMC's mortgage loans are originated by the Company's indirect wholly-owned subsidiary Advanta National Bank ("ANB") and other channels. ABS leases and business cards are originated by the Company's wholly-owned subsidiary Advanta Bank Corp ("ABC"). Prior to February 20, 1998, the Company issued consumer credit cards primarily through ANB. On February 20, 1998 the Company completed a transaction (the "Fleet Transaction") with Fleet Financial Group, Inc. ("Fleet") to contribute substantially all of it's consumer credit card receivables, subject to liabilities, to Fleet Credit Card LLC (the "LLC"), a limited liability company controlled by Fleet (see Note 2). Subsequent to February 20, 1998, Fleet Credit Card Services LP became the successor in interest to the LLC. References to the LLC include its successor in interest Fleet Credit Card Services LP. PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. BASIS OF PRESENTATION The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for gain on sale of receivables and the retained interest-only strips, contractual mortgage servicing rights, the fair value of certain financial instruments, the allowance for credit losses, and income taxes, among others. Actual results could differ from those estimates. The Company has reformatted its consolidated financial statements and, accordingly, certain prior period amounts have been reclassified to conform with this presentation. SECURITIZATION ACTIVITIES The Company, through its subsidiaries, sells mortgage loans, business loans and leases through securitizations, typically with servicing retained. Prior to the Fleet Transaction, the Company also securitized consumer credit card receivables through its subsidiaries. The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), effective January 1, 1997. The transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received 44 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in exchange. SFAS 125 requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. The adoption of SFAS 125 did not have a material effect on the Company's financial statements. The Company allocates the previous carrying amount of the receivables securitized between the assets sold and the retained interests, including the servicing relationship, interests in the receivables, and an interest-only strip net of any recourse obligation, based on their relative estimated fair values at the date of sale. A gain is recognized at the time of the sale, equal to the excess of the fair value of the assets obtained (principally cash) over the allocated cost of the assets sold and transaction costs. The retained interest-only strip represents the fair value of the remaining interest to be collected from the borrowers on the underlying loans after the payment of pass-through interest to the certificate holders and the payment of a servicing fee to the Company in its role as servicer reduced by the estimated fair value of the Company's recourse obligation for anticipated charge-offs. During the "revolving period" of each credit card securitization trust, securitization income is recorded representing gains on the sale of new receivables to the trusts on a continuous basis to replenish the investors' interest in trust receivables that have been repaid by the credit cardholders. RETAINED INTEREST-ONLY STRIP SFAS 125 requires that any retained interest-only strips be measured in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company accounts for the retained interest-only strips from mortgage securitizations as trading securities. These assets are recorded at estimated fair value and the resulting unrealized gain or loss from the valuation of the receivable is included in the results of operations for the period. The Company accounts for the retained interest-only strips related to leasing and business card securitizations as available for sale securities. At December 31, 1998 and 1997, unrealized gains and losses on the retained interest-only strips related to leasing and business card securitizations were not material. The Company estimates the fair value of retained interest-only strips based on a discounted cash flow analysis. The cash flows are estimated as the excess of the weighted average yield on each pool of the receivables sold over the sum of the pass-through interest rate plus the servicing fee, a trustee fee, credit enhancement costs and an estimate of future credit losses over the life of the receivables. Cash flows are discounted from the date the cash is expected to become available to the Company (the "cash-out" method). These cash flows are projected over the life of the loans and leases using prepayment, default, and interest rate assumptions that management believes would be used by market participants for similar financial instruments subject to prepayment, credit and interest rate risk. The cash flows are discounted using an interest rate that management believes a purchaser unrelated to the seller of such a financial instrument would demand. See Note 23 for discussion of assumptions used in the estimate of fair value at December 31, 1998 and 1997. As all estimates used are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Interest income is recognized over the life of the retained interest-only strip using the discount rate used for the initial valuation. CONTRACTUAL MORTGAGE SERVICING RIGHTS The Company allocates cost to the right to service mortgage loans at the time of sale or securitization of receivables, based on the fair value of the servicing rights. Management has estimated the fair value of contractual mortgage servicing rights based on a discounted cash flow analysis. The cash flows are estimated as the excess of the benefits of servicing, principally revenues from contractually specified servicing fees, late charges, and other ancillary sources, over adequate compensation. SFAS 125 defines adequate compensation 45 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as the amount of benefits of servicing that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. Contractual mortgage servicing rights are amortized in proportion to, and over the period of, estimated net future servicing fee income. Servicing assets associated with lease, business card and consumer credit card securitization transactions are not material as the benefits of servicing are not expected to be more or less than adequate compensation to the Company for performing the servicing. The Company periodically evaluates the potential impairment of contractual mortgage servicing rights. The Company stratifies these rights based on two of the predominant risk characteristics of the underlying loans, the year of origination and the type of loan (i.e., fixed or adjustable rate loan). Impairment is recognized through a valuation allowance for each individual stratum. The amount of impairment recognized is the amount by which the contractual mortgage servicing rights for a stratum exceed their estimated fair value. See Note 23 for discussion of assumptions used in the estimate of fair value at December 31, 1998 and 1997. SUBORDINATED TRUST ASSETS These amounts represent other retained interests in Advanta Mortgage's securitizations. Ownership of these interests is represented by subordinate certificates issued by the securitization trust. These certificates serve as a form of credit enhancement for the transactions, and excess losses on the collateral would be absorbed by these amounts. The Company classifies and measures these amounts in accordance with SFAS 115 as trading securities. At December 31, 1998 and 1997, unrealized gains and losses on the subordinated trust assets were not material. LOAN AND LEASE RECEIVABLES HELD FOR SALE Loan and lease receivables held for sale represent receivables currently on the balance sheet that the Company intends to sell or securitize within the next six months. These assets are reported at the lower of aggregate cost or fair market value by loan type. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses for lending and leasing transactions is established to reflect losses that have already occurred through provisions for loan and lease losses. In estimating the allowance, management relies on historical experience by loan type adjusted for any known trends in the portfolio. As these estimates are influenced by factors outside of the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. The Company charges off against the allowance for credit losses confirmed losses on all nonperforming Advanta Mortgage loans at the earlier of foreclosure or when they have become twelve months delinquent. Lease receivables are generally written off when 120 days contractually delinquent. The Company's charge-off policy, as it relates to business and consumer credit card accounts, is to charge-off a receivable, if not paid, at 180 and 186 days contractually delinquent, respectively. Accounts suspected of being fraudulent are written off after a 90 day investigation period, unless the investigation shows no evidence of fraud. In the third quarter of 1996, the Company adopted a new charge-off methodology related to bankrupt consumer credit card accounts, providing for up to a 90-day investigative period following notification of the bankruptcy petition, prior to charge-off. This methodology is consistent with others in the credit card industry. 46 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ORIGINATION COSTS AND FEES The Company accounts for origination costs following Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS 91"). This accounting standard requires certain loan and lease origination fees and costs to be deferred and amortized over the life of a loan or lease. Origination costs are defined under this standard to include costs of loan origination associated with transactions with independent third parties and certain costs relating to underwriting activities and preparing and processing loan documents. The Company generally charges origination fees ("points") for mortgage loans. Origination fees, net of direct origination costs, are deferred and amortized over the contractual life of the loan as an adjustment to yield (interest income). However, upon the sale or securitization of the loans, the unamortized portion of such net fees is included in the computation of the gain on sale. The Company engages third parties to solicit and originate credit card account relationships. The Company amortizes deferred credit card origination costs on a straight-line basis over one year following the consensus reached at the May 20, 1993 meeting of the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board in EITF Issue 93-1. Costs incurred for originations that were initiated prior to the EITF Issue 93-1 consensus were amortized over a 60-month period. INVESTMENTS Trading investments are securities that are bought and held principally for the purpose of selling them in the near term. Trading investments are reported at fair value, with unrealized gains and losses included in earnings. Investments available for sale include securities that the Company sells from time to time to provide liquidity and in response to changes in the market. Debt and equity securities classified as available for sale are reported at market value in accordance with SFAS 115. Under SFAS 115, unrealized gains and losses on these securities are reported in other comprehensive income, net of income taxes. Investments of the Company's venture capital unit, Advanta Partner's LP, are included in investments available for sale and carried at estimated fair value following the specialized industry accounting principles of this unit. Management makes such fair value determinations based on quoted market prices, when available, and considering the investees' financial results, conditions and prospects when market prices are not available. Following venture capital accounting principles, the equity method of accounting for investments is not applied. PREMISES AND EQUIPMENT Premises, equipment, computers and software are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are charged to expense as incurred. GOODWILL Goodwill, representing the cost of investments in subsidiaries and affiliated companies in excess of the fair value of net assets acquired, is amortized on a straight-line basis for periods of up to 25 years. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses various derivative financial instruments ("derivatives") such as interest rate swaps and caps, forward contracts, options on securities, and financial futures as part of its risk management strategy to reduce interest rate risk and, where appropriate, to synthetically lower its cost of funds. Derivatives are classified as hedges or synthetic alterations of specific on-balance sheet items, off-balance sheet items or anticipated transactions. In order for derivatives to qualify for hedge accounting treatment the following conditions must be met: 1) the underlying item being hedged must expose the Company to interest rate risk; 47 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2) the derivative used serves to reduce the Company's sensitivity to interest rate risk; and 3) the derivative used is designated and deemed effective in hedging the Company's exposure to interest rate risk. In addition to meeting these conditions, anticipatory hedges must demonstrate that the anticipated transaction being hedged is probable to occur and the expected terms of the transaction are identifiable. For derivatives designated as hedges of interest rate exposure, gains or losses are deferred and included in the carrying amounts of the related item exposing the Company to interest rate risk and are ultimately recognized in income as part of those carrying amounts. Accrual accounting is applied for derivatives designated as synthetic alterations with income and expense recorded in the same category as the related underlying on-balance sheet or off-balance sheet item synthetically altered. Gains or losses resulting from early terminations of derivatives are deferred and amortized over the remaining term of the underlying balance sheet item or the remaining term of the derivative, as appropriate. For derivatives designated as hedges of assets where changes in fair value are recognized currently in earnings, the related derivative is included in the balance sheet at fair value, and changes in the fair value of the derivative are also recognized currently in earnings. Derivatives not qualifying for hedge or synthetic accounting treatment would be carried at market value with realized and unrealized gains and losses included in operating results. During 1998, 1997 and 1996, all of the Company's derivatives qualified as hedges or synthetic alterations. INTEREST INCOME The Company recognizes interest income using a method which approximates the level yield method. The accrual of interest is discontinued when the related receivable becomes 90 days past due. Interest income is subsequently recognized only to the extent cash payments are received. INSURANCE Insurance premiums are earned ratably over the period of insurance coverage provided. Reinsurance premiums, net of commissions, on credit life, disability and unemployment policies on credit cards, are earned monthly based upon the outstanding balance of the underlying receivables. The cost of acquiring new reinsurance is deferred and amortized over the respective periods in order to match the expense with the anticipated revenue. Insurance loss reserves are based on estimated settlement amounts for both reported losses and incurred but not reported losses. STOCK-BASED COMPENSATION The Company has elected to account for stock-based compensation following Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") as permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). The Company has adopted the disclosure-only provisions of SFAS 123. INCOME TAXES The Company accounts for income taxes following the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 prescribes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities and the provisions of the enacted tax laws. 48 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JOINT VENTURE In 1995, the Company formed a joint venture with The Royal Bank of Scotland, RBS Advanta, to market, issue and service bankcards in the United Kingdom. As of December 31, 1997, the Company owned 49% of the RBS Advanta joint venture, the investment in which was accounted for under the equity method. During 1998, in connection with the transaction described in Note 2, the Company contributed its interest in the RBS Advanta joint venture to the LLC. Cumulative translation adjustments included in accumulated other comprehensive income were $0 and $202 thousand at December 31, 1998 and 1997, respectively. EARNINGS PER SHARE Earnings per share are calculated following the provisions of SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation and disclosure of Basic Earnings Per Share and Diluted Earnings Per Share. Basic Earnings Per Share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Income available to common stockholders is computed by deducting Class A and Class B preferred stock dividends from net income. Diluted Earnings Per Share is computed by dividing income available to common stockholders, increased by dividends on dilutive Class B preferred stock for the period, divided by the sum of average common shares outstanding plus dilutive common shares for the period. Potentially dilutive common shares include stock options, restricted stock issued under incentive plans and Class B preferred stock. Since the cash dividends declared on the Company's Class B Common Stock were higher than the dividends declared on the Class A Common Stock, Basic and Dilutive Earnings Per Share have been calculated using the "two-class" method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. The Company has also presented "Combined Earnings Per Share," which represents a weighted average of Class A and Class B Earnings Per Share. CASH FLOW REPORTING For purposes of reporting cash flows, cash includes cash on hand and amounts due from banks. Cash paid during 1998, 1997 and 1996 for interest was $218.3 million, $304.0 million and $241.1 million, respectively. Cash paid or (refunds received) for taxes during these periods was $28.2 million, $(6.1) million and $45.1 million, respectively. See Note 2 for discussion of noncash transfer of assets and liabilities in the Fleet Transaction. Noncash transactions in 1998 also include the retention of $795 million of trust certificates at the time of receivable securitization. These securities are classified as trading investments. RECENT ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" in March 1998. SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and specifies that direct costs incurred when developing computer software for internal use should be capitalized once certain capitalization criteria are met. The Company will adopt this SOP during the first quarter of 1999. The adoption of SOP 98-1 is not expected to have a material effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board ("FASB")issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. The Company will adopt SFAS No. 133 effective January 1, 2000. 49 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company anticipates that the adoption of SFAS No. 133 will not have a material effect on the results of operations. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65." SFAS No. 134 amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. SFAS No. 134 also conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. Prior to the issuance of SFAS No. 134, the Company was required to account for resulting mortgage-backed securities or other retained interests as trading securities. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. The Company will adopt SFAS No. 134 during the first quarter of 1999. The adoption of SFAS No. 134 is not expected to have a material effect on the Company's financial statements. NOTE 2. DISPOSITION OF CONSUMER CREDIT CARD ASSETS In accordance with the terms of the Contribution Agreement, dated as of October 28, 1997, as amended February 20, 1998, by and between the Company and Fleet, the Company and certain of its subsidiaries and Fleet and certain of its subsidiaries each contributed certain assets and liabilities of their respective consumer credit card businesses to the LLC in exchange for an ownership interest in the LLC. As of the consummation of the Fleet Transaction on February 20, 1998, the Company's ownership interest in the LLC was 4.99%, which is accounted for on the cost basis. The Company recognized a gain on the transfer of the consumer credit card business representing the excess of liabilities transferred to the LLC over the net basis of the assets transferred. The gain also included the Company's ownership interest in the LLC. The gain on the transfer is not subject to income tax and no tax provision has been recorded. The Contribution Agreement provides for the parties to make a final determination of the transferred assets and liabilities. As further described in Note 10, the Contribution Agreement contains provisions with respect to dispute resolution in the event the parties do not agree on the final determination of the transferred assets and liabilities. It is possible the parties will not agree, and that the dispute resolution process will result in an increase or decrease to the gain recorded. The Company retained certain immaterial assets of its consumer credit card business which are not required in the operation of such business and certain liabilities related to its consumer credit card business. These retained assets and liabilities include among others, all reserves relating to its credit insurance business and any liability or obligation relating to certain consumer credit card accounts generated in specific programs which comprised a very small portion of the Company's consumer credit card receivables as of February 20, 1998. The assets and liabilities retained have been classified in other assets and other liabilities. The contribution was accounted for as: (i) the transfer of financial assets (cash, loans, and other receivables) and an extinguishment of financial liabilities (deposits, debt and other borrowings and other liabilities) under SFAS 125; and (ii) the sale of non-financial assets and liabilities (principally property and equipment, prepaid assets, deferred costs and certain contractual obligations). The financial assets, non financial assets and liabilities of the Company's consumer credit card business that were contributed were removed from the balance sheet. The Company was legally released as primary obligor under all of the financial liabilities contributed and, accordingly, they were removed from the balance sheet. Concurrently with the Fleet Transaction the Company purchased 7,882,750 shares of its Class A Common Stock, 12,482,850 of its Class B Common Stock, each at $40 per share net, and 1,078,930 of its depositary shares each representing one one-hundredth interest in a share of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciated Income Linked Securities (SAILS)) at $32.80 per share net, through an issuer tender offer (the "Tender Offer") which was completed on February 20, 1998. The 50 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Office of the Comptroller of the Currency (the "OCC") approved the payment of a special dividend/return of capital from ANB to Advanta Corp., its parent company, to effect the purchase of the shares. NOTE 3. SECURITIZATION ACTIVITIES At December 31, 1998 and 1997, there were $7.4 billion and $4.8 billion, respectively, of securitized Advanta Mortgage loan receivables outstanding which are subject to certain recourse obligations. The Company had estimated liabilities of $149.0 million and $120.0 million at year end 1998 and 1997, respectively, related to these recourse obligations which are netted against the retained interest-only strips. At December 31, 1998, the Company had amounts receivable from Advanta Mortgage loan sales and securitizations, net of recourse obligations, of $761.1 million, $309.8 million of which was subject to liens. At December 31, 1997, the amounts receivable and amounts subject to lien were $402.6 million and $146.8 million, respectively. These amounts are included in restricted interest-bearing deposits, subordinated trust assets, retained interest-only strip and other assets. At December 31, 1998 and 1997, there were $1.2 billion and $965 million, respectively, of securitized business cards and leases outstanding which are subject to certain recourse obligations. There were liabilities of $41.3 million and $34.0 million at year end 1998 and 1997, respectively, related to these recourse obligations. These liabilities are netted against the retained interest-only strips from business card and lease securitizations. The Company had amounts receivable from business card and lease securitizations of $11.7 million at year-end 1998, all of which was subject to liens, and $6.3 million at year-end 1997, none of which was subject to liens. These amounts are included in restricted-interest bearing deposits and other assets. Total interest in equipment residuals for lease assets sold was $49.3 million and $42.7 million at December 31, 1998 and 1997, respectively, also subject to recourse obligations. Interests in equipment residuals are included in loan and lease receivables. At December 31, 1998, there were no securitized consumer credit cards outstanding, due to the contribution of consumer credit card assets in connection with the Fleet Transaction described in Note 2. There were securitized consumer credit card receivables outstanding of $8.7 billion at December 31, 1997. In each securitization transaction, consumer credit card receivables were transferred to a trust that issued certificates representing ownership interests in the trust primarily to institutional investors. The Company retained a participation interest in the trusts, reflecting the excess of the total amount of receivables transferred to the trust over the portion represented by certificates sold to investors. The retained participation interests in the consumer credit card trusts were $1.6 billion at December 31, 1997. The Company was subject to certain recourse obligations in connection with these securitizations. At December 31, 1997, the Company had liabilities of $338.3 million related to these recourse obligations. These liabilities are netted against the amounts due from consumer credit card securitizations. At December 31, 1997, there were amounts receivable from consumer credit card securitizations, including related interest-bearing deposits, of $647.2 million, $438.8 million of which was subject to liens by the providers of the credit enhancement facilities for the individual securitizations and inclusive of amounts awaiting distributions to investors. 51 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents activity in subordinated trust assets related to Advanta Mortgage loan securitizations:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- Beginning balance $170,281 $ 75,044 Initial collateral deposits 52,889 51,649 Subordinated trust assets acquired with excess cash flows 96,455 48,086 Interest earned 10,270 6,386 Less: Excess cash flows released to the Company (45,367) (10,884) - -------------------------------------------------------------------------------------- Ending Balance $284,528 $170,281 - --------------------------------------------------------------------------------------
The following table presents activity in the retained interest-only (IO) strip and contractual mortgage servicing rights ("CMSR") asset related to Advanta Mortgage loan securitizations:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- Beginning balance IO Strip $191,868 $133,805 Beginning balance CMSR $ 24,546 $ 11,153 IO activity Retained IO on sales, net 206,753 160,903 Interest income 21,674 17,656 Cash received and used to acquire subordinated trust assets (96,455) (48,086) Cash released to the Company (25,479) (30,039) Fair value adjustments (50,980) (42,371) CMSR activity Servicing rights acquired 45,803 17,461 Amortization (12,977) (4,068) Valuation allowance provision (8,275) 0 Ending Balance IO Strip $247,381 $191,868 Ending Balance CMSR $ 49,097 $ 24,546 - --------------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company had a valuation allowance on contractual mortgage servicing rights of $8,275 and $0, respectively. During 1998, there were no direct write-downs or other reductions to the valuation allowance. 52 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. LOAN AND LEASE RECEIVABLES Loan and lease receivables on the balance sheet, including those held for sale, consisted of the following:
DECEMBER 31, ------------------------ - -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- Advanta Mortgage loans(A) $ 837,744 $ 478,433 Leases and business cards(B) 304,185 298,789 Consumer credit cards(C) 0 2,579,890 Other loans 17,862 40,978 - -------------------------------------------------------------------------------------- Gross loan and lease receivables 1,159,791 3,398,090 - -------------------------------------------------------------------------------------- Add: Deferred origination costs, net of deferred fees 12,579 116,229 Less: Allowance for credit losses: Advanta Mortgage loans (20,092) (5,822) Leases and business cards (9,611) (9,798) Consumer credit cards 0 (118,420) Other loans (3,734) (3,733) - -------------------------------------------------------------------------------------- Total allowance (33,437) (137,773) - -------------------------------------------------------------------------------------- Net loan and lease receivables $1,138,933 $3,376,546 - --------------------------------------------------------------------------------------
(A) Includes Advanta Mortgage loan receivables held for sale of $459.5 million and $394.1 million in 1998 and 1997, respectively, and is net of unearned income of $4.2 million and $3.1 million in 1998 and 1997, respectively. (B) Includes leases and business cards held for sale of $68.1 million and $43.8 million in 1998 and 1997, respectively, and is net of unearned income of $19.4 million and $20.7 million in 1998 and 1997, respectively. Also includes residual interest for both years. (C) Includes consumer credit card receivables held for sale of $1.0 billion in 1997. Receivables sold and now serviced for others consist of the following:
DECEMBER 31, ------------------------- - --------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------- Advanta Mortgage loans $7,447,502 $ 4,830,403 Business cards 664,712 522,688 Leases 516,077 442,312 Consumer credit cards 0 8,664,711 - --------------------------------------------------------------------------------------- Total $8,628,291 $14,460,114 - ---------------------------------------------------------------------------------------
"Advanta Mortgage loans" include home equity and auto loans and exclude loans which were never owned by the Company, but which the Company services for a fee ("contract servicing" or "subservicing"). Contract servicing receivables were $8.3 and $9.2 billion at December 31, 1998 and 1997, respectively. 53 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The geographic concentration of managed (owned and serviced) receivables was as follows:
DECEMBER 31, - ----------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------------- California $1,246,394 12.7% $ 2,545,282 14.3% Michigan 816,971 8.4 797,043 4.5 Florida 541,501 5.5 1,037,763 5.8 Pennsylvania 517,369 5.3 789,526 4.4 New York 510,187 5.2 1,349,654 7.6 All other 6,155,660 62.9 11,338,936 63.4 - ----------------------------------------------------------------------------------------------- Total managed receivables $9,788,082 100.0% $17,858,204 100.0% - -----------------------------------------------------------------------------------------------
In the normal course of business, the Company makes commitments to extend credit to its credit card and home equity line of credit customers. Commitments to extend credit are agreements to lend to a customer subject to certain conditions established in the contract. The Company does not require collateral to support credit card commitments. At December 31, 1998 and 1997, the Company had $3.3 billion and $54.2 billion, respectively, of commitments to extend credit outstanding for which there is potential credit risk. The Company believes that its customers' utilization of these lines of credit will continue to be substantially less than the amount of the commitments, as has been the Company's experience to date. At December 31, 1998 and 1997, outstanding managed credit card and home-equity lines of credit receivables represented 35% and 22%, respectively, of outstanding commitments on revolving customer relationships. In June 1996, the Company, through its subsidiary ANB, sold certain consumer credit card customer relationships and the related receivable balances to a domestic bank. The receivables associated with these relationships represented less than 2% of the Company's managed consumer credit card portfolio as of June 30, 1996. The Company recorded a $33.8 million net gain related to this transaction in 1996. 54 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. ALLOWANCE FOR CREDIT LOSSES The following table displays five years of allowance history:
ALLOWANCE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Balance at January 1 $ 137,773 $ 89,184 $ 53,494 $ 41,617 $ 31,227 Provision for credit losses 67,193 210,826 96,862 53,326 34,198 Transfer from recourse reserves 0 0 3,000 1,100 11,485 Allowances on receivables (sold)/purchased (118,420) (11,015) 6,404 0 0 Gross charge-offs: Advanta Mortgage loans (14,313) (6,825) (3,473) (6,038) (11,731) Leases and business cards (16,118) (9,583) (3,444) (1,413) (1,053) Consumer credit cards (30,999) (155,528) (73,466) (41,779) (28,646) Other loans -- (4) (13) (38) (44) - ---------------------------------------------------------------------------------------------- Total gross charge-offs (61,430) (171,940) (80,396) (49,268) (41,474) Recoveries: Advanta Mortgage loans 3,007 991 414 76 42 Leases and business cards 2,594 1,215 442 274 139 Consumer credit cards 2,719 18,511 8,945 6,354 5,958 Other loans 1 1 19 15 42 - ---------------------------------------------------------------------------------------------- Total recoveries 8,321 20,718 9,820 6,719 6,181 - ---------------------------------------------------------------------------------------------- Net charge-offs (53,109) (151,222) (70,576) (42,549) (35,293) Balance at December 31 $ 33,437 $ 137,773 $ 89,184 $ 53,494 $ 41,617 - ----------------------------------------------------------------------------------------------
NOTE 6. INVESTMENTS Trading investments at December 31, 1998 consisted of AAA rated classes of Advanta Mortgage Loan Trust 1998-2 and Advanta Mortgage Loan Trust 1998-4 securities. There were no trading investments held during 1997. Net unrealized gains on trading investments of $1,471 in 1998 were included in other revenues. Investments available for sale consisted of the following:
DECEMBER 31, -------------------------------------------------------------------------------------------------- 1998 1997 ---------------------------------------------- ------------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------- U.S. Treasury & other U.S. Government Securities $435,953 $178 $ (33) $436,098 $1,083,848 $ 82 $(184) $1,083,746 State and municipal securities 4,636 182 0 4,818 5,195 123 0 5,318 Collateralized mortgage obligations 12,278 0 (18) 12,260 15,639 0 (151) 15,488 Mortgage-backed securities 4,265 0 (203) 4,062 47,387 150 0 47,537 Equity securities(1) 61,006 0 (250) 60,756 69,092 0 (250) 68,842 Other 3,411 5 0 3,416 1,344 0 (3) 1,341 - ------------------------------------------------------------------------------------------------------------------------- Total investments available for sale $521,549 $365 $(504) $521,410 $1,222,505 $355 $(588) $1,222,272 - ------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, ---------------------------------------------- 1996 ---------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE - --------------------- ---------------------------------------------- U.S. Treasury & other U.S. Government Securities $645,113 $ 21 $ (677) $644,457 State and municipal securities 3,640 38 0 3,678 Collateralized mortgage obligations 7,624 9 (108) 7,525 Mortgage-backed securities 41,493 45 (464) 41,074 Equity securities(1) 69,830 440 (250) 70,020 Other 925 0 (4) 921 - ------------------------------------------------------------------------------------------------------------------------- Total investments available for sale $768,625 $553 $(1,503) $767,675 - -------------------------------------------------------------------------------------------------------------------------
(1) Includes investments of the venture capital unit, Advanta Partners LP. The amount shown as amortized cost represents carrying value for these investments. See Note 1. 55 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1998 and 1997, $139 and $233, respectively, of net unrealized losses on securities were included in investments available for sale. During 1998 and 1997, the net change in unrealized losses on available for sale securities, net of tax, included in comprehensive income were unrealized gains of $61 and $466, respectively. Unrealized losses on available for sale securities, net of tax, of $91 and $152 were included in accumulated other comprehensive income at December 31, 1998 and 1997, respectively. Maturities of investments available for sale at December 31, 1998 were as follows:
AMORTIZED MARKET COST VALUE - ----------------------------------------------------------------------------------- Due in 1 year $383,188 $383,396 Due after 1 but within 5 years 54,645 54,623 Due after 5 but within 10 years 2,070 2,183 Due after 10 years 686 714 - ----------------------------------------------------------------------------------- Subtotal 440,589 440,916 Mortgage-backed securities 4,265 4,062 Collateralized mortgage obligations 12,278 12,260 Equity and other securities 64,417 64,172 - ----------------------------------------------------------------------------------- Total investments available for sale $521,549 $521,410 - -----------------------------------------------------------------------------------
During 1998, proceeds from sales of available for sale securities were $1,707,418. Gross gains of $7,457 and losses of $176 were realized on these sales. Of the gross gains and losses, $5,791 of gains and $461 of losses relate to realized gains/losses from sales of investments held by Advanta Partners LP. Proceeds during 1997 were $1,736,050. Gross gains of $3,867 and losses of $181 were realized on these sales. Of the gross gains, $3,471 relate to realized gains from sales of investments held by Advanta Partners LP. Proceeds during 1996 were $1,121,679. Gross gains of $2,492 and losses of $110 were realized on these sales. Of the gross gains, $2,448 relate to realized gains from sales of investments held by Advanta Partners LP. The specific identification method was the basis used to determine the amortized cost in computing realized gains and losses. At December 31, 1998 and 1997, investment securities with a book value of $5,778 and $5,370, respectively, were deposited with insurance regulatory authorities to meet statutory requirements or held by a trustee for the benefit of primary insurance carriers. At December 31, 1997, investment securities with a book value of $2,016 were pledged at the Federal Reserve Bank. There were no investment securities pledged at the Federal Reserve Bank at December 31, 1998. NOTE 7. SELECTED BALANCE SHEET INFORMATION Restricted interest-bearing deposits at December 31, 1997 included $438,838 of amounts due from consumer credit card trusts, which represented initial deposits and subsequent excess collections up to the required amount on consumer credit card securitizations, and included amounts to be distributed to investors. 56 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other assets consisted of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------- Prepaid expenses $110,344 $131,305 Contractual mortgage servicing rights 49,097 24,546 Current and deferred federal income taxes, net (see Note 19) 31,243 0 Goodwill 3,600 5,134 Other real estate(A) 6,622 689 Amounts due from consumer credit card securitizations(B) 0 222,330 Other 378,608 431,254 - ---------------------------------------------------------------------------------- Total other assets $579,514 $815,258 - ----------------------------------------------------------------------------------
(A) Carried at the lower of cost or fair market value less selling costs. (B) Includes retained interest-only strips, net of recourse liabilities, accrued interest receivable and other amounts related to these securitizations. Other liabilities consisted of the following:
DECEMBER 31, - ---------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------- Accounts payable and accrued expenses $ 66,852 $ 91,821 Current and deferred income taxes 2,445 40,461 Other 249,911 208,343 - ---------------------------------------------------------------------------------- Total other liabilities $319,208 $340,625 - ----------------------------------------------------------------------------------
57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. LONG-TERM DEBT Long-term debt consists of borrowings having an original maturity of over one year. The composition of long-term debt at December 31, 1998 and 1997, was as follows:
DECEMBER 31, - -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- SENIOR DEBT 12 month senior notes (6.86%-8.39%) $ 48,948 $ 51,537 18 month senior notes (6.58%-8.48%) 6,565 6,795 24 month senior notes (6.16%-8.85%) 32,360 33,517 30 month senior notes (6.30%-8.85%) 13,609 14,441 48 month senior notes (5.97%-8.44%) 8,454 8,061 60 month senior notes (5.83%-9.53%) 20,779 21,999 Value notes, fixed (6.85%-7.85%) 9,300 30,755 Medium-term notes, fixed (6.41%-8.36%) 703,460 861,462 Medium-term notes, floating 163,000 238,000 Short-term bank notes, fixed (5.98%) 0 99,986 Short-term bank notes, floating 0 141,974 Medium-term bank notes, fixed (6.45%-7.12%) 7,338 408,651 Medium-term bank notes, floating 0 260,837 Other senior notes (4.50%-11.34%) 14,844 14,625 - -------------------------------------------------------------------------------------- Total senior debt 1,028,657 2,192,640 SUBORDINATED DEBT Subordinated notes (5.83%-11.34%) 1,490 5,754 7% subordinated bank notes due 2003 0 49,778 - -------------------------------------------------------------------------------------- Total subordinated debt 1,490 55,532 - -------------------------------------------------------------------------------------- Total long-term debt $1,030,147 $2,248,172 - --------------------------------------------------------------------------------------
The Company's senior floating rate notes were priced based on a spread over LIBOR. At December 31, 1998, the rates on these notes varied from 5.52% to 6.16%. At December 31, 1998 and 1997, the Company used derivative financial instruments to effectively convert certain fixed rate debt to a LIBOR based variable rate (see Note 24). The annual maturities of long-term debt at December 31, 1998 for the years ending December 31 are as follows: $377.4 million in 1999; $275.3 million in 2000; $296.3 million in 2001; $75.5 million in 2002; $4.3 million in 2003; and $1.4 million thereafter. The average interest cost of the Company's debt during 1998, 1997 and 1996 was 6.53%, 6.42%, and 6.39%, respectively. NOTE 9. OTHER BORROWINGS The composition of other borrowings was as follows:
DECEMBER 31, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Warehouse facility $18,517 $ 3,857 Other borrowings 17,784 48,917 - -------------------------------------------------------------------------------- Total $36,301 $52,774 - --------------------------------------------------------------------------------
58 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has secured warehouse financing facilities for mortgage products totaling $1.5 billion at December 31, 1998. Of the total, $1.1 billion was committed. The Company pays a monthly facility fee on the unused commitments of up to 35 basis points. These facilities provide for on-balance sheet and off-balance sheet funding. At December 31, 1998, the Company had $963.9 million available under these facilities as there was $536.1 million of mortgage loans funded through these facilities, $18.5 million of which were accounted for as secured borrowings. These facilities are generally renewable annually. The Company chose to reduce one of these facilities by $196 million in the first quarter of 1999, the remaining $304 million of which expires in the second quarter of 1999. Upon the expiration of these facilities, management expects to obtain the appropriate levels of replacement funding under similar terms and conditions. At December 31, 1997, the Company had an on-balance sheet secured warehouse financing facility of $500 million, of which $3.9 million was outstanding. Through February 20, 1998, the Company had a revolving credit facility of $1.0 billion. There was a quarterly facility fee of up to 35 basis points on the total amount of the revolving credit facility. There were no borrowings outstanding under this facility at December 31, 1997. Following the closing of the Fleet Transaction on February 20, 1998 as described in Note 2, the Company terminated this facility. The Company is subject to loan covenants related to the maintenance of certain equity levels at the borrowing subsidiaries, limitations on mergers and acquisitions, limitations on transactions with affiliates, and maintenance of adequate investment base and interest rate protection agreements. Management believes that at December 31, 1998, the Company was in compliance with all such loan covenants. The following table displays information related to selected types of short-term borrowings:
1998 1997 1996 - -------------------------------------------------------------------------------------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE - -------------------------------------------------------------------------------------------------- At year end: Term fed funds $ 0 0% $ 0 0% $ 10,000 5.42% - -------------------------------------------------------------------------------------------------- Average for the year: Securities sold under Repurchase agreements $ 69,916 6.05% $ 9,796 5.66% $ 149,791 5.31% Term fed funds and fed Funds purchased 272 5.61 11,925 5.71 100,793 5.71 - -------------------------------------------------------------------------------------------------- Total $ 70,188 6.05% $ 21,721 5.69% $ 250,584 5.47% - -------------------------------------------------------------------------------------------------- Maximum month-end balance: Securities sold under Repurchase agreements $259,643 $149,130 $1,027,695 Term fed funds and fed Funds purchased 1,700 65,000 263,000 - --------------------------------------------------------------------------------------------------
The weighted average interest rates were calculated by dividing the interest expense for the period for such borrowings by the average amount of short-term borrowings outstanding during the period. NOTE 10. COMMITMENTS AND CONTINGENCIES On June 30, 1997, purported shareholders of the Company who are represented by a group of law firms filed a putative class action complaint against the Company and several of its current and former officers and directors in the United States District Court for the Eastern District of Pennsylvania. A second, similar complaint was filed in the same court a few days later by a different group of law firms. Both complaints allege that the Company made misrepresentations in certain of its public filings and statements in violation of the Securities Exchange Act of 1934. The complaints seek damages of an unspecified amount. On July 10, 1998, the complaints, which had previously been consolidated, were dismissed by the Court for failing to state a claim. The plaintiffs determined not to attempt to amend their complaints. Rather, they have appealed the District Court's decision to the United States Courts of Appeals for the Third Circuit. The appeal has been fully briefed and is awaiting decision. The Company believes that the District Court's ruling will be affirmed 59 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and that the allegations in the complaints are without merit. In the opinion of management, the ultimate resolution of these complaints is not expected to have a material adverse effect on the financial position or future operating results of the Company. Between August 25, 1997 and September 10, 1998, the Company and certain of its subsidiaries were named as defendants in lawsuits by certain consumer credit cardholders claiming to represent consumer credit cardholders in a specific program. The class action complaints alleged that consumer credit cardholder accounts in a specific program were improperly repriced to a higher percentage rate of interest. The complaints asserted various violations of federal and state law with regard to such repricings, and each sought damages of an unspecified amount. On June 3, 1998, the Judicial Panel on multidistrict litigation ordered that all of the federal court actions be consolidated into one proceeding for pretrial purposes in the United States District Court for the Eastern District of Pennsylvania. On November 5, 1998, the Company and counsel for plaintiffs in two of the actions pending in the Superior Court of the State of Delaware and in the consolidated litigation in the United States District Court for the Eastern District of Pennsylvania entered into a Settlement Agreement and Stipulation in the Delaware State Court to settle the claims relating to the specific program referred to above. Pursuant to the Settlement Agreement and Stipulation, which was approved by the Court on December 30, 1998, the Company paid $7.25 million to the plaintiffs. With the exception of the claims of persons who opted out of the settlement and certain class members who are debtors in bankruptcy cases, all the claims in the other lawsuits related to the specific program referred to above have been released. On January 22, 1999, Fleet and certain of its affiliates filed a lawsuit against the Company and certain of its subsidiaries in Delaware Chancery Court. Fleet's allegations, which the Company denies, center around Fleet's assertions that the Company has failed to complete certain post-closing adjustments to the value of the assets and liabilities the Company contributed to the LLC in connection with the Fleet Transaction. Fleet seeks damages of approximately $141 million. The Company has filed an answer to the complaint denying the material allegations of the complaint, but acknowledging that the Company contributed $1.8 million in excess liabilities in the post-closing adjustment process, after taking into account the liabilities the Company has already assumed. The Company also has filed a countersuit against Fleet for approximately $101 million in damages the Company believes have been caused by certain actions of Fleet following closing of the Fleet Transaction. Management expects that the ultimate resolution of this litigation will not have a material adverse effect on the financial position or future operating results of the Company. The Company and its subsidiaries are involved in other legal proceedings, claims and litigation, including those arising in the ordinary course of business. Management believes that the aggregate liabilities, if any, resulting from such actions will not have a material adverse effect on the consolidated financial position or results of operations of the Company. However, as the ultimate resolution of these proceedings is influenced by factors outside of the Company's control, it is reasonably possible that the Company's estimated liability under these proceedings may change. The Company leases office space in several states under leases accounted for as operating leases. Total rent expense for all of the Company's locations for the years ended December 31, 1998, 1997 and 1996 was $7.9 million, $11.3 million and $8.5 million, respectively. The future minimum lease payments of all non-cancelable operating leases are as follows: Year Ended December 31, 1999 $ 7,043 2000 6,484 2001 5,237 2002 4,063 2003 3,790 Thereafter 13,310
60 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. MANDATORILY REDEEMABLE PREFERRED SECURITIES In December 1996, Advanta Capital Trust I, a newly formed statutory business trust established by and wholly-owned by the Company (the "Trust"), issued in a private offering $100 million of capital securities, representing preferred beneficial interests in the assets of the Trust (the "Capital Securities"). The Company used the proceeds from the sale for general corporate purposes. The sole assets of the Trust consist of $100 million of 8.99% junior subordinated debentures issued by the Company due December 17, 2026 (the "Junior Subordinated Debentures"). The Capital Securities will be subject to mandatory redemption under certain circumstances, including at any time on or after December 17, 2006 upon the optional prepayment by the Company of the Junior Subordinated Debentures at an amount per Capital Security equal to 104.495% of the principal amount (declining ratably on each December 17 thereafter to 100% on December 17, 2016), plus accrued and unpaid distributions thereon. The obligations of the Company with respect to the Junior Subordinated Debentures, when considered together with the obligations of the Company under the Indenture relating to the Junior Subordinated Debentures, the Amended and Restated Declaration of Trust relating to the Capital Securities and the Capital Securities Guarantee issued by the Company with respect to the Capital Securities will provide, in the aggregate, a full and unconditional guarantee of payments of distributions and other amounts due on the Capital Securities. In July 1997, the Company and the Trust exchanged the outstanding Capital Securities and Junior Subordinated Debentures for substantially identical securities which were registered under the Securities Act of 1933, as amended (the "Act"). The Company also exchanged the Capital Securities Guarantee for a substantially identical guarantee which was also registered under the Act. Dividends on the Capital Securities are cumulative, payable semi-annually in arrears, and are deferrable at the Company's option for up to ten consecutive semi-annual periods. The Company cannot pay dividends on its preferred or common stocks during such deferments. Dividends on the Capital Securities have been classified in other operating expenses in the Consolidated Income Statements. The Trust has no operations or assets separate from its investment in the Junior Subordinated Debentures. Separate financial statements of the Trust are not presented because management has determined that they would not be meaningful to investors. NOTE 12. CAPITAL STOCK Class A Preferred Stock is entitled to 1/2 vote per share and a non-cumulative dividend of $140 per share per year, which must be paid prior to any dividend on the common stock. Dividends were declared on the Class A Preferred Stock for the first time in 1989 and have continued through 1998 as the Company paid dividends on its common stock. The redemption price of the Class A Preferred Stock is equivalent to the par value. In 1995, the Company sold 2,500,000 depositary shares each representing a one-hundredth interest in a share of Stock Appreciation Income Linked Securities ("SAILS"). The SAILS constitute a series of the Company's Class B Preferred Stock, designated as 6 3/4% Convertible Class B Preferred Stock, Series 1995 (SAILS). The SAILS (and thereby the related depositary shares) were not redeemable by the Company before September 15, 1998. The call price of each of the depositary shares was $37.6244 at September 15, 1998 and $37.4683 at December 31, 1998. The call price declines periodically and will be $37.00 at September 15, 1999 (the mandatory conversion date). On September 15, 1999, unless either previously redeemed by the Company or converted at the option of the holder, each share of the SAILS will automatically convert into 100 shares of Class B Common Stock. The SAILS pay an annual dividend of $249.75 per share and must be paid prior to any dividend on the common stock. Proceeds from the offering, net of underwriting discount, were approximately $90 million. The Company used the proceeds of the offering for general corporate purposes, including financing the growth of its subsidiaries. On February 20, 1998, the Company purchased 7,882,750 shares of its Class A Common Stock and 12,482,850 of its Class B Common Stock at $40 per share net, and 1,078,930 of its depositary shares each representing one one-hundredth interest in a share of SAILS at $32.80 per share net through the Tender Offer. 61 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During the third quarter of 1998, the Board of Directors authorized the repurchase of up to 2.5 million shares of the Company's Class A and Class B Common Stock and the formation of an Employee Stock Ownership Plan ("ESOP"). At December 31, 1998, the Company had purchased approximately 445,600 Class B shares and approximately 1,055,000 Class A shares at a total cost of $17.1 million. Of the total shares purchased, approximately 1,000,000 Class A shares were purchased for the Company's newly formed ESOP. NOTE 13. BENEFIT PLANS The Company has adopted several management incentive plans designed to provide incentives to participating employees to remain in the employ of the Company and devote themselves to its success. Under these plans, eligible employees were given the opportunity to elect to take portions of their anticipated or "target" bonus payments for future years in the form of restricted shares of common stock (with each plan covering three performance years). To the extent that such elections were made (or, for executive officers, were required by the terms of such plans), restricted shares were issued to employees, with the number of shares granted to employees determined by dividing the amount of future bonus payments the employee had elected to receive in stock by the market price as determined under the incentive plans. The restricted shares are subject to forfeiture prior to vesting should the employee terminate employment with the Company. Restricted shares vest 10 years from the date of grant but, with respect to the restricted shares issued under each plan, vesting was and may continue to be accelerated annually with respect to up to one-third of the shares, based on the extent to which the employee and the Company met or meet their respective performance goals for a given plan performance year. When newly eligible employees elect to participate in a plan, the number of shares issued to them with respect to their "target" bonus payments for the relevant plan performance years is determined based on the average market price of the stock for the 90 days prior to eligibility. Following the Tender Offer in 1998, the Company granted additional restricted shares to certain participants in AMIPWISE III and AMIPWISE IV and granted a phantom stock award of 50,627 shares in lieu of additional restricted shares to an officer of the Company. The additional restricted shares and phantom stock award were granted at $10.625. The following table summarizes the Company's incentive plans:
RESTRICTED PLAN PERFORMANCE ORIGINAL SHARES PLAN YEARS COVERED STOCK PRICE OUTSTANDING - ----------------------------------------------------------------------------------------------------- AMIPWISE III 1996-1998 $17.00 398,125 AMIPWISE IV 1999-2001 $25.00 943,350 - -----------------------------------------------------------------------------------------------------
The weighted average fair value of shares issued on or after January 1, 1995 are: $30 for 8,336 AMIPWISE III shares and $31 for 19,740 AMIPWISE IV shares issued in 1995, $40 for both 31,694 AMIPWISE III shares and 89,760 AMIPWISE IV shares issued in 1996, $39 for both 16,808 AMIPWISE III shares and 50,496 AMIPWISE IV shares in 1997, and $14 for 303,713 AMIPWISE III shares and $16 for 682,908 AMIPWISE IV shares in 1998. At December 31, 1998, a total of 1,343,704 shares issued under these and the predecessor plans to AMIPWISE III were subject to restrictions and were included in the number of shares outstanding. At December 31, 1998 the Company had two stock option plans and accounts for these plans following APB 25, under which no compensation expense has been recognized. 62 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1998 1997 1996 - --------------------------------------------------------------------------------------------- Net Income As reported $447,880 $71,625 $175,657 Pro forma 436,960 58,576 168,193 Basic Earnings per Share As reported Combined $ 16.65 $ 1.52 $ 4.15 Class A 16.62 1.45 4.08 Class B 16.68 1.57 4.19 Pro forma Combined $ 16.24 $ 1.22 $ 3.97 Class A 16.21 1.15 3.90 Class B 16.27 1.27 4.01 Diluted Earnings per Share As reported Combined $ 15.71 $ 1.50 $ 3.89 Class A 15.69 1.43 3.86 Class B 15.73 1.54 3.91 Pro forma Combined $ 15.33 $ 1.20 $ 3.73 Class A 15.31 1.14 3.70 Class B 15.34 1.24 3.75 - ---------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: risk-free interest rates of 5.7%, 6.7% and 6.0% for 1998, 1997, and 1996, respectively, expected dividend yields of 3% in 1998 and 1% in 1997 and 1996; expected lives of 10 years; expected volatility of 48% for 1998, 40% for 1997 and 41% for 1996. Because SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. During 1997 and 1998, the Company changed the exercise price of certain options granted during 1996 and 1997 to the current market price on the date of the modification. These modifications did not result in additional compensation expense under the accounting prescribed by SFAS 123. Also in 1998, the Company amended the terms of options granted to employees who became employees of the LLC or whose employment was otherwise terminated in connection with the Fleet Transaction to extend the post-employment exercise period. Contingent on the Fleet Transaction in 1998, the Company accelerated vesting of 43.15% of outstanding options that were not vested at the time of the Fleet Transaction. See discussion in Note 20 of charges to earnings relating to these modifications. Subsequent to the Tender Offer in 1998, the Company issued stock appreciation rights to certain directors of the Company in exchange for or in lieu of options. At December 31, 1998, 1,230 rights were outstanding with a strike price of $4.75, 163,074 rights were outstanding with a strike price of $12.33 and 231,342 were outstanding with a strike price between $19.00 and $22.125. The Company's two stock option plans together authorize the grant to employees and directors of options to purchase an aggregate of 10.2 million shares of common stock. The Company presently intends only to issue options to purchase Class B Common Stock. Options generally vest over a four-year period and expire 10 years after the date of grant. 63 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Shares available for future grant were approximately 2.2 million at December 31, 1998, and 2.8 million at December 31, 1997. Transactions under the plans for the three years ended December 31, 1998, were as follows:
1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE (SHARES IN THOUSANDS) ------------------------------------------------------------------------------------------ Outstanding at beginning of year 3,934 $27 4,109 $25 4,381 $21 Granted 1,186 18 967 27 578 39 Exercised (1,471) 24 (774) 11 (699) 9 Terminated (661) 21 (368) 33 (151) 30 - --------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,988 22 3,934 27 4,109 25 - --------------------------------------------------------------------------------------------------------------------- Options exercisable at year-end 1,353 2,003 2,138 - --------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 8.05 $22.90 $19.87 - ---------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1998:
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------ NUMBER WEIGHTED AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE ------------------------------------------------- ------------------------------ 1 to 10 265 9.1 years $ 9 49 $ 8 11 to 20 851 8.9 19 81 18 21 to 30 1,609 7.2 23 1,017 23 31 to 40 221 6.7 35 171 35 40 to 46 42 6.9 44 35 44 - ---------------------------------------------------------------------------------------------------- 2,988 1,353 - ----------------------------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan which allows employees and directors to purchase Class B Common Stock at a 15% discount from the market price without paying brokerage fees. The Company reports this 15% discount as compensation expense and incurred expense of $200, $339 and $248 in 1998, 1997 and 1996, respectively. Shares issued under the plan from unissued stock or from treasury stock are issued at the average market price on the day of purchase. The Company has a tax-deferred employee savings plan which provides employees savings and investment opportunities, including the ability to invest in the Company's Class B Common Stock. The employee savings plan provides for discretionary Company contributions equal to a portion of the first 5% of an employee's compensation contributed to the plan. For the three years ended December 31, 1998, 1997 and 1996, the Company contributions equaled 100% of the first 5% of participating employees' compensation contributed to the plan. The expense for this plan totaled $2,403, $3,494 and $2,546 in 1998, 1997, and 1996, respectively. All shares purchased by the plan for the three years ended December 31, 1998, 1997 and 1996 were acquired from the Company at the market price on each purchase date or were purchased on the open market. The Company offers an elective, nonqualified deferred compensation plan to qualified executives and non-employee directors, which allows them to defer a portion of their cash compensation on a pretax basis. The plan contains provisions related to minimum contribution levels and deferral periods with respect to any individual's participation. The plan participant makes irrevocable elections at the date of deferral as to deferral period and date of distribution. Interest is credited to the participant's account at the rate of 125% of the 10 year rolling average interest rate on 10-Year U.S. Treasury Notes. Distribution from the plan may be either 64 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) at retirement or at an earlier date, and can be either in a lump sum or in installment payments. The Company has purchased life insurance contracts with a face value of $53.4 million to fund this plan. On September 10, 1998, the Company's Board of Directors authorized the formation of an Employee Stock Ownership Plan, covering all employees of the Company who have reached age 21 with one year of service. During 1998, the ESOP borrowed approximately $12.6 million from the Company (the "ESOP Loan") and used the proceeds to purchase approximately 1,000,000 shares of the Company's Class A Common Stock. The ESOP Loan is repayable with an interest rate of 8% over 30 years. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. All dividends received by the ESOP are used to pay debt service. As the ESOP Loan is repaid, shares are allocated to active employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with AICPA Statement of Position 93-6, "Employer's Accounting for Employee Stock Ownership Plans." Accordingly, unallocated shares are reported as unearned ESOP shares in the balance sheet. As shares of common stock acquired by the ESOP are committed to be released to each employee , the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are used to fund debt service of the ESOP. ESOP compensation expense for the year ended December 31, 1998 was not material. There were 998,513 unearned ESOP shares at December 31, 1998 with a fair value of $13 million. NOTE 14. CAPITAL RATIOS Advanta National Bank ("ANB") and Advanta Bank Corp. ("ABC", formerly Advanta Financial Corp.) are wholly-owned subsidiaries of the Company. ANB and ABC are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the institutions' and the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the institutions must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The institutions' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the institution to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that as of December 31, 1998, ANB and ABC meet all capital adequacy requirements to which they are subject and are correctly categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the institutions must maintain minimum total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the following table. There have been no events or conditions since those notifications that management believes have changed such categorizations. 65 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS - ------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1998 Total Capital (to Risk Weighted Assets) ANB $380,107 12.12% $250,932 greater $313,665 greater than or than or equal equal to 8.0% to 10.0% ABC 41,840 14.13 23,683 greater 29,604 greater than or than or equal equal to 8.0 to 10.0 Tier I Capital (to Risk Weighted Assets) ANB 370,281 11.80% 125,466 greater 188,199 greater than or than or equal equal to 4.0% to 6.0% ABC 38,139 12.88 11,842 greater 17,763 greater than or than or equal equal to 4.0 to 6.0 Tier I Capital (to Average Assets) ANB 370,281 17.13% 86,458 greater 108,074 greater than or than or equal equal to 4.0% to 5.0% ABC 38,139 16.10 9,474 greater 11,842 greater than or than or equal equal to 4.0 to 5.0 AS OF DECEMBER 31, 1997 Total Capital (to Risk Weighted Assets) ANB $824,801 16.39% $402,640 greater $503,300 greater than or than or equal equal to 8.0% to 10.0% ABC 33,038 18.02 14,669 greater 18,337 greater than or than or equal equal to 8.0 to 10.0 Tier I Capital (to Risk Weighted Assets) ANB 650,911 12.93% 201,320 greater 301,980 greater than or than or equal equal to 4.0% to 6.0% ABC 30,746 16.77 7,335 greater 11,002 greater than or than or equal equal to 4.0 to 6.0 Tier I Capital (to Average Assets) ANB 650,911 14.07% 185,015 greater 231,269 greater than or than or equal equal to 4.0% to 5.0% ABC 30,746 10.97 11,208 greater 14,010 greater than or than or equal equal to 4.0 to 5.0
- -------------------------------------------------------------------------------- NOTE 15. CASH, DIVIDEND AND LOAN RESTRICTIONS In the normal course of business, the Company and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in cash, debt and dividend restrictions. ANB and ABC are subject to the following restrictions: FDIC-insured banks are subject to certain provisions of the Federal Reserve Act which impose various legal limitations on the extent to which such banks may finance or otherwise supply funds to certain of their affiliates. In particular, ANB and ABC are subject to certain restrictions on any extensions of credit to, or other covered transactions, such as certain purchases of assets, with the Company or its affiliates. Such restrictions prevent ANB and ABC from lending to the Company and its affiliates unless such extensions of credit are secured by U.S. Government obligations or other specified collateral. Further, such secured extensions of credit are limited in amount: (a) as to the Company or any such affiliate, to 10 percent of each bank's capital and surplus, and (b) as to the Company and all such affiliates in the aggregate, to 20 percent of each bank's capital and surplus. Under certain grandfathering provisions of the Competitive Equality Banking Act of 1987, the Company is not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"), so long as the Company and ANB continue to comply with certain restrictions on their activities. These restrictions include limiting the scope of ANB's activities to those in which it was engaged prior to March 5, 1987. Since ANB was not making commercial loans at that time, it must continue to refrain from making commercial loans -- which would include any loans to the Company or any of its subsidiaries -- in order for the Company to maintain its grandfathered exemption under the BHCA. The Company has no present plans to register as a bank holding company under the BHCA. 66 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ANB is also subject to various legal limitations on the amount of dividends that can be paid to its parent, the Company. ANB is eligible to declare a dividend provided that it is not greater than the current year's net profits plus net profits of the preceding two years, as defined. During 1998, the OCC approved the payment of a special dividend/return of capital of $1.3 billion from ANB to the Company to effect the Tender Offer described in Note 2. ANB paid no dividends to the Company during 1997, and paid $107 million of dividends during 1996. Advances to bank subsidiaries totaled $15.1 million at December 31, 1998. The Company had advances from bank subsidiaries of $3.6 million at December 31, 1997. The Company's insurance subsidiaries are also subject to certain capital, deposit and dividend rules and regulations as prescribed by state jurisdictions in which they are authorized to operate. At December 31, 1998 and 1997, the insurance subsidiaries were in compliance with such rules and regulations. Dividends paid to the Company in 1998 by insurance subsidiaries were $39 million, including an extraordinary dividend of $35 million. There were no dividends paid to the Company by insurance subsidiaries in 1997 or 1996. At December 31, 1998 and 1997, total stockholders' equity of the Company's banking and insurance affiliates approximated $429 million and $829 million, respectively. At January 1, 1999, $146 million of stockholders' equity of the Company's banking and insurance affiliates was available for payment of dividends under applicable regulatory guidelines. NOTE 16. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," effective January 1, 1998. SFAS 131 establishes revised standards for public companies related to the reporting of financial and descriptive information about their operating segments in financial statements. The Company has three reportable segments: Advanta Mortgage, Advanta Business Services, and, through February 20, 1998, Advanta Personal Payment Services. Each of these business segments have or had separate management teams and infrastructures that offer different products and services. Advanta Mortgage is engaged in nonconforming home equity lending directly to consumers or through brokers and other originators. This business unit originates, purchases, securitizes and services nonconforming credit first and second lien mortgage loans and home equity lines of credit, directly through subsidiaries of the Company. In addition to servicing and managing the loans it originates, Advanta Mortgage contracts with third parties to service their home equity loans on a subservicing basis. Advanta Business Services offers flexible lease financing programs on small-ticket equipment and business credit cards to small businesses. The commercial equipment leasing business is generated primarily through third-party referrals from manufacturers or distributors of equipment, as well as independent brokers. Direct marketing techniques are the source of growth in accounts in the business credit card operations. Prior to the Fleet Transaction, the Company offered consumer credit cards through Advanta Personal Payment Services. See further discussion of the Fleet Transaction in Note 2. This business segment issued consumer credit cards nationwide. The primary method of account acquisition was direct mail solicitation using credit scoring by independent third parties and proprietary market segmentation and targeting models to target its mailing to profitable segments of the market. As of February 20, 1998, this segment had no operations, and the activity below reflects operations through that date. The accounting policies of the segments are the same as those described in the summary of significant accounting policies with the exception of annual fees on credit cards and deferred acquisition costs on mortgage loans and leases. For management reporting purposes, annual fees recognized on credit cards are included in other revenues rather than as an adjustment to operating expenses, and amortization of deferred acquisition costs on leases are recorded as operating expenses rather than as an adjustment to interest income. The Company evaluates performance based on net income of the respective business units. 67 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA ADVANTA PERSONAL ADVANTA BUSINESS PAYMENT RECONCILING MORTGAGE SERVICES SERVICES OTHER(2) ITEMS TOTAL - ----------------------------------------------------------------------------------------------------------------- 1998 Noninterest revenues $ 240,366 $ 96,228 $ 126,466 $ 4,762 $(46,180)(3)(5) $ 421,642 Interest revenue 123,550 34,360 23,465 64,183 (4,468)(4) 241,090 Interest expense 76,056 20,854 33,352 54,013 0 184,275 Gain on transfer of consumer credit card business 0 0 541,288 0 0 541,288 Other charges(1) 0 0 167,572 0 (42,500)(5) 125,072 Income taxes (benefit) 10,667 4,430 (24,141) 0 0 (9,044) Net income 25,090 10,338 412,452 0 0 447,880 Average managed receivables 6,737,019 1,353,391 1,846,109 15,724 0 9,952,243 Total assets 1,794,491 430,058 0 1,571,201 0 3,795,750 Capital expenditures 835 3,658 2,469 38,398 0 45,360 Depreciation and amortization 6,160 4,720 5,600 5,000 0 21,480 - ----------------------------------------------------------------------------------------------------------------- 1997 Noninterest revenues $ 130,511 $ 75,665 $ 590,750 $ 34,854 $ (4,299)(3) $ 827,481 Interest revenue 94,499 44,971 179,844 120,034 (4,074)(4) 435,274 Interest expense 51,825 20,073 130,351 122,309 0 324,558 Income taxes (benefit) 1,107 7,856 16,042 (100) 0 24,905 Net income 33,316 14,726 22,877 706 0 71,625 Average managed receivables 3,918,240 1,063,056 11,356,944 31,810 0 16,370,050 Total assets 1,048,461 264,928 3,498,212 1,874,531 0 6,686,132 Capital expenditures 464 4,582 33,770 40,414 0 79,230 Depreciation and amortization 3,534 4,203 22,339 5,204 0 35,280 - ----------------------------------------------------------------------------------------------------------------- 1996 Noninterest revenues $ 87,916 $ 65,052 $ 633,554 $ 16,621 $ (3,573)(3) $ 799,570 Interest revenue 43,097 32,231 220,847 61,694 (2,942)(4) 354,927 Interest expense 23,773 17,372 147,133 81,422 0 269,700 Income taxes (benefit) 412 10,095 78,611 (14) 0 89,104 Net income (loss) 24,981 19,776 130,928 (28) 0 175,657 Average managed receivables 2,133,047 603,797 12,169,546 12,270 0 14,918,660 Total assets 767,408 466,092 3,189,955 1,160,504 0 5,583,959 Capital expenditures 3,781 6,882 60,920 12,584 0 84,167 Depreciation and amortization 1,940 3,146 12,145 2,104 0 19,335 - -----------------------------------------------------------------------------------------------------------------
(1) Other charges represents the following: severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Fleet Transaction/Tender Offer; expense associated with exited business/product; asset impairment; and equity losses related to exited business/product. (2) Other includes insurance operations, venture capital operations and assets not attributable to other segments. (3) Annual fees recognized on credit cards are included in other revenues for management reporting purposes, and are offset against deferred acquisition costs in operating expenses for GAAP reporting. (4) Amortization of deferred acquisition costs on leases is considered an operating expense for management reporting purposes, but is considered an adjustment to interest income for GAAP reporting. (5) Equity losses related to exited business/product are included in other charges for management reporting purposes, but are netted against equity gains in other revenues for GAAP reporting. 68 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 17. SELECTED INCOME STATEMENT INFORMATION
OTHER REVENUES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Equity securities (losses) gains(1) $(41,750) $(11,426) $ 6,522 Business card interchange income 20,741 11,617 4,396 Consumer credit card interchange income 11,881 85,208 102,804 Consumer credit card overlimit fees 16,233 46,447 16,465 Mortgage other revenues(2) 22,945 4,535 1,645 Leasing and business card other revenues 18,769 15,865 24,039 Insurance revenues, net 14,408 37,816 38,175 Other 1,149 18,021 3,276 - --------------------------------------------------------------------------------------------- Total other revenues, net $ 64,376 $208,083 $197,322 - ---------------------------------------------------------------------------------------------
(1) Equity securities (losses) gains include losses of $42.5 million recognized in 1998 reflecting changes in the fair value of Advanta Partners LP investments. Most of the loss relates to investments not publicly traded for which Advanta Partners LP decided to expedite a disposal plan. (2) Mortgage other revenues in 1998 include an $11.2 million gain on the sale of an investment in affordable housing partnerships, and $6 million from the favorable settlement of certain prior year claims.
OTHER OPERATING EXPENSES YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Marketing $ 53,109 $ 53,039 $ 31,975 Equipment expense 23,381 37,712 22,752 Amortization of credit card deferred origination costs, net 22,271 69,344 88,517 External processing 21,908 43,256 42,814 Occupancy expense 16,001 23,097 14,827 Credit and collection expense 15,715 20,017 13,784 Professional/consulting fees 14,767 38,600 40,247 Telephone expense 12,428 21,262 16,116 Postage 8,949 29,039 25,700 Minority interest in income of consolidated subsidiary 8,880 8,880 222 Credit card fraud losses 3,194 22,287 23,611 Other 2,475 17,021 19,943 - --------------------------------------------------------------------------------------------- Total other operating expenses $203,078 $383,554 $340,508 - ---------------------------------------------------------------------------------------------
69 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18. NET INTEREST INCOME The following table presents the components of net interest income:
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Interest income: Loans and leases $129,748 $ 276,982 $267,823 Trading investments 10,374 0 0 Investments available for sale 79,294 140,636 80,142 Interest component of previously discounted cash flows 21,674 17,656 6,962 - --------------------------------------------------------------------------------------------- Total interest income 241,090 435,274 354,927 Interest expense: Deposits 85,935 150,164 110,879 Debt 87,900 161,295 136,654 Other borrowings 10,440 13,099 22,167 - --------------------------------------------------------------------------------------------- Total interest expense 184,275 324,558 269,700 Net interest income 56,815 110,716 85,227 Less: Provision for loan losses (67,193) (210,826) (96,862) - --------------------------------------------------------------------------------------------- Net interest after provision for credit losses $(10,378) $(100,110) $(11,635) - ---------------------------------------------------------------------------------------------
NOTE 19. INCOME TAXES Income tax (benefit) expense consisted of the following components:
YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- Current: Federal $ 20,254 $ 5,953 $78,037 State 2,470 (651) 5,346 - -------------------------------------------------------------------------------------------- Total current 22,724 5,302 83,383 - -------------------------------------------------------------------------------------------- Deferred: Federal (44,777) 16,950 5,800 State 13,009 2,653 (79) - -------------------------------------------------------------------------------------------- Total deferred (31,768) 19,603 5,721 - -------------------------------------------------------------------------------------------- Total tax (benefit) expense $ (9,044) $24,905 $89,104 - --------------------------------------------------------------------------------------------
70 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The reconciliation of the statutory federal income tax to the consolidated tax expense is as follows:
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------- Statutory federal income tax $ 153,593 $33,786 $92,740 State income taxes, net of federal income tax benefit 10,061 1,302 3,423 Insurance program income (expense) 30,414 (8,707) (4,492) Tax credits (7,288) (5,271) (1,231) Compensation limitation 4,725 0 0 Transfer of consumer credit card business (see Note 2) (200,494) 0 0 Nontaxable investment income (607) (560) (443) Other 552 4,355 (893) - --------------------------------------------------------------------------------------------- Consolidated tax (benefit) expense $ (9,044) $24,905 $89,104 - ---------------------------------------------------------------------------------------------
Deferred taxes are provided to reflect the estimated future tax effects of the differences between the financial statement and tax bases of assets and liabilities and enacted tax laws. The net deferred tax asset/ (liability) is comprised of the following:
DECEMBER 31, - ----------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------- Deferred taxes: Gross assets $ 44,541 $ 84,676 Gross liabilities (80,566) (118,655) - ----------------------------------------------------------------------------------- Total deferred taxes $(36,025) $ (33,979) - -----------------------------------------------------------------------------------
A summary of deferred tax assets and liabilities follows:
DECEMBER 31, - ---------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------- Deferred loan fees and costs $ (5,167) $(24,655) Allowance for loan losses 17,415 45,224 Securitization income (32,538) (38,543) Leasing income (16,092) (10,772) Other 357 (5,233) - ---------------------------------------------------------------------------------- Net deferred tax liability $(36,025) $(33,979) - ----------------------------------------------------------------------------------
The net deferred federal tax liability is presented net with current federal income taxes receivable for financial reporting purposes, and is included in other assets. 71 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 20. COSTS ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER AND OTHER EXITED BUSINESS/PRODUCTS In connection with the Fleet Transaction more fully discussed in Note 2, the Company effected major organizational changes during the first quarter of 1998 to reduce corporate expenses incurred in the past: (a) to support the business contributed to the LLC in the Fleet Transaction; and (b) associated with the business and products no longer being offered or not directly associated with its mortgage and business services units. Costs associated with these changes include:
CHARGED TO ACCRUAL IN 1998 ------------------ 12/31/98 1998 NON- ACCRUAL ACCRUAL CASH CASH BALANCE - ----------------------------------------------------------------------------------------------- Employee costs associated with Fleet Transaction/Tender Offer $ 62,257 $55,192 $ 3,774 $ 3,291 Expenses associated with exited business/products 54,115 25,717 13,632 14,766 Asset impairment/disposal 8,700 0 8,133 567 - ----------------------------------------------------------------------------------------------- Total $125,072 $80,909 $25,539 $18,624 - -----------------------------------------------------------------------------------------------
EMPLOYEE COSTS ASSOCIATED WITH FLEET TRANSACTION/TENDER OFFER In connection with the organizational changes, the Company incurred approximately $26.8 million of severance and related costs classified as employee costs associated with Fleet Transaction/Tender Offer. These expenses included severance and outplacement costs associated with the workforce reduction, option exercise and remeasurement costs, and other employee costs directly attributable to the Fleet Transaction/ Tender Offer. In connection with these organizational changes, approximately 255 employees who ceased to be employed by the Company were entitled to benefits, of which 190 employees were directly associated with the business contributed to the LLC and approximately 65 employees were associated with the workforce reduction. Additionally, during the first quarter of 1998, the Company incurred approximately $35.5 million of other compensation charges. This amount includes $21.3 million attributable to payments under change of control plans and $14.2 million associated with the execution of the Tender Offer. EXITED BUSINESS/PRODUCTS During the first quarter of 1998, the Company implemented a plan to exit certain businesses and product offerings not directly associated with its mortgage and business services units. In connection with this plan, contractual vendor commitments of approximately $10.0 million associated with discontinued development and other activities were accrued. The Company has substantially completed the settlement of these contractual commitments. The Company also has contractual commitments to certain customers, and non-related financial institutions that are providing benefits to those customers, under a product that will no longer be offered and for which no future revenues or benefits will be received. The Company has recorded a charge of $22.8 million associated with this commitment, and an $8.3 million charge associated with the write-down of assets associated with this program. The Company expects to pay a substantial portion of these costs over the next 33 months. The actions required to complete this plan include the settlement of contractual commitments and the payment of customer benefits. In connection with the Fleet Transaction/Tender Offer and the other exited business and product offerings, the Company also incurred $11.5 million of related professional fees and $1.5 million of other expenses related to these plans. 72 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ASSET IMPAIRMENT/DISPOSAL In connection with the Company's plans to reduce corporate expenses and exit certain business and product offerings, certain assets were identified for disposal and the carrying costs thereof were written off or written down to estimated realizable value resulting in a charge of $8.7 million. These assets consisted principally of leasehold improvements and various other assets. The disposal of these assets has been substantially completed. NOTE 21. CALCULATION OF EARNINGS PER SHARE The following table shows the calculation of basic earnings per share and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 - --------------------------------------------------------------------------------------------- Net income $447,880 $ 71,625 $175,657 less: Preferred "A" dividends (141) (141) (141) less: Preferred "B" dividends (3,549) (6,409) (6,403) - --------------------------------------------------------------------------------------------- Income available to common shareholders $444,190 $ 65,075 $169,113 less: Class A dividends declared (2,615) (7,997) (6,703) less: Class B dividends declared (4,589) (13,754) (11,334) - --------------------------------------------------------------------------------------------- Undistributed Earnings $436,986 $ 43,324 $151,076 Basic Shares Class A 11,174 18,172 17,621 Class B 15,500 24,635 23,174 Combined(2) 26,674 42,807 40,795 - --------------------------------------------------------------------------------------------- Options A 8 63 410 Options B 103 532 1,293 AMIP B 138 99 507 Preferred B 1,572 0(1) 2,068 - --------------------------------------------------------------------------------------------- Diluted Shares Class A 11,182 18,235 18,031 Class B 17,313 25,266 27,042 Combined(2) 28,495 43,501 45,073 - --------------------------------------------------------------------------------------------- Basic Earnings Per Share Class A $ 16.62 $ 1.45 $ 4.08 Class B 16.68 1.57 4.19 Combined(2) 16.65 1.52 4.15 - --------------------------------------------------------------------------------------------- Diluted Earnings Per Share Class A $ 15.69 $ 1.43 $ 3.86 Class B 15.73 1.54 3.91 Combined(2) 15.71 1.50 3.89 - ---------------------------------------------------------------------------------------------
(1) 25,000 shares of the Company's Class B convertible preferred stock were outstanding during 1997 but were not included in the computation of diluted earnings per share for the year ended December 31, 1997 because they were antidilutive for that period. (2) Combined represents a weighted average of Class A and Class B earnings per share. Options to purchase 2.7 million shares of Class B Common Stock were outstanding during 1998 but were not included in the computation of diluted EPS because the option's exercise price was greater than or equal to the average market price of the common shares during the applicable periods. 73 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 22. PARENT COMPANY FINANCIAL STATEMENTS ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
(IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- ASSETS Cash $ 17,276 $ 94,887 Commercial paper equivalent(1) 440,900 0 Investments 20,592 29,046 Other assets, principally investments in and advances to wholly owned subsidiaries(2) 1,244,656 2,314,852 - -------------------------------------------------------------------------------------- Total assets $1,723,424 $2,438,785 - -------------------------------------------------------------------------------------- LIABILITIES Accrued expenses and other liabilities $ 37,218 $ 121,797 Debt 1,125,902 1,390,038 - -------------------------------------------------------------------------------------- Total liabilities 1,163,120 1,511,835 - -------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 1,010 1,010 Common stock 267 448 Other stockholders' equity 559,027 925,492 - -------------------------------------------------------------------------------------- Total stockholders' equity 560,304 926,950 - -------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,723,424 $2,438,785 - --------------------------------------------------------------------------------------
(1) Commercial paper equivalent refers to unsecured loans made to Advanta National Bank for terms less than 35 days in maturity which are not automatically renewable, consistent with commercial paper issuance. (2) Includes advances to wholly-owned non-bank subsidiaries to fund $329.1 million in loans, $70.5 million of retained interest-only strips, $128.1 million in subordinated trust assets and $41.2 million of equity securities accounted for at fair value as of December 31, 1998. 74 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS
($ IN THOUSANDS) DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- INCOME: Dividends from subsidiaries(1) $ 560,015 $ 12,300 $135,006 Interest 78,210 81,656 62,144 Gain on transfer of credit card business 48,944 0 0 Other, net 44,623 33,649 29,450 - ---------------------------------------------------------------------------------------------- Total Income 731,792 127,605 226,600 - ---------------------------------------------------------------------------------------------- EXPENSES: General and administrative 44,289 69,010 75,768 Interest 86,557 97,067 72,219 Severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with Fleet Transaction/Tender Offer 55,007 0 0 Expense associated with exited business/product 2,000 0 0 Asset impairment 2,700 0 0 - ---------------------------------------------------------------------------------------------- Total expense 190,553 166,077 147,987 - ---------------------------------------------------------------------------------------------- Income (loss) before income taxes and equity in subsidiaries 541,239 (38,472) 78,613 - ---------------------------------------------------------------------------------------------- Income tax benefit 8,566 20,677 24,784 - ---------------------------------------------------------------------------------------------- Income (loss) before equity in undistributed net (loss) profit in subsidiaries 549,805 (17,795) 103,397 - ---------------------------------------------------------------------------------------------- Equity in undistributed net (loss) profit of subsidiaries (101,925) 89,420 72,260 - ---------------------------------------------------------------------------------------------- Net income $ 447,880 $ 71,625 $175,657 - ----------------------------------------------------------------------------------------------
(1) Dividends from subsidiaries include only dividends from current year net income of subsidiaries. See Parent Company Only Condensed Statements of Cash Flows for total dividends received from subsidiaries. The Parent Company Only Statements of Changes in Stockholders' Equity is the same as the Consolidated Statements of Changes in Stockholder's Equity. 75 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVANTA CORP. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 447,880 $ 71,625 $ 175,657 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in net profit of subsidiaries (458,090) (101,719) (207,266) Dividends received from subsidiaries 903,831 12,300 135,006 Gain on transfer of consumer credit card business (48,944) 0 0 Depreciation and amortization 6,880 5,083 1,375 Noncash expense associated with Fleet Transaction/Tender Offer and other exited business/products 11,974 0 0 Change in other assets and interest-bearing deposits (19,339) (154,043) (162,600) Change in accrued liabilities (81,886) 94,401 51,853 - ---------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 762,306 (72,353) (5,975) INVESTING ACTIVITIES Net change in premises & equipment 4,793 (8,793) (9,408) Net change in commercial paper equivalents (440,900) 0 0 Investments in subsidiaries (124,500) 0 (149,925) Return of investment from subsidiaries 470,000 0 46,867 Purchase of investments available for sale (471,582) (87,324) (3,754,047) Proceeds from sales of investments available for sale 143,770 49,946 77,404 Proceeds from maturing investments available for sale 327,200 25,000 3,771,981 - ---------------------------------------------------------------------------------------------- Net cash used in investing activities (91,219) (21,171) (17,128) FINANCING ACTIVITIES Change in lines of credit 0 (40,000) 40,000 Proceeds from issuance of subordinated/senior debt 29,858 24,747 41,036 Payments on redemption of subordinated/senior debt (60,991) (97,609) (38,541) Decrease (increase) in affiliate borrowings 339,822 (26,827) (324,341) Proceeds from issuance of medium-term notes 0 511,255 720,545 Payments on maturity of medium-term notes (233,035) (261,873) (494,400) Proceeds from issuance of affiliate subordinated debentures 0 0 103,093 Issuance of stock 5,249 14,000 11,974 Tender offer (801,606) 0 0 Stock buyback (4,549) 0 0 ESOP stock purchase (12,569) 0 0 ESOP debt repayment 17 0 0 Cash dividends paid (10,894) (28,301) (24,581) - ---------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (748,698) 95,392 34,785 - ---------------------------------------------------------------------------------------------- Net (decrease) increase in cash (77,611) 1,868 11,682 Cash at beginning of year 94,887 93,019 81,337 Cash at end of year $ 17,276 $ 94,887 $ 93,019 - ----------------------------------------------------------------------------------------------
76 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Noncash transactions of the Parent Company include capital contributions to bank subsidiaries through the forgiveness of debt of $67.5 million in 1998, and $76 million to nonbank subsidiaries in 1998. NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
1998 1997 - ------------------------------------------------------------------------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------ Financial assets: Cash $ 90,597 $ 90,597 $ 57,953 $ 57,953 Federal funds sold 267,400 267,400 156,500 156,500 Restricted interest-bearing deposits 80,028 80,028 543,239 543,239 Trading investments 501,563 501,563 0 0 Investments available for sale 521,410 521,410 1,222,272 1,222,272 Subordinated trust assets 284,528 284,528 170,281 170,281 Loans and lease receivables, net 1,138,933 1,189,124 3,376,546 3,412,823 Retained interest-only strip-Advanta Mortgage loans 247,381 247,381 191,868 191,868 Amounts due from consumer credit card securitizations 0 0 208,330 208,330 Contract mortgage servicing rights 49,097 49,097 24,546 24,546 Financial liabilities: Demand and savings deposits $ 185,782 $ 185,782 $ 548,440 $ 548,440 Time deposits and debt 2,594,155 2,560,034 4,717,343 4,693,887 Other borrowings 36,301 36,301 52,774 53,411 Off-balance sheet financial instruments -- Asset/(Liability): Interest rate swaps $ 0 $ 11,589 $ 0 $ 8,323 Interest rate options: Caps purchased 45 130 360 596 Caps written (45) (130) (1,350) (616) Forward contracts 0 365 0 (522) - ------------------------------------------------------------------------------------------------
The above values do not necessarily reflect the premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. In addition, these values, derived from the methods and assumptions described below, do not consider the potential income taxes or other expenses that would be incurred on an actual sale of an asset or settlement of a liability. With respect to the fair value of liabilities, the above table is prepared on the basis that the amounts necessary to discharge such liabilities represent fair value. The Company's off-balance sheet financial instruments relate to managing the interest rate sensitivity position as described in Note 24. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH, FEDERAL FUNDS SOLD AND RESTRICTED INTEREST-BEARING DEPOSITS For these short-term instruments, the carrying amount is a reasonable estimate of the fair value. INVESTMENTS The fair values of trading investments and investment securities available for sale are based on quoted market prices, dealer quotes or estimates using quoted market prices for similar securities. For investments that are 77 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) not publicly traded, management has made estimates of fair value that consider several factors including the investees' financial results, conditions and prospects, and the values of comparable public companies. SUBORDINATED TRUST ASSETS Subordinated trust assets earn a variable rate, risk-adjusted return. These assets are classified and measured in accordance with SFAS 115 as trading securities, and are reported at fair value. LOAN AND LEASE RECEIVABLES, NET For mortgage loans, business card receivables and consumer credit card receivables, the fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for these loans also includes the estimated value of the portion of the retained interest-only strip and, for mortgage loans, servicing which are not sold with securities backed by these types of loans. The value of the retained interest-only strips and, for mortgage loans, servicing is estimated based on a discounted cash flow analysis. The cash flows are estimated as the excess of the weighted average yield on each pool of the loans sold over the sum of the pass-through interest rate plus the servicing fee and an estimate of future credit losses over the life of the loans and other amounts described in Note 1. The value of other loans is estimated based on the market prices of similar receivables with similar characteristics. RETAINED INTEREST-ONLY STRIPS, CONTRACTUAL MORTGAGE SERVICING RIGHTS AND AMOUNTS DUE FROM CONSUMER CREDIT CARD SECURITIZATIONS The fair values of retained interest-only strips and contractual mortgage servicing rights are estimated based on discounted cash flow analyses as described in Note 1. For the other components of amounts due from consumer credit card securitizations, the carrying amount is a reasonable estimate of the fair value. For purposes of estimating the fair value of the retained interest-only strip from Advanta Mortgage loan securitizations, management has assumed a discount rate of 14%, a prepayment rate of 29% CPR for fixed rate loans and 43% for adjustable rate loans and a loss rate of 100 basis points at December 31, 1998, and has assumed a discount rate of 14%, a prepayment rate of 24% CPR for fixed rate loans and 29% CPR for adjustable rate loans and a loss rate of 80 basis points at December 31, 1997. For purposes of estimating the fair value of contractual mortgage servicing rights, management has assumed a discount rate of 12% at December 31, 1998 and 1997, and prepayment rates consistent with retained interest-only strip assumptions at those dates. For purposes of estimating the fair value of the retained interest-only strip from consumer credit card securitizations, management assumed a discount rate of 12%, a principal payment rate of 10% and a loss rate of 7.8% at December 31, 1997. DEMAND AND SAVINGS DEPOSITS The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. This fair value does not include any benefit that may result from the low cost of funding provided by these deposits compared to the cost of borrowing funds in the market. TIME DEPOSITS AND DEBT The fair value of fixed-maturity certificates of deposit and notes is estimated using the rates currently offered for deposits and notes of similar remaining maturities. OTHER BORROWINGS The other borrowings are all at variable interest rates and therefore the carrying value approximates a reasonable estimate of the fair value. 78 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTEREST RATE SWAPS, OPTIONS AND FORWARD CONTRACTS The fair value of interest rate swaps, options and forward contracts (used for managing interest rate risk) is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparty. COMMITMENTS TO EXTEND CREDIT Although the Company had $2.1 billion of unused commitments to extend credit, there is no market value associated with these commitments, as any fees charged are consistent with the fees charged by other companies at the reporting date to enter into similar agreements. NOTE 24. DERIVATIVE FINANCIAL INSTRUMENTS In managing its interest rate risk, the Company may use derivative financial instruments. These instruments are used for the express purpose of managing interest rate exposures and are not used for any trading or speculative activities. During 1998, 1997, and 1996, all of the Company's derivatives were designated as hedges or synthetic alterations and were accounted for as such. The following table summarizes by notional amounts the Company's derivatives instruments as of December 31, 1998 and 1997:
1998 1997 - -------------------------------------------------------------------------------------- Interest rate swaps $2,997,912 $2,111,711 Interest rate options: Caps written 268,633 1,018,781 Caps purchased 268,633 328,781 Forward contracts 499,000 400,437 - -------------------------------------------------------------------------------------- $4,034,178 $3,859,710 - --------------------------------------------------------------------------------------
The notional amounts of derivatives do not represent amounts exchanged by the counterparties and, thus, are not a measure of the Company's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amounts and the other terms of the derivatives contracts. Credit risk associated with derivatives arises from the potential for a counterparty to default on its obligations. The Company attempts to limit credit risk by only transacting with highly creditworthy counterparties and requiring master netting and collateral agreements for all interest rate swap and interest rate option contracts. All derivative counterparties are associated with organizations having securities rated as investment grade by independent rating agencies. The list of eligible counterparties, setting of counterparty limits, and monitoring of credit exposure is controlled by the Investment Committee, a management committee. The Company's credit exposure to derivatives, with the exception of caps written, is represented by contracts with a positive fair value without giving consideration to the value of any collateral exchanged (see Note 23). For caps written, credit exposure does not exist since the counterparty has performed its obligation to pay the Company a premium payment. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. Based on its interest rate sensitivity analyses, the Company enters into interest rate swaps to more effectively manage the impact of fluctuating interest rates on its net interest income and noninterest revenues. The Company has used interest rate swaps to synthetically alter the cash flows on certain deposit, debt, and off-balance sheet receivable securitizations. As of December 31, 1998, the Company used interest rate swaps for the following purposes: $575.5 million to effectively convert fixed rate debt to a LIBOR based variable rate; and $2.4 billion to effectively 79 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) convert certain off-balance sheet variable pass-through rate home equity and leasing securitizations to a fixed rate. As of December 31, 1997, the Company used interest rate swaps for the following purposes: $1.0 billion to effectively convert fixed rate debt to a LIBOR based variable rate; and $1.1 billion to effectively convert certain off-balance sheet variable pass-through rate home equity and leasing securitizations to a fixed rate. In 1997, as part of its asset/liability risk management process, the Company chose to effectively convert $598 million of fixed rate off-balance sheet consumer credit card securitizations to a LIBOR based variable rate through the use of interest rate swaps. In 1997, the Company elected to terminate all of these interest rate swap positions after a 7 month period and realized a gain of $16.3 million. Gains or losses resulting from these interest rate swap terminations are deferred and amortized over the remaining life of the underlying fixed rate credit card securitization. As of December 31, 1997, the unamortized gain amounted to $15.6 million with the remaining amortization period of 4.2 years. During 1998, the unamortized gain was recorded as part of the gain on the Fleet Transaction described in Note 2. The following table summarizes by notional amounts the Company's interest rate swap and swaption activity by major category for the periods presented:
RECEIVE PAY FIXED RATE FIXED RATE TOTAL - ----------------------------------------------------------------------------------------------- Balance at 1/1/96 $ 203,835 $ 664,000 $ 867,835 Additions 635,000 594,804 1,229,804 Net accretion 0 41,805 41,805 Maturities (26,000) (400,000) (426,000) - ----------------------------------------------------------------------------------------------- Balance at 12/31/96 $ 812,835 $ 900,609 $1,713,444 Additions 967,250 472,496 1,439,746 Net amortization 0 (142,894) (142,894) Maturities (136,835) (10,500) (147,335) Swaptions exercised 0 (153,000) (153,000) Terminations (598,250) 0 (598,250) - ----------------------------------------------------------------------------------------------- Balance at 12/31/97 $1,045,000 $1,066,711 $2,111,711 Additions 0 1,948,046 1,948,046 Net amortization (4,000) (380,533) (384,533) Maturities (249,000) 0 (249,000) Terminations (54,790) (211,812) (266,602) Contributed to Fleet Credit Card LLC (161,710) 0 (161,710) - ----------------------------------------------------------------------------------------------- Balance at 12/31/98 $ 575,500 $2,422,412 $2,997,912 - -----------------------------------------------------------------------------------------------
Interest rate options are contracts that grant the purchaser, for a premium payment, the right to either purchase or sell a financial instrument at a future date for a specified price from the writer of the option. Interest rate caps and floors are option-like contracts that require the seller (writer) to pay the purchaser at specified future dates the amount by which a specified market interest rate exceeds the cap rate or falls below the floor rate, multiplied against a notional amount. A collar is an option-like contract which is the simultaneous purchase of an interest rate cap and the sale of an interest rate floor using the same reference interest rate index. As part of managing its balance sheet and liquidity position, the Company periodically securitizes and sells receivables. For credit enhancement purposes, certain variable pass-through rate receivable securitizations were issued with embedded or purchased interest rate caps. These rate caps, however, were not needed to satisfy asset/liability management strategies. In order to achieve its desired interest rate sensitivity structure and further reduce the effective pass-through rate of the securitization, the Company has 80 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) synthetically altered the interest rate structure on certain off-balance sheet receivable securitizations by writing interest rate caps to offset the embedded and purchased rate caps attached to them. The premiums received or paid for writing or purchasing such cap contracts with third parties are included in other assets and are amortized to other revenues over the life of the contract. Any obligations which may arise under these contracts are recorded in other revenues on an accrual basis. As of December 31, 1998, unamortized premiums for both caps written and caps purchased amounted to $44.6 thousand. The weighted average maturities for caps written and purchased were 2.8 years. As of December 31, 1997, unamortized premiums for caps written and purchased amounted to $1.3 million and $360 thousand, respectively. The weighted average maturities for caps written and purchased were 3.3 years and 4.6 years, respectively. Forward contracts are commitments to either purchase or sell a financial instrument at a future date for a specified price and may be settled in cash or through delivery of the underlying financial instrument. The Company regularly securitizes and sells receivables. The Company may choose to hedge the changes in the market value of its fixed rate loans and commitments designated for anticipated securitizations by selling U.S. Treasury securities for forward settlement. The maximum and average terms of hedges of anticipated mortgage loan sales is four and two months, respectively. Gains and losses from forward sales are deferred and included in the measurement of the dollar basis of the loans sold. Realized (losses) gains of ($3.8) million and $4.2 million were deferred as of December 31, 1998 and 1997, respectively. The Company may choose to hedge market value changes on its trading investments with forward contracts. Gains and losses on the forward contracts hedging the Company's trading investments are recognized currently and reported in other revenues with the gains and losses on trading investments. The following table discloses the Company's interest rate swaps by major category, notional value, weighted average interest rates, and annual maturities for the periods presented.
BALANCES MATURING IN: BALANCE AT ---------------------------------------------------------------------------------- 12/31/98 1999 2000 2001 2002 2003 2004 2005 2006 - --------------------------------------------------------------------------------------------------------------------------------- Pay Fixed/Receive Variable: Notional Value $2,422,412 $ 66,325 $ 11,495 $118,318 $348,710 $531,348 $ 0 $414,029 $932,187 Weighted Average Pay Rate 5.32% 5.62% 5.72% 5.72% 5.93% 5.35% 0.00% 5.54% 4.90% Weighted Average Receive Rate 5.60% 5.62% 5.33% 5.44% 5.56% 5.62% 0.00% 5.62% 5.62% Receive Fixed/Pay Variable: Notional Value $ 575,500 $141,000 $124,000 $250,500 $ 60,000 $ 0 $ 0 $ 0 $ 0 Weighted Average Receive Rate 6.52% 6.46% 6.32% 6.63% 6.60% 0.00% 0.00% 0.00% 0.00% Weighted Average Pay Rate 5.27% 5.29% 5.29% 5.23% 5.33% 0.00% 0.00% 0.00% 0.00% Total Notional Value $2,997,912 $207,325 $135,495 $368,818 $408,710 $531,348 $ 0 $414,029 $932,187 Total Weighted Average Rates on Swaps: Pay Rate 5.31% 5.40% 5.33% 5.39% 5.85% 5.35% 0.00% 5.54% 4.90% Receive Rate 5.78% 6.19% 6.24% 6.25% 5.71% 5.62% 0.00% 5.62% 5.62% - ---------------------------------------------------------------------------------------------------------------------------------
81 83 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Advanta Corp.: We have audited the accompanying consolidated balance sheets of Advanta Corp. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanta Corp. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Philadelphia, PA January 26, 1999 REPORT OF MANAGEMENT ON RESPONSIBILITY FOR FINANCIAL REPORTING To the Stockholders of Advanta Corp.: The management of Advanta Corp. and its subsidiaries is responsible for the preparation, content, integrity and objectivity of the financial statements contained in this Annual Report. These financial statements have been prepared in accordance with generally accepted accounting principles and as such must, by necessity, include amounts based upon estimates and judgments made by management. The other financial information in the Annual Report was also prepared by management and is consistent with the financial statements. Management maintains a system of internal controls that provides reasonable assurance as to the integrity and reliability of the financial statements. This control system includes: (l) organizational and budgetary arrangements which provide reasonable assurance that errors or irregularities would be detected promptly; (2) careful selection of personnel and communications programs aimed at assuring that policies and standards are understood by employees; (3) a program of internal audits; and (4) continuing review and evaluation of the control program itself. The financial statements in this Annual Report have been audited by Arthur Andersen LLP, independent public accountants. Their audits were conducted in accordance with generally accepted auditing standards and considered the Company's system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Their report is printed herewith. /s/ Dennis Alter /s/ Philip M. Browne /s/ John J. Calamari - ---------------------------- ---------------------------- ---------------------------- Chairman of the Board and Senior Vice President and Vice President, Finance and Chief Executive Officer Chief Financial Officer Chief Accounting Officer
82 84 SUPPLEMENTAL SCHEDULES (UNAUDITED) MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, ($ IN THOUSANDS) 1998 - ---------------------------------------------------------------------------- Maturity: 3 months or less $ 41,062 Over 3 months through 6 months 32,878 Over 6 months through 12 months 134,219 Over 12 months 64,926 - ---------------------------------------------------------------------------- Total $273,085 - ----------------------------------------------------------------------------
COMMON STOCK PRICE RANGES AND DIVIDENDS The Company's common stock is traded on the National Market tier of The Nasdaq Stock Market under the symbols ADVNB (Class B non-voting common stock) and ADVNA (Class A voting common stock). Following are the high, low and closing sale prices and cash dividends declared for the last two years as they apply to each class of stock:
CASH DIVIDENDS QUARTER ENDED: HIGH LOW CLOSE DECLARED - ------------------------------------------------------------------------------------------------ Class B: - ------------------------------------------------------------------------------------------------ March 1997 $53.63 $25.50 $25.88 $.132 June 1997 36.25 18.88 35.69 .132 September 1997 36.50 24.75 27.25 .132 December 1997 37.63 23.38 25.38 .132 March 1998 $31.25 $19.69 $21.00 $.076 June 1998 24.25 17.50 19.88 .076 September 1998 20.56 8.25 10.50 .076 December 1998 12.00 5.25 11.06 .076 - ------------------------------------------------------------------------------------------------ Class A: - ------------------------------------------------------------------------------------------------ March 1997 $54.75 $26.63 $26.88 $.110 June 1997 37.25 20.00 36.75 .110 September 1997 37.50 26.19 29.13 .110 December 1997 38.75 24.25 26.25 .110 March 1998 $32.75 $21.00 $22.50 $.063 June 1998 26.25 19.25 21.94 .063 September 1998 22.75 9.38 12.88 .063 December 1998 14.88 7.13 13.25 .063 - ------------------------------------------------------------------------------------------------
At December 31, 1998, the Company had approximately 775 and 338 holders of record of Class B and Class A Common Stock, respectively. 83 85 QUARTERLY DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 - ---------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ---------------------------------------------------------------------------------------------------- Gain on sale of receivables $ 44,964 $ 46,428 $ 57,145 $ 104 Interest income 54,170 55,199 33,428 98,293 Gain on transfer of consumer credit card business 0 0 0 541,288 Other revenues 63,384 45,655 40,441 123,521 - ---------------------------------------------------------------------------------------------------- Total revenues 162,518 147,282 131,014 763,206 Interest expense 41,340 39,165 36,226 67,544 Provision for credit losses 19,972 6,414 6,846 33,961 Salaries and other operating expenses 94,639 80,239 74,465 139,301 Other charges(2) 0 0 0 125,072 - ---------------------------------------------------------------------------------------------------- Total expenses 155,951 125,818 117,537 365,878 Pretax income 6,567 21,464 13,477 397,328 - ---------------------------------------------------------------------------------------------------- Net income 4,597 15,025 9,471 418,787 - ---------------------------------------------------------------------------------------------------- Basic earnings per share Class A $ .15 $ .57 $ .34 $ 11.84 Class B .17 .58 .35 11.85 Combined(1) .16 .58 .35 11.84 - ---------------------------------------------------------------------------------------------------- Diluted earnings per share Class A $ .15 $ .56 $ .34 $ 11.04 Class B .17 .58 .35 11.04 Combined(1) .16 .58 .35 11.04 - ---------------------------------------------------------------------------------------------------- Weighted average common shares outstanding Basic Class A 9,374 10,316 10,362 14,798 Class B 13,811 14,166 14,161 20,480 Combined(1) 23,185 24,482 24,523 35,278 - ---------------------------------------------------------------------------------------------------- Weighted average common shares -- assuming dilution Diluted Class A 9,377 10,320 10,372 14,822 Class B 13,817 14,194 14,330 23,093 Combined(1) 23,194 24,514 24,702 37,915 - ----------------------------------------------------------------------------------------------------
84 86 QUARTERLY DATA -- CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 - ---------------------------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ---------------------------------------------------------------------------------------------------- Gain on sale of receivables $ 33,647 $ 28,575 $ 29,298 $ 25,954 Interest income 91,832 138,777 103,468 101,197 Other revenues 244,684 175,369 163,177 126,777 - ---------------------------------------------------------------------------------------------------- Total revenues 370,163 342,721 295,943 253,928 Interest expense 84,885 88,414 79,797 71,462 Provision for credit losses 51,940 48,243 50,279 60,364 Salaries and other operating expenses 174,562 148,904 158,564 148,811 - ---------------------------------------------------------------------------------------------------- Total expenses 311,387 285,561 288,640 280,637 Pretax income 58,776 57,160 7,303 (26,709) - ---------------------------------------------------------------------------------------------------- Net income (loss) 43,612 42,412 5,419 (19,818) - ---------------------------------------------------------------------------------------------------- Basic earnings (loss) per share Class A $ .96 $ .94 $ .07 $ (.52) Class B .99 .96 .09 (.49) Combined(1) .98 .95 .09 (.51) - ---------------------------------------------------------------------------------------------------- Diluted earnings (loss) per share Class A $ .94 $ .91 $ .07 $ (.52) Class B .95 .92 .09 (.49) Combined(1) .95 .92 .09 (.51) - ---------------------------------------------------------------------------------------------------- Weighted average common shares outstanding Basic Class A 18,201 18,188 18,178 18,129 Class B 24,802 24,687 24,594 24,392 Combined(1) 43,003 42,875 42,772 42,521 - ---------------------------------------------------------------------------------------------------- Weighted average common shares -- assuming dilution Diluted Class A 18,250 18,245 18,239 18,129 Class B 27,775 27,870 24,969 24,392 Combined(1) 46,025 46,115 43,208 42,521 - ----------------------------------------------------------------------------------------------------
(1) See Note 1 to Consolidated Financial Statements. (2) Other charges represents the following: severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Fleet Transaction/Tender Offer; expense associated with exited business/product; and asset impairment. 85 87 ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
($ IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- -------------- ------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - -------------------------------------------------------------------------------------------------------------------------- Advanta Mortgage Loans(1) $20,092 60% $ 5,822 4% $ 8,785 10% $ 3,360 6% $ 5,164 12% Leases and business cards(2) 9,611 29 9,798 7 4,241 5 977 2 1,076 3 Consumer Credit cards -- 0 118,420 86 76,084 85 36,889 69 27,486 66 Other 3,734 11 3,733 3 74 -- 12,268 23 7,891 19 - -------------------------------------------------------------------------------------------------------------------------- Total $33,437 100% $137,773 100% $89,184 100% $53,494 100% $41,617 100% - --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF GROSS RECEIVABLES
($ IN THOUSANDS) DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------------------------- Advanta Mortgage Loans(1) $ 837,744 72% $ 478,433 14% $ 376,260 14% $ 321,711 12% $ 142,874 7% Leases and business cards(2) 304,185 26 298,789 9 214,327 8 93,660 3 86,157 5 Consumer Credit cards -- 0 2,579,890 76 2,045,219 77 2,338,280 85 1,730,176 88 Other loans 17,862 2 40,978 1 20,835 1 9,276 -- 5,237 -- - ---------------------------------------------------------------------------------------------------------------------------- Total $1,159,791 100% $3,398,090 100% $2,656,641 100% $2,762,927 100% $1,964,444 100% - ----------------------------------------------------------------------------------------------------------------------------
(1) Includes mortgage and home equity loans for all years presented and auto loans beginning in 1996. (2) Includes leases for all years presented and business cards beginning in 1996. 86 88 YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 1998
($ IN THOUSANDS) MATURING - --------------------------------------------------------------------------------------------------------- AFTER ONE BUT WITHIN FIVE AFTER FIVE BUT WITHIN ONE YEAR YEARS WITHIN TEN YEARS ------------------------ -------------------------- ------------------------ MARKET VALUE YIELD(C) MARKET VALUE YIELD(C) MARKET VALUE YIELD(C) - --------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government securities $382,954 5.45% $53,144 5.00% $ 0 0.00% State and municipal securities(A) 442 4.74 1,479 4.86 2,183 5.98 Other(B) 0 0.00 0 0 0 0.00 - --------------------------------------------------------------------------------------------------------- Total investments available for sale $383,396 5.45% $54,623 4.99% $2,183 5.98% - --------------------------------------------------------------------------------------------------------- Trading investments $ 0 0.00% $ 0 0.00% $ 0 0.00% - --------------------------------------------------------------------------------------------------------- ($ IN THOUSANDS) MATURING - --------------------- ------------------------ AFTER TEN YEARS ------------------------ MARKET VALUE YIELD(C) - --------------------- ------------------------ U.S. Treasury and other U.S. Government securities $ 0 0.00% State and municipal securities(A) 714 5.53 Other(B) 16,322 6.29 - -------------------------------------------------------- Total investments available for sale $ 17,036 6.25% - ------------------------------------------------------------------ Trading investments $501,563 6.29% - ----------------------------------------------------------------------------
(A) Yield computed on a taxable equivalent basis using a statutory rate of 35%. (B) Equity investments and other securities without a stated maturity are excluded from this table. (C) Yields are computed by dividing annualized interest by the amortized cost of the respective investment securities. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 87 89 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The text of the Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" are hereby incorporated by reference, as is the text in Part I of this Report under the caption, "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. The text of the Proxy Statement under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Election of Directors -- Committees, Meetings and Compensation of the Board of Directors", "-- Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The text of the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" are hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The text of the Proxy Statement under the captions "Election of Directors -- Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "-- Other Matters" are hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. The following Financial Statements, Schedules, and Other Information of the Registrant and its subsidiaries are included in this Form 10-K: (a)(1) Financial Statements. 1. Consolidated Balance Sheets at December 31, 1998 and 1997. 2. Consolidated Income Statements for each of the three years in the period ended December 31, 1998. 3. Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998. 4. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998. 5. Notes to Consolidated Financial Statements.
(a)(2) Schedules. 1. Other statements and schedules are not being presented either because they are not required or the information required by such statements and schedules is presented elsewhere in the financial statements.
88 90 (a)(3) Exhibits 3-a Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (File No. 33-53475), filed June 10, 1994) , as amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated August 15, 1995, as further amended by the Certificate of Designations, Preferences, Rights and Limitations of the Registrant's Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A, dated March 17, 1997)). 3-b By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated March 17, 1997). 3-c Rights Agreement, dated as of March 14, 1997, by and between the Registrant and the Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificate (incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated March 17, 1997), as amended by Amendment No. 1 to the Rights Agreement, dated as of June 4, 1998 (incorporated by reference to Exhibit 1 to the Registrant's Amended Registration Statement on Form 8-A/A, dated June 11, 1998), as amended by Amendment No. 2 to the Rights Agreement, dated as of September 10, 1998 (incorporated by reference to Exhibit 1 to the Company's Amended Registration Statement on Form 8-A/A, dated September 23, 1998). 4-a* Trust Indenture dated April 22, 1981 between Registrant and Mellon Bank, N.A., (formerly, CoreStates Bank, N.A.), as Trustee, including Form of Debenture. 4-b Specimen of Class A Common Stock Certificate and specimen of Class B Common Stock Certificate (incorporated by reference to Exhibit 1 of the Registrant's Amendment No. 1 to Form 8 and Exhibit 1 to Registrant's Form 8-A, respectively, both dated April 22, 1992). 4-c Trust Indenture dated as of November 15, 1993 between the Registrant and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-3 (No. 33-50883), filed November 2, 1993). 4-d Specimen of 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-e Deposit Agreement, dated as of August 15, 1995, among Advanta Corp. and Mellon Securities Trust Company and the Holders from Time to Time of the Depositary Receipts Described Therein in Respect of the 6 3/4% Convertible Class B Preferred Stock, Series 1995 (Stock Appreciation Income Linked Securities (SAILS)) (with form of Depositary Receipt as an exhibit thereto) (incorporated by reference to Exhibit 4.10 to the Company's Current Report on Form 8-K dated August 15, 1995, filed the same date). 4-f Senior Trust Indenture, dated as of October 23, 1995, between the Registrant and Mellon Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-62601), filed September 13, 1995). 4-g Indenture dated as of December 17, 1996 between Advanta Corp. and The Chase Manhattan Bank, as trustee relating to the Junior Subordinated Debentures. (incorporated by reference to Exhibit 4-g to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-h Declaration of Trust dated as of December 5, 1996 of Advanta Capital Trust I. (incorporated by reference to Exhibit 4-h to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).
89 91 4-i Amended and Restated Declaration of Trust dated as of December 17, 1996 for Advanta Capital Trust I. (incorporated by reference to Exhibit 4-I to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 4-j Series A Capital Securities Guarantee Agreement dated as of December 17, 1996. (incorporated by reference to Exhibit 4-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). 9 Inapplicable. 10-a Registrant's Stock Option Plan, as amended (incorporated by reference to Exhibit 10-b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989).+ 10-b Amended and Restated Advanta Corp. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).+ 10-c Advanta Management Incentive Plan, as amended (incorporated by reference to Exhibit 10-c to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).+ 10-d* Application for membership in VISA(R) U.S.A. Inc. and Membership Agreement executed by Colonial National Bank USA on March 25, 1983. 10-e* Application for membership in MasterCard(R) International, Inc. and Card Member License Agreement executed by Colonial National Bank USA on March 25, 1983. 10-f* Indenture of Trust dated May 11, 1984 between Linda Alter, as settlor, and Dennis Alter, as trustee. 10-f(i) Agreement dated October 20, 1992 among Dennis Alter, as Trustee of the trust established by the Indenture of Trust filed as Exhibit 10-g (the "Indenture"), Dennis Alter in his individual capacity, Linda Alter, and Michael Stolper, which Agreement modifies the Indenture (incorporated by reference to Exhibit 10-g(i) to the Registrant's Registration Statement on Form S-3 (File No. 33-58660), filed February 23, 1993). 10-g Agreement dated as of March 5, 1998 between the Registrant and Olaf Olafsson (incorporated by reference to Exhibit 10-g to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).+ 10-h Advanta Management Incentive Plan with Stock Election (incorporated by reference to Exhibit 4-c to Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (File No. 33-33350), filed February 21, 1990).+ 10-i Advanta Corp. Executive Deferral Plan (incorporated by reference to the Exhibit 10-j to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-j Advanta Corp. Non-Employee Directors Deferral Plan (incorporated by reference to Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-k Advanta Management Incentive Plan With Stock Election II (incorporated by reference to Exhibit 10-o to the Registrant's Registration Statement on Form S-2 (File No. 33-39343), filed March 8, 1991).+ 10-l Amended and Restated Advanta Management Incentive Plan With Stock Election III (filed herewith).+ 10-m Life Insurance Benefit for Certain Key Executives and Directors (filed herewith).+ 10-n Amended and Restated Advanta Management Incentive Plan With Stock Election IV (filed herewith). + 10-o Amended and Restated Agreement of Limited Partnership of Advanta Partners LP, dated as of October 1, 1996 (incorporated by reference to Exhibit 10-o to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996).
90 92 10-p Agreement dated as of January 15, 1996 between the Registrant and William A. Rosoff (incorporated by reference to Exhibit 10-u to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).+ 10-q Pooling and Servicing Agreement, dated as of June 1, 1996, among Advanta Business Receivables Corp., Advanta Financial Corp. and First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10-q to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). 10-r Agreement dated May 11, 1998 between the Registrant and Philip M. Browne (filed herewith).+ 10-s Master Business Receivables Asset-Backed Financing Facility Agreement, dated as of May 1, 1997, by and among Advanta Business Service Corp., Advanta Leasing Receivables Corp. III and The Chase Manhattan Bank (incorporated by reference to Advanta Business Services Corp.'s Registration Statement on Form S-1 (File No. 333-38575). 10-t Contribution Agreement, dated as of October 28, 1997, by and between Advanta Corp. and Fleet Financial Group (incorporated by reference to Exhibit(c)(2) to the Registrant's Schedule 13E-4, dated January 20, 1998), as amended by the First Amendment to the Contribution Agreement, dated as of February 20, 1998, by and among Advanta Corp., Fleet Financial Group and Fleet Credit Card, LLC (incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K, filed March 6, 1998). 10-u Agreement dated July 27, 1998 between the Registrant and George O. Deehan (filed herewith).+ 10-v Amended and Restated Master Loan and Security Agreement, dated as of August 21, 1998, by and among Morgan Stanley Mortgage Capital Inc., as Lender and Advanta Mortgage Holding Company, AMCUSA, Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp. Northeast, Advanta Mortgage Conduit Services, Inc. and Advanta Finance Corp., as Borrowers, as amended (filed herewith). 10-w Master Repurchase Agreement, dated as of August 21, 1998, between Morgan Stanley Capital Inc., as Buyer and Advanta National Bank, as Seller, as amended (filed herewith). 10-x Sale and Servicing Agreement, dated as of September 25, 1998 among Advanta Home Equity Loan Owner Trust 1998-MS1, as Issuer, Advanta Loan Warehouse Corporation, as Depositor, Bankers Trust Company of California, N.A., AMCUSA, Advanta Bank Corp., Advanta National Bank and Advanta Corp. (filed herewith). 11 Inapplicable. 12 Computation of Ratio of Earnings to Fixed Charges (filed herewith). 13 Inapplicable. 16 Inapplicable. 18 Inapplicable. 21 Subsidiaries of the Registrant (filed herewith). 22 Inapplicable. 23 Consent of Independent Public Accountants (filed herewith). 24 Powers of Attorney (included on the signature page hereof). 27 Financial Data Schedule (filed herewith). 28 Inapplicable. 99 Inapplicable.
- -------------------------------------------------------------------------------- * Incorporated by reference to the Exhibit with corresponding number constituting part of the Registrant's Registration Statement on Form S-2 (No. 33-00071), filed on September 4, 1985. + Management contract or compensatory plan or arrangement. 91 93 (b) Reports on Form 8-K 1. A Report on Form 8-K was filed by the Company on October 27, 1998 regarding consolidated earnings of the Company and its subsidiaries for the fiscal quarter ended September 30, 1998. Summary earnings and balance sheet information as of that date were filed with such report. 92 94 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Advanta Corp. Dated: March 30, 1999 By: /s/ OLAF OLAFSSON ------------------------------------ Olaf Olafsson, President and Director KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby constitute and appoint Dennis Alter, William A. Rosoff, Olaf Olafsson, Philip M. Browne, John J. Calamari and Elizabeth H. Mai, or any of them (with full power to each of them to act alone), his or her true and lawful attorney in-fact and agent, with full power of substitution, for him or her and on his or her behalf to sign, execute and file an Annual Report on Form 10-K under the Securities Exchange Act of 1934, as amended, for the fiscal year ended December 31, 1998 relating to Advanta Corp. and any or all amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 30th day of March, 1999.
NAME TITLE ---- ----- /s/ DENNIS ALTER Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer Dennis Alter /s/ WILLIAM A. ROSOFF Vice Chairman and Director - ----------------------------------------------------- William A. Rosoff /s/ OLAF OLAFSSON President and Director - ----------------------------------------------------- Olaf Olafsson /s/ PHILIP M. BROWNE Senior Vice President and Chief Financial - ----------------------------------------------------- Officer Philip M. Browne /s/ JOHN J. CALAMARI Vice President, Finance and Chief Accounting - ----------------------------------------------------- Officer John J. Calamari /s/ ARTHUR P. BELLIS Director - ----------------------------------------------------- Arthur P. Bellis /s/ MAX BOTEL Director - ----------------------------------------------------- Max Botel /s/ WILLIAM C. DUNKELBERG Director - ----------------------------------------------------- William C. Dunkelberg
93 95
NAME TITLE ---- ----- /s/ DANA BECKER DUNN Director - ----------------------------------------------------- Dana Becker Dunn /s/ ROBERT C. HALL Director - ----------------------------------------------------- Robert C. Hall /s/ JAMES E. KSANSNAK Director - ----------------------------------------------------- James E. Ksansnak /s/ RONALD LUBNER Director - ----------------------------------------------------- Ronald Lubner /s/ MICHAEL STOLPER Director - ----------------------------------------------------- Michael Stolper
94 EX-10.L 2 ADVANTA MAN. INCENTIVE PLAN WITH STOCK ELECT.111 1 EXHIBIT 10-l (as amended 10/26/95, 3/7/96 and 8/27/98) ADVANTA CORP. ADVANTA MANAGEMENT INCENTIVE PLAN WITH STOCK ELECTION III 1. Purpose. This Plan is intended as an additional incentive to employees to enter into or remain in the employ of Advanta Corp., a Delaware corporation (the "Company"), or a subsidiary thereof and to devote themselves to the Company's success. This Plan provides selected employees with an opportunity to acquire the Company's Class B Common Stock, par value $0.01 per share (the "Common Stock"). 2. Administration. This Plan shall be administered by the Board of Directors of the Company; however, the Board of Directors may (i) designate a committee composed of two or more of its Non-employee Directors to operate and administer the Plan in its stead, (ii) designate two committees to operate and administer the Plan in its stead, one of such committees composed of two or more of its Non-employee Directors to operate and administer the Plan with respect to the Company's "Principal Officers" (as defined below), and the other such committee composed of two or more directors (whether or not Non-employee Directors) to operate and administer the Plan with respect to persons other than Principal Officers and Non-employee Directors or (iii) designate only one of the two committees referred to in subparagraph (ii) and itself operate and administer the Plan with respect to persons not within the jurisdiction of such committee. Any of such committees designated by the Board of Directors, and the Board of Directors itself in its administrative capacity with respect to the Plan, is referred to as the "Committee." As used herein, the term "Principal Officers" means any person who is an "officer" within the meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended, or any successor rule. The Committee shall hold meetings at such times and places as it may determine. Acts approved at a meeting by a majority of the members of the Committee or acts approved in writing by the unanimous consent of the members of the Committee shall be valid acts of the Committee. The interpretation and construction by the Committee of any provision of the Plan or of any Restricted Stock Award awarded hereunder shall be final, binding and conclusive. 3. Eligibility. All employees of the Company or a subsidiary thereof who are selected by the Company's Compensation Committee to be eligible to receive a bonus pursuant to the Advanta Management Incentive Plan shall be eligible to receive shares (the "Restricted Shares") of the Company's Class B Common Stock (the "Restricted Stock Awards") pursuant to this Plan. For purposes of this Plan, "subsidiary" shall include any corporation, partnership, joint venture or other entity in which the Company, directly or 2 indirectly, has an equity interest of at least twenty percent (20%) or a significant financial interest, provided the Committee has determined that such entity shall be deemed a "subsidiary" for purposes of this Plan. The aggregate maximum number of shares of Class B Common Stock for which Restricted Stock Awards may be awarded under this Plan is 1,200,000 shares. 4. Restricted Stock Awards. (a) Elective Participation. Each eligible employee other than an employee to whom Section 4(b) applies shall be permitted to elect (which election shall be irrevocable) a portion of such employee's annual bonus for services performed during 1996, 1997, and 1998 to be received in the form of Class B Common Stock. The portion of each such bonus which may be elected in stock is an amount up to the employee's anticipated 1993 "target" bonus, calculated on the basis of the employee's base salary as of December 1, 1992, subject to modification as described in Section 4(f). The election shall be performed by the employee's execution of such forms as may be determined by the Committee. (b) Mandatory Participation by Section 16 Officers. Each eligible employee who is an "officer" of the Company as defined for purposes of the Rule (an "Officer") as of the date the Plan is adopted (subject to stockholder approval) by the Board of Directors, shall be granted a Restricted Stock Award based upon the employee's anticipated 1993 "target" bonus, calculated on the basis of the employee's base salary as of December 1, 1992. The number of shares so awarded shall be determined by applying the formula set forth in Section 4(c), using a percentage factor of 100% in clause (ii) of such formula. (c) Number of Restricted Shares. Subject to the provisions of this Plan, the Committee shall award a Restricted Stock Award to an eligible employee ("Award Recipient") equal to the number of shares (rounded down to the nearest whole number divisible by three) calculated by (i) multiplying the employee's anticipated 1993 "target" bonus (calculated on the basis of the employee's base salary as of December 1, 1992) by three, (ii) multiplying this product times the percentage factor (25%, 50%, 75% or 100%) irrevocably elected by the employee, and (iii) dividing the product thereof by the market price of the Class B Common Stock as of the close of business on December 1, 1992 (the "Base Price"). (d) Documents. Restricted Shares awarded pursuant to this Plan shall be evidenced by the stock certificates described in Section 13 and such other written documents (the "Restricted Stock Award Documents") in such form as the Committee shall approve from time to time. Such Restricted Stock Award Documents shall comply with and be subject to the terms and conditions of this Plan and such other terms and conditions which the Committee shall require from time to time which are not inconsistent with the terms of this Plan. The Committee shall have the right to amend the Restricted Stock Award Documents issued to an Award Recipient subject to his or her consent. 3 (e) New Participants. In the event an individual becomes eligible to participate in the Plan for any reason (including promotion or being newly hired) subsequent to the time at which initial awards are made hereunder in 1992, (i) if such individual is an Officer, such individual shall automatically become a participant in the Plan, or (ii) if such individual is not an Officer, he or she shall be entitled to elect to participate in the Plan, provided that such election must be made within thirty days after the person first becomes eligible to participate. Except as provided under Section 4(f)(2), the number of shares included in such new participant's Restricted Stock Award shall be based on the participant's annualized target bonus for the then current calendar year and the average of the closing market prices of the Class B Common Stock for each trading day in the ninety day period ending on the day before the date the recipient became eligible to participate in the Plan ("New Participant Base Plan"). Any such Restricted Stock Awards shall be made otherwise in accordance with the terms of this Plan, with such modifications as may be appropriate to implement the intended operation of the Plan. (f) Modification for Increases in Target Bonus Percentage. If a participant's prospective target bonus is increased to a higher percentage of his or her base salary (whether as a consequence of such participant receiving a promotion, or of other action by the Committee), then (a) if such participant is an Officer or as the result of such promotion the participant has become an Officer, then the participant shall receive additional Restricted Shares reflecting the full amount of the increase in target bonus as applied to the years 1996-1998, or (b) if the participant is not an Officer, to the extent that the participant previously elected to receive a percentage of 1996-1998 bonuses in stock, that election shall be likewise applied to the additional target bonus resulting from the increase in the participant's target bonus percentage. In either event, the number of additional shares of Restricted Stock awarded to the participant in such a case shall be based on the average of the closing market prices of the Class B Common Stock for each trading day in the ninety day period ending on the day before the effective date of the promotion or other action by the Committee ("Target Increase Base Price"). For example, suppose a participant's target bonus percentage is 15% of her $70,000 salary (resulting in a $10,500 target bonus) at the time she makes an irrevocable election in 1992 to take 100% of her target bonuses in stock. The closing price of the Class B Common Stock on December 1, 1992 (i.e., the Base Price) was $25.50 per share. Consequently, she is awarded 1,233 restricted shares ($70,000 X 15% - $25.50 per share = 411 shares X 3 years = 1,233). In 1994, she receives a promotion, as the result of which her salary is increased to $90,000 per year and her target bonus percentage is increased to 25%. Consequently, her new target bonus is 25% of $90,000 or $22,500. This represents an incremental $12,000 over her previous target bonus of $10,500. If at the time she receives such promotion the market price of the stock (using the 90 day average) is $30 per share, she will be awarded an additional 1,200 restricted shares ($12,000 X 3 years - $30 per share = 1,200). If the participant is awarded her target bonus in each of 1996, 1997 and 1998, she will have 811 shares vested each year (411 of the $25.50 shares and 400 of the $30 shares, for a total grant date value of $22,480.50, with the $19.50 balance paid in cash). If the promotion occurred on January 1, 1997 and the 90 day average 4 market price of the stock was $30 per share at that time, she would be awarded an additional 800 shares rather than 1200, as the first bonus year, 1996, will at that point have already passed. (g) Committee Adjustments to Restricted Stock Awards. Notwithstanding anything contained herein to the contrary, the Committee shall have the authority to make such adjustments to the Base Price, New Participant Base Price, Target Increase Base Price of the Restricted Shares covered by a Restricted Stock Award and/or to the number of shares that are subject to any Restricted Stock Awards granted hereunder and/or to make additional Restricted Stock Awards all on such terms and conditions as the Committee, in its discretion, deems appropriate in order to take into account any facts and circumstances that influence the effectiveness of the Plan as a method of providing appropriate current performance incentives for recipients of Restricted Stock Awards, including, but not limited to, any facts and circumstances related to levels of compensation and bonuses paid by other similarly situated employers, current needs of the Company to encourage the retention of valued employees and to reward high levels of performance by such employees. The Committee shall have authority to determine the adjustments to be made under this Section 4(g), and any such determination by the Committee shall be final, binding and conclusive. Nothing contained in this Section 4(g) shall constitute authorization to grant more shares under the Plan than are authorized in the aggregate for grants of Restricted Stock Awards under the terms of the Plan. For these purposes, shares available for grant under the Plan shall include shares subject to Restricted Stock Awards that have been previously forfeited under the terms of the Plan." 5. Vesting. (a) General. Restricted Shares shall fully vest upon the lapse of ten years from the date they are awarded as Restricted Stock Awards. However, the Committee may accelerate the vesting of the Restricted Shares, and to the extent that both the Award Recipient and the Company meet their respective annual target performance goals for the applicable years so that the Committee or the Board of Directors approves payment of bonuses under the Senior Management Incentive Plan, vesting will be accelerated annually with respect to one-third of the Restricted Shares on such date that the Company elects to pay bonuses for services performed during the years 1996, 1997, and 1998, respectively. The portion of any bonus award which exceeds the 1993 "target" level will be paid in cash. Bonus awards which fall short of the 1993 "target" bonus awards, as determined by the Compensation Committee or the Board of Directors, in their discretion, will be paid by reducing both the cash component and the number of shares of stock to be vested, on a pro rata basis. All Restricted Shares shall be valued at the Base Price (or, if applicable, the average price utilized under Section 4(e) or 4(f) to determine the number of Restricted Shares in a Restricted Stock Award) for purposes of determining the value of that portion of any bonus award to be paid by accelerating the vesting of Restricted Shares. 5 (b) Examples. The following examples are designed to clarify the operation of the Plan. The Base Price (which is the closing price of the Class B Common Stock on December 1, 1992) is $25.50 per share. (1) If, in connection with services performed during any one of the years 1996, 1997 or 1998, the Compensation Committee grants an annual bonus to an Award Recipient in an amount equal to or greater than such Award Recipient's "target" bonus for 1993, such bonus shall be paid by (i) the acceleration of the vesting of Restricted Shares representing one-third of the number of Restricted Shares previously awarded under this Plan, and (ii) payment of cash in the amount of the excess, if any, of such bonus over the product of the number of vested shares times the Base Price. For example, an Award Recipient (not an Officer) whose 1993 "target" bonus was $8,000 and who had elected to receive 75% of such bonus in Class B Common Stock and who therefore received a Restricted Stock Award of 705 Restricted Shares shall, upon the Company's granting of any bonus equal to or greater than $8,000 in any year, receive 235 vested shares (one-third of the Restricted Stock Award) and cash in the amount of the balance. (2) If, in connection with services performed during any of the years 1996, 1997 or 1998 the Compensation Committee awards a bonus to an Award Recipient in an amount less than such Award Recipient's "target" bonus for 1993, such bonus shall be paid in cash and vested shares, each of which shall be reduced on a pro-rata basis in relation to the shortfall from the 1993 "target" award. (3) A participant in the Plan ("Employee") has made a 50% irrevocable election. For 1993 his "target" bonus is $8,000. Employee would be granted 468 Restricted Shares (($8,000 x 3) x 50% - $25.50, rounded down to the nearest whole number divisible by three). Assume that in 1996 Employee exceeded all his goals for 1996 and the Company prospered. Employee is awarded a 1996 bonus of $10,000. He would have all restrictions removed from 156 shares of stock (1/3 of 468) and would receive $6022.00 in cash ($10,000 - (156 x $25.50)). Assume that in 1997 Employee did not perform as well. He is awarded a 1997 bonus of $4,000. Employee would have the restrictions removed on 78 shares ($2,000 -$25.50, rounded down to the nearest whole share), and would receive $2,011.00 in cash ($4,000 - (78 x $25.50)). In 1998, Employee again does well and receives a bonus for 1998 of $11,000. He would have the restrictions removed on 156 shares and would receive $7,022.00 in cash ($11,000 - (156 x $25.50)). The remaining 78 Restricted Shares would vest in the year 2002 (ten years after grant) unless the Committee, in its discretion, caused them to vest at an earlier date. (c) Pro Rata Acceleration of Vesting of Restricted Shares in the Event of the Award Recipient's Death, Disability or Retirement. In the event of the death, disability (within the meaning of section 22(e)(3) of the Internal Revenue Code) or retirement of 6 the Award Recipient after December 31, 1995, the Committee may, after considering any recommendation of the President with respect to the performance of such Award Recipient and of the Company for the portion of the then current year prior to such death, disability or retirement, direct that the vesting with respect to a pro rata portion of the Restricted Shares which would have become vested had the employee worked the entire year shall be accelerated and such Restricted Shares shall become fully vested. For example, assume that in the example in the last paragraph of Section 5(b)(3), Employee died on July 1, 1998, and the Compensation Committee in its discretion determined to award him a partial-year 1998 bonus of $5,500, on the basis that had he worked the full year his bonus would have been $11,000.00. His estate or, in the event Employee had named a beneficiary under the Plan, his beneficiary would receive 78 unrestricted shares and $3,511.00 in cash ($5,500 - (78 x $25.50)). (d) Pro Rata Acceleration of Vesting of Restricted Shares in the Event of a Change of Control. After December 31, 1995, in the event of, or upon the date set by the Committee to be an accelerated vesting date in anticipation of, a Change of Control, the Committee may, after considering any recommendation of the Chairman and President with respect to the performance of such Award Recipient and of the Company for the portion of the then current year prior to such actual or anticipated Change of Control, direct that the vesting with respect to a pro rata portion of the Restricted Shares which would have become vested had the employee worked the entire year shall be accelerated and such Restricted Shares shall become fully vested. A "Change of Control" shall be deemed to have occurred upon the earliest to occur of the following events: (i) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated, or (ii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a definitive agreement to sell or otherwise dispose of substantially all of the assets of the Company, or (iii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) and the stockholders of the other constituent corporation (or its board of directors if stockholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into such other corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Company's Class A Common Stock immediately prior to the merger or consolidation will have at least a majority of the voting power of the surviving corporation's voting securities immediately after the merger or consolidation, which voting securities are to be held in the same proportion as such holders' ownership of Class A Common Stock of the Company immediately before the merger or consolidation, or (iv) the date any entity, person or group, within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (other than (a) the Company or any of its subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (b) any person who, on the date the Plan is effective, shall have been the beneficial owner of or have voting control over shares of Common Stock of the Company possessing more than twenty-five percent (25%) of the aggregate voting power of the Company's Common Stock) shall have become the 7 beneficial owner of, or shall have obtained voting control over, more than twenty-five percent (25%) of the outstanding shares of the Company's Class A Common Stock, or (v) the first day after the date this Plan is effective when directors are elected such that a majority of the Board of Directors shall have been members of the Board of Directors for less than two (2) years, unless the nomination for election of each new director who was not a director at the beginning of such two (2) year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 6. Forfeiture of Restricted Shares. All nonvested Restricted Shares shall be forfeited without the receipt of any payment by the Award Recipient upon the last day of the Award Recipient's employment with the Company or a subsidiary thereof, except to the extent that the provisions of Sections 5(c) or 5(d) are applicable. Restricted Shares which are forfeited may be cancelled by the Company without any action by the Award Recipient. 7. Transfer of Restricted Shares. No Restricted Shares awarded under this Plan may be transferred, pledged, or encumbered until such time as any such shares become vested. 8. Amendment of the Plan. The non-employee members of the Board of Directors of the Company may amend this Plan from time to time in such manner as they may deem advisable. No amendment to this Plan shall adversely affect any outstanding Restricted Stock Award, however, without the consent of the Award Recipient. 9. No Continued Employment. The award of a Restricted Stock Award pursuant to this Plan shall not be construed to imply or to constitute evidence of any agreement, express or implied, on the part of the Company or any subsidiary thereof to retain the Award Recipient in the employ of the Company or any subsidiary thereof, and each such Award Recipient shall remain subject to discharge to the same extent as if this Plan had not been adopted. 10. Withholding of Taxes. Whenever Restricted Shares vest or, if sooner, whenever an Award Recipient must include the Restricted Shares in income for federal income tax purposes, the Company shall have the right to (a) require the recipient to remit or otherwise make available to the Company an amount sufficient to satisfy all federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Restricted Shares or (b) take whatever action it deems necessary to 8 protect its interests with respect to tax liabilities, including, without limitation, redeeming a portion of any Restricted Shares otherwise deliverable pursuant to this Plan with a then fair market value equal to such tax liabilities. The Company's obligation to make any delivery or transfer of vested Restricted Shares shall be conditioned on the Award Recipient's compliance with any withholding requirement to the Company's satisfaction. 11. Establishment of Rules by the Committee. The Committee shall have the authority to establish rules with respect to the Company's obligations in connection with the withholding requirements described in Section 10 so as to insure compliance with Rule 16b-3(e) of the Securities Exchange Act of 1934. 12. Dividend and Other Rights. During the period from the date a Restricted Stock Award is granted to the date Restricted Shares are vested, the Award Recipient will be entitled to all rights of a holder of the Class B Common Stock of the Company, including the right to receive dividends declared on such shares, as paid. 13. Stock Certificates. The stock certificate(s) evidencing a Restricted Stock Award shall be registered in the name of the Award Recipient and shall bear a legend referring to the terms, conditions and restrictions applicable to such shares. The Committee shall direct the Company to either retain physical possession or custody of or place into escrow the certificate(s) evidencing the Restricted Shares until such time as such shares are vested. EX-10.M 3 LIFE INSURANCE BENEFIT 1 Exhibit 10-m As a taxable executive benefit, the Company pays the premiums for life insurance policies on the lives of non-employee Directors and certain key executives. The executive or Board member has the right to designate the beneficiary under the applicable life insurance policy. Messrs. Alter, Rosoff and Olafsson are each covered by a $5,000,000 policy. Messrs. Podowski and Deehan are each covered by a $1,000,000 policy. Each non-employee Director is covered by a $500,000 policy. All of the life insurance policies are owned by the Company. Upon termination of employment, each executive is entitled to acquire the insurance policy from the Company upon payment to the Company of an amount equal to the cash value of the policy at that time. The policies insuring the non-employee Directors are term life insurance policies, on which there is no build-up in cash value. EX-10.N 4 ADVANTA MAN. INCENTIVE PLAN STOCK ELECTION IV 1 EXHIBIT 10-n (as amended 8/27/98 ) ADVANTA MANAGEMENT INCENTIVE PLAN WITH STOCK ELECTION IV 1. Purpose. This Plan is intended as an additional incentive to employees to enter into or remain in the employ of Advanta Corp., a Delaware corporation (the "Company"), or a subsidiary thereof and to devote themselves to the Company's success. This Plan provides selected employees with an opportunity to acquire the Company's Class B Common Stock, par value $0.01 per share (the "Common Stock"). 2. Administration. This Plan shall be administered by the Board of Directors of the Company; however, the Board of Directors may (i) designate a committee composed of two or more of its Non-employee Directors to operate and administer the Plan in its stead, (ii) designate two committees to operate and administer the Plan in its stead, one of such committees composed of two or more of its Non-employee Directors to operate and administer the Plan with respect to the Company's "Principal Officers" (as defined below), and the other such committee composed of two or more directors (whether or not Non-employee Directors) to operate and administer the Plan with respect to persons other than Principal Officers and Non-employee Directors or (iii) designate only one of the two committees referred to in subparagraph (ii) and itself operate and administer the Plan with respect to persons not within the jurisdiction of such committee. Any of such committees designated by the Board of Directors, and the Board of Directors itself in its administrative capacity with respect to the Plan, is referred to as the "Committee." As used herein, the term "Principal Officers" means any person who is an "officer" within the meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934, as amended, or any successor rule. The Committee shall hold meetings at such times and places as it may determine. Acts approved at a meeting by a majority of the members of the Committee or acts approved in writing by the unanimous consent of the members of the Committee shall be valid acts of the Committee. The interpretation and construction by the Committee of any provision of the Plan or of any Restricted Stock Award awarded hereunder shall be final, binding and conclusive. 3. Eligibility. All employees of the Company or a subsidiary thereof who are selected by the Company's Compensation Committee to be eligible to receive a bonus pursuant to the Advanta Management Incentive Plan shall be eligible to receive shares (the "Restricted Shares") of the Company's Class B Common Stock (the "Restricted Stock Awards") pursuant to this Plan. For purposes of this Plan, "subsidiary" shall include any corporation, partnership, joint venture or other entity in which the Company, directly or indirectly, has an equity interest of at least twenty percent (20%) or a significant financial interest, provided that the Committee has determined that such entity shall be deemed a "subsidiary" for purposes of this Plan. The aggregate maximum 2 number of shares of Class B Common Stock for which Restricted Stock Awards may be awarded under this Plan is 1,500,000 shares. 4. Restricted Stock Awards. (a) Elective Participation. Each eligible employee other than an employee to whom Section 4(b) applies shall be permitted to elect (which election shall be irrevocable) a portion of such employee's annual bonus for services performed during 1999, 2000 and 2001 to be received in the form of Class B Common Stock. The portion of each such bonus which may be elected in stock is an amount up to the employee's anticipated 1995 "target" bonus, calculated on the basis of the employee's base salary as of December 2, 1994 subject to modification as described in Section 4(f). The election shall be performed by the employee's execution of such forms as may be determined by the Committee. (b) Mandatory Participation by Section 16 Officers. Each eligible employee who is an "officer" of the Company as defined for purposes of the Rule (an "Officer") as of the date the Plan is adopted (subject to stockholder approval) by the Board of Directors, shall be granted a Restricted Stock Award based upon the employee's anticipated 1995 "target" bonus, calculated on the basis of the employee's base salary as of December 2, 1994. The number of shares so awarded shall be determined by applying the formula set forth in Section 4(c), using a percentage factor of 100% in clause (ii) of such formula. Plan provisions providing for Plan participation by Officers, and the terms of such participation, shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. (c) Number of Restricted Shares. Subject to the provisions of this Plan, the Committee shall award a Restricted Stock Award to an eligible employee ("Award Recipient") equal to the number of shares (rounded down to the nearest whole number divisible by three) calculated by (i) multiplying the employee's anticipated 1995 "target" bonus, calculated on the basis of the employee's base salary as of December 2, 1994 by three, (ii) multiplying this product times the percentage factor (25%, 50%, 75% or 100%) irrevocably elected by the employee, and (iii) dividing the product thereof by the market price of the Class B Common Stock as of the close of business on December 2, 1994 (the "Base Price"). (d) Documents. Restricted Shares awarded pursuant to this Plan shall be evidenced by the stock certificates described in Section 13 and such other written documents (the "Restricted Stock Award Documents") in such form as the Committee shall approve from time to time. Such Restricted Stock Award Documents shall comply with and be subject to the terms and conditions of this Plan and such other terms and conditions which the Committee shall require from time to time which are not inconsistent with the terms of this Plan. The Committee shall have the right to amend the Restricted Stock Award Documents issued to an Award Recipient subject to his or her consent. (e) New Participants. In the event an individual becomes eligible to participate in the Plan for any reason (including promotion or being newly hired) subsequent to the time as of which initial awards are made hereunder, (i) if such individual is an Officer, such individual shall 2 3 automatically become a participant in the Plan, or (ii) if such individual is not an Officer, he or she shall be entitled to elect to participate in the Plan, provided that such election must be made within thirty days after the person first becomes eligible to participate. Except as provided under Section 4(f)(2), the number of shares included in such new participant's Restricted Stock Award shall be based on the participant's annualized target bonus for the then current calendar year and the average of the closing market prices of the Class B Common Stock for each trading day in the ninety day period ending on the day before the date the recipient became eligible to participate in the Plan ("New Participant Base Price"). Any such Restricted Stock Awards shall be made otherwise in accordance with the terms of this Plan, with such modifications as may be appropriate to implement the intended operation of the Plan. (f) Modification for Increases in Target Bonus Percentage. If a participant's prospective target bonus is increased to a higher percentage of his or her base salary (whether as a consequence of such participant receiving a promotion, or of other action by the Committee), then (a) if such participant is an Officer or as the result of such promotion the participant has become an Officer, then the participant shall receive additional Restricted Shares reflecting the full amount of the increase in target bonus as applied to the years 1999-2001, or (b) if the participant is not an Officer, to the extent that the participant previously elected to receive a percentage of 1999-2001 bonuses in stock, that election shall be likewise applied to the additional target bonus resulting from the increase in the participant's target bonus percentage. In either event, the number of additional shares of Restricted Stock awarded to the participant in such a case shall be based on the average of the closing market prices of the Class B Common Stock for each trading day in the ninety day period ending on the day before the effective date of the promotion or other action by the Committee ("Target Increase Base Price"). For example, suppose a participant's target bonus percentage is 15% of her $70,000 salary (resulting in a $10,500 target bonus) at the time she makes an irrevocable election in 1994 to take 100% of her target bonuses in stock, and assume that the Base Price, as defined in Section 4(e), is $25.00 per share. Consequently, she is awarded 1,260 restricted shares ($70,000 X 15% / $25.00 per share = 420 shares X 3 years = 1,260). In 1996, she receives a promotion, as the result of which her salary is increased to $90,000 per year and her target bonus percentage is increased to 25%. Consequently, her new target bonus is 25% of $90,000 or $22,500. This represents an incremental $12,000 over her previous target bonus of $10,500. If at the time she receives such promotion the market price of the stock (using the 90 day average) is $40.00 per share, she will be awarded an additional 900 restricted shares ($12,000 X 3 years / $40.00 per share = 900). If the participant is awarded her target bonus in each of 1999, 2000 and 2001, she will have 720 shares vested each year (420 of the $25.00 shares and 300 of the $40.00 shares, for a total grant date value of $22,500.00). If the promotion occurred on January 1, 2000 and the 90 day average market price of the stock was $40.00 per share at that time, she would be awarded an additional 600 shares rather than 900, as the first bonus year, 1999, will at that point have already passed. (g) Committee Adjustments to Restricted Stock Awards. Notwithstanding anything contained herein to the contrary, the Committee shall have the authority to make such adjustments to the Base Price, New Participant Base Price, Target Increase Base Price of the Restricted Shares covered by a Restricted Stock Award and/or to the number of shares that are subject to any Restricted Stock Awards granted hereunder and/or to make additional Restricted Stock Awards all on such terms and conditions as the 3 4 Committee, in its discretion, deems appropriate in order to take into account any facts and circumstances that influence the effectiveness of the Plan as a method of providing appropriate current performance incentives for recipients of Restricted Stock Awards, including, but not limited to, any facts and circumstances related to levels of compensation and bonuses paid by other similarly situated employers, current needs of the Company to encourage the retention of valued employees and to reward high levels of performance by such employees. The Committee shall have authority to determine the adjustments to be made under this Section 4(g), and any such determination by the Committee shall be final, binding and conclusive. Nothing contained in this Section 4(g) shall constitute authorization to grant more shares under the Plan than are authorized in the aggregate for grants of Restricted Stock Awards under the terms of the Plan. For these purposes, shares available for grant under the Plan shall include shares subject to Restricted Stock Awards that have been previously forfeited under the terms of the Plan. 5. Vesting. (a) General. Restricted Shares shall fully vest upon the lapse of ten years from the date they are awarded as Restricted Stock Awards. However, the Committee may accelerate the vesting of the Restricted Shares, and to the extent that both the Award Recipient and the Company meet their respective annual target performance goals for the applicable years so that the Committee or the Board of Directors approves payment of bonuses under the Advanta Management Incentive Plan, vesting will be accelerated annually with respect to one-third of the Restricted Shares on such date that the Company elects to pay bonuses for services performed during the years 1999, 2000 and 2001, respectively. The portion of any bonus award which exceeds the 1995 "target" level will be paid in cash. Bonus awards which fall short of the 1995 "target" bonus awards, as determined by the Compensation Committee or the Board of Directors, in their discretion, will be paid by reducing both the cash component and the number of shares of stock to be vested, on a pro rata basis. All Restricted Shares shall be valued at the Base Price (or, if applicable, the average price utilized under Section 4(e) or 4(f) to determine the number of Restricted Shares in a Restricted Stock Award) for purposes of determining the value of that portion of any bonus award to be paid by accelerating the vesting of Restricted Shares. (b) Examples. The following examples are designed to clarify the operation of the Plan. For the purposes of these examples, the Base Price (which is the market price of the Class B Common Stock as of the close of business on December 2, 1994) is assumed to be $25.00 per share. (1) If, in connection with services performed during any one of the years 1999, 2000 or 2001, the Compensation Committee grants an annual bonus to an Award Recipient in an amount equal to or greater than such Award Recipient's "target" bonus for 1995, such bonus shall be paid by (i) the acceleration of the vesting of Restricted Shares representing one-third of the number of Restricted Shares previously awarded under this Plan, and (ii) payment of cash in the amount of the excess, if any, of such bonus over the product of the number of vested shares times the Base Price. For example, an Award Recipient (not an Officer) whose 1995 "target" bonus was $8,000 and who had elected to receive 75% of such bonus in Class B Common Stock and who therefore received a Restricted Stock Award of 720 Restricted Shares shall, upon the 4 5 Company's granting of any bonus equal to or greater than $8,000 in any year, receive 240 vested shares (one-third of the Restricted Stock Award) and cash in the amount of the balance. (2) If, in connection with services performed during any of the years 1999, 2000 or 2001 the Compensation Committee awards a bonus to an Award Recipient in an amount less than such Award Recipient's "target" bonus for 1995, such bonus shall be paid in cash and vested shares, each of which shall be reduced on a pro-rata basis in relation to the shortfall from the 1995 "target" award. (3) A participant in the Plan ("Employee") has made a 50% irrevocable election. For 1995 his "target" bonus is $8,000. Employee would be granted 480 Restricted Shares (($8,000 x 3) x 50% / $25.00). Assume that in 1999 Employee exceeded all his goals for 1999 and the Company prospered. Employee is awarded a 1999 bonus of $10,000. He would have all restrictions removed from 160 shares of stock (1/3 of 480) and would receive $6000.00 in cash ($10,000 - (160 x $25.00)). Assume that in 2000 Employee did not perform as well. He is awarded a 2000 bonus of $4,000. Employee would have the restrictions removed on 80 shares ($2,000 /$25.00), and would receive $2,000 in cash ($4,000 - (80 x $25.00)). In 2001, Employee again does well and receives a bonus for 2001 of $11,000. He would have the restrictions removed on 160 shares and would receive $7,000 in cash ($11,000 - (160 x $25.00)). The remaining 80 Restricted Shares would vest in the year 2004 (ten years after grant) unless the Committee, in its discretion, caused them to vest at an earlier date. (c) Pro Rata Acceleration of Vesting of Restricted Shares in the Event of the Award Recipient's Death, Disability or Retirement. In the event of the death, disability (within the meaning of section 22(e)(3) of the Internal Revenue Code) or retirement of the Award Recipient after December 31, 1998, the Committee may, after considering any recommendation of the President with respect to the performance of such Award Recipient and of the Company for the portion of the then current year prior to such death, disability or retirement, direct that the vesting with respect to a pro rata portion of the Restricted Shares which would have become vested had the employee worked the entire year shall be accelerated and such Restricted Shares shall become fully vested. For example, assume that in the example in the last paragraph of Section 5(b)(3), Employee died on July 1, 1999, and the Compensation Committee in its discretion determined to award him a partial-year 1999 bonus of $5,500, on the basis that had he worked the full year his bonus would have been $11,000.00. His estate or, in the event Employee had named a beneficiary under the Plan, his beneficiary would receive 80 unrestricted shares and $3,500 in cash ($5,500 - (80 x $25.00)). (d) Pro Rata Acceleration of Vesting of Restricted Shares in the Event of a Change of Control. After December 31, 1998, in the event of, or upon the date set by the Committee to be an accelerated vesting date in anticipation of, a Change of Control, the Committee may, after considering any recommendation of the Chairman and President with respect to the performance of such Award Recipient and of the Company for the portion of the then current year prior to 5 6 such actual or anticipated Change of Control, direct that the vesting with respect to a pro rata portion of the Restricted Shares which would have become vested had the employee worked the entire year shall be accelerated and such Restricted Shares shall become fully vested. A "Change of Control" shall be deemed to have occurred upon the earliest to occur of the following events: (i) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated, or (ii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) approve a definitive agreement to sell or otherwise dispose of substantially all of the assets of the Company, or (iii) the date the stockholders of the Company (or the Board of Directors, if stockholder action is not required) and the stockholders of the other constituent corporation (or its board of directors if stockholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into such other corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Company's Class A Common Stock immediately prior to the merger or consolidation will have at least a majority of the voting power of the surviving corporation's voting securities immediately after the merger or consolidation, which voting securities are to be held in the same proportion as such holders' ownership of Class A Common Stock of the Company immediately before the merger or consolidation, or (iv) the date any entity, person or group, within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (other than (a) the Company or any of its subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (b) any person who, on the date the Plan is effective, shall have been the beneficial owner of or have voting control over shares of Common Stock of the Company possessing more than twenty-five percent (25%) of the aggregate voting power of the Company's Common Stock) shall have become the beneficial owner of, or shall have obtained voting control over, more than twenty-five percent (25%) of the outstanding shares of the Company's Class A Common Stock, or (v) the first day after the date this Plan is effective when directors are elected such that a majority of the Board of Directors shall have been members of the Board of Directors for less than two (2) years, unless the nomination for election of each new director who was not a director at the beginning of such two (2) year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. 6. Forfeiture of Restricted Shares. All nonvested Restricted Shares shall be forfeited without the receipt of any payment by the Award Recipient upon the last day of the Award Recipient's employment or service with the Company or a subsidiary thereof, except to the extent that the provisions of Sections 5(c) or 5(d) are applicable. Restricted Shares which are forfeited may be cancelled by the Company without any action by the Award Recipient. 7. Transfer of Restricted Shares. No Restricted Shares awarded under this Plan may be transferred, pledged, or encumbered until such time as any such shares become vested. 6 7 8. Amendment of the Plan. The non-employee members of the Board of Directors of the Company may amend this Plan from time to time in such manner as they may deem advisable. No amendment to this Plan shall adversely affect any outstanding Restricted Stock Award, however, without the consent of the Award Recipient. 9. No Continued Employment. The award of a Restricted Stock Award pursuant to this Plan shall not be construed to imply or to constitute evidence of any agreement, express or implied, on the part of the Company or any subsidiary thereof to retain the Award Recipient in the employ or service of the Company or any subsidiary thereof, and each such Award Recipient shall remain subject to discharge to the same extent as if this Plan had not been adopted. 10. Withholding of Taxes. Whenever Restricted Shares vest or, if sooner, whenever an Award Recipient must include the Restricted Shares in income for federal income tax purposes, the Company shall have the right to (a) require the recipient to remit or otherwise make available to the Company an amount sufficient to satisfy all federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Restricted Shares or (b) take whatever action it deems necessary to protect its interests with respect to tax liabilities, including, without limitation, redeeming a portion of any Restricted Shares otherwise deliverable pursuant to this Plan with a then fair market value equal to such tax liabilities. The Company's obligation to make any delivery or transfer of vested Restricted Shares shall be conditioned on the Award Recipient's compliance with any withholding requirement to the Company's satisfaction. 11. Establishment of Rules by the Committee. The Committee shall have the authority to establish rules with respect to the Company's obligations in connection with the withholding requirements described in Section 10 so as to insure compliance with Rule 16b-3(e) of the Securities Exchange Act of 1934. 12. Dividend and Other Rights. During the period from the date a Restricted Stock Award is granted to the date Restricted Shares are vested, the Award Recipient will be entitled to all rights of a holder of the Class B Common Stock of the Company, including the right to receive dividends declared on such shares, as paid. 13. Stock Certificates. The stock certificate(s) evidencing a Restricted Stock Award shall be registered in the name of the Award Recipient and shall bear a legend referring to the terms, conditions and 7 8 restrictions applicable to such shares. The Committee may direct the Company to either retain physical possession or custody of or place into escrow the certificate(s) evidencing the Restricted Shares until such time as such shares are vested. 8 EX-10.R 5 AGREEMENT BETWEEN REGISTRANT & PHILIP M. BROWNE 1 EXHIBIT 10-r [On Advanta Corp. Letterhead] May 11, 1998 Mr. Philip M. Browne 684 Gray Circle Southampton, PA 18966 Dear Phil: This will reflect the terms we have been discussing for your joining Advanta: 1. POSITION - Senior Vice President, Chief Financial Officer. 2. BASE SALARY - $350,000.00 per annum. 3. START DATE - June, 1998. 4. RESTRICTED STOCK IN ADVANTA CORP. - Upon joining Advanta, you will receive 50,000 shares of restricted Advanta Corp. Class B Common Stock. Twelve thousand five hundred shares of the stock will vest and become free of restrictions when you have been employed for one year, and an additional 12,500 shares will become vested at the end of your second, third and fourth year of employment respectively. There will be accelerated vesting of all outstanding unvested shares in the case of change of control, as defined in Advanta's Stock Option Plan. 5. OPTIONS - You will be granted options to purchase 75,000 Advanta Class B Common Shares at today's closing price. The options for 18,750 shares will vest when you have been employed by Advanta for one year and an additional 18,750 will vest at the end of the second, third and fourth year of employment respectively. There will also be accelerated vesting of all outstanding unvested options in the case of change of control as defined in Advanta's Stock Option Plan. In addition, you will also be eligible for annual stock option grants in the discretion of the Board, in accordance with the Stock Option Plan. 6. ANNUAL BONUS - You will be eligible to participate in Advanta's Management Incentive Plan ("AMIP") as a Class "B" participant. As such, your target bonus will be 50% of your Base Salary each year. The maximum bonus is currently 200% of target. 2 7. CHANGE OF CONTROL SEVERANCE PLAN - If there should be a change of control at Advanta in the future, as defined in the Advanta Senior Management Change of Control Severance Plan, you will be entitled to the benefits provided in that plan with the amount of severance set at two times your base salary. 8. BENEFITS - The Company will acquire a $1,000,000 life insurance policy on your life, the full premium of which is paid by Advanta during your employment and the beneficiary of which is named by you. In addition, Advanta provides a broad range of health, medical, disability and other benefits. You will be treated for purposes these benefits comparable to others similarly situated Class "B" AMIP participants. If the foregoing accurately reflects our understanding, please sign a copy of this letter and return it to me. Bill, Olaf and I are very excited about your joining us and cannot wait to get started. Best personal regards. Sincerely, /s/ Dennis Alter Accepted and agreed to this 11th day of May, 1998. /s/ Philip M. Browne - -------------------- Philip M. Browne EX-10.U 6 AGREEMENT BETWEEN REGISTRANT & GEORGE O. DEEHAN 1 EXHIBIT 10-U July 27, 1998 Mr. George O. Deehan 99 Ridgecrest Road Stamford, CT 06903 Dear George: This will reflect the terms for your joining Advanta: 1. POSITION - President and CEO, Advanta Leasing. 2. BASE SALARY - $330,000.00 per annum 3. START DATE - On or about August 3, 1998 4. ANNUAL BONUS - You will be eligible to participate in Advanta's Management Incentive Plan ("AMIP") as a Class "B" participant. As such, your target bonus will be 50% of your Base Salary each year. The maximum bonus is currently 200% of target. 5. OPTIONS - You will be granted options, pursuant to the Advanta Corp. Stock Option Plan to purchase 40,000 Advanta Class "B" common shares at the closing price on your start date. The options for 10,000 shares will vest when you have been employed by Advanta for one year and an additional 10,000 shares will vest at the end of the second, third and fourth year of employment respectively. In addition, you will be eligible for annual stock option grants in the discretion of the Board in accordance with the Stock Option Plan. 6. SIGNING BONUS - You will be entitled to a signing bonus of $70,000 payable in 12 consecutive monthly installments conditioned upon your continued employment at the time each installment is due. 7. PLACE OF EMPLOYMENT - Your principal place of business will be at Advanta Leasing headquarters in Voorhees, New Jersey. However, we recognize that you expect to spend, on average, approximately a day a week at the present Advanta Partners offices in New York City, which will also serve as offices for Advanta Leasing. Since you 2 expect to continue maintaining your principal residence in Stamford, Advanta will provide, at the Company's expense, housing that is reasonably satisfactory to you (including access, at its expense, to a health club) in Center City Philadelphia, or such other location in the Greater Philadelphia area as you may choose, for so long as you are employed by Advanta and Stamford continues to be your principal residence. 8. SEVERANCE - If there should be a change of control at Advanta in the future, as defined in the Advanta Senior Management Change of Control Severance Plan, you will be entitled to the benefits provided in that plan with the amount of severance at two times your Base Salary. In addition, if your employment should be terminated by Advanta without Cause within the first two years of your employment you will be entitled to severance equal to one year's Base Salary payable in 12 monthly installments. If your employment is terminated by Advanta without cause, you will also have two years to exercise then vested options granted on your start date. Your employment will be terminable on 30 days written notice by you or the Company, except that you agree not to voluntarily leave your employment with us before the first anniversary of your employment. 9. BENEFITS - Advanta provides a broad range of medical, disability, life insurance and other benefits. You will be treated for the purpose of these benefits comparably to other similarly situated Class B AMIP participants. In addition, if you are employed by Advanta when you reach age 62 (a) you will be entitled to $16,667 per month for each of the next twelve months; and (b) Advanta will include you and your family in its group medical insurance program for the following ten years on the same basis as would have been applicable had you continued to be employed, if permitted to do so on the same basis as applicable to an employee by the group insurance carriers (and if necessary will seek to obtain such permission). These benefits after age 62 are not dependent on your continued employment with Advanta, but will end if you or an entity associated with you competes with Advanta. 10. MISCELLANEOUS - The laws of the Commonwealth of Pennsylvania will govern your employment arrangements. All compensation for the calendar year 1998 will be pro rated based on the number of days during 1998 of your employment. Cause, for purposes of this letter, shall mean your willful refusal to perform a material and substantial part of your duties which has not been cured after 30 days written notice of the failure, or your commission of personal dishonesty, materially injurious to the company, or any act of fraud, misappropriation or criminal conduct. 3 If the foregoing accurately reflects our understanding, please sign a copy of this letter and return it to me. George, putting aside the terms and technicalities, we are extremely excited about your joining us and look forward to enormous opportunities. Sincerely, /S/ Dennis Alter Accepted and agreed to this 27th day of July, 1998. ---- ----- /s/ George O. Deehan - -------------------- George O. Deehan EX-10.V 7 MASTER LOAN AND SECURITY AGREEMENT 1 Exhibit 10-v ================================================================================ AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT DATED AS OF AUGUST 21, 1998 ------------------------------ ADVANTA MORTGAGE HOLDING COMPANY AS A BORROWER AND ADVANTA MORTGAGE CORP. USA, AS A BORROWER AND ADVANTA MORTGAGE CORP. MIDATLANTIC, AS A BORROWER AND ADVANTA MORTGAGE CORP. MIDATLANTIC II, AS A BORROWER AND ADVANTA MORTGAGE CORP. MIDWEST, AS A BORROWER AND ADVANTA MORTGAGE CORP. OF NEW JERSEY, AS A BORROWER AND ADVANTA MORTGAGE CORP. NORTHEAST, AS A BORROWER AND ADVANTA MORTGAGE CONDUIT SERVICES, INC., AS A BORROWER AND ADVANTA FINANCE CORP., AS A BORROWER COLLECTIVELY, THE BORROWERS AND MORGAN STANLEY MORTGAGE CAPITAL INC. AS LENDER ================================================================================ 2 TABLE OF CONTENTS RECITALS ..................................................................................................1 Section 1. Definitions and Accounting Matters....................................................................1 1.01 Certain Defined Terms..................................................................................1 1.02 Accounting Terms and Determinations...................................................................10 Section 2. Loans, Note and Prepayments..........................................................................10 2.01 Loans ...............................................................................................10 2.02 Notes ...............................................................................................10 2.03 Procedure for Borrowing...............................................................................11 2.04 Limitation on Types of Loans; Illegality..............................................................12 2.05 Repayment of Loans; Interest..........................................................................12 2.06 Mandatory Prepayments or Pledge.......................................................................13 2.07 Optional Prepayments..................................................................................13 2.08 Release of Excess Collateral..........................................................................13 Section 3. Payments; Computations; Etc..........................................................................14 3.01 Payments..............................................................................................14 3.02 Computations..........................................................................................14 3.03 U.S. Taxes............................................................................................14 Section 4. Collateral Security..................................................................................15 4.01 Collateral; Security Interest.........................................................................15 4.02 Further Documentation.................................................................................16 4.03 Changes in Locations, Name, etc.......................................................................17 4.04 Lender's Appointment as Attorney-in-Fact.............................................................17 4.05 Performance by Lender of Borrowers' Obligations......................................................18
-i- 3 4.06 Proceeds.............................................................................................18 4.07 Remedies..............................................................................................19 4.08 Limitation on Duties Regarding Preservation of Collateral............................................19 4.09 Powers Coupled with an Interest......................................................................19 4.10 Release of Security Interest..........................................................................19 Section 5. Conditions Precedent.................................................................................20 5.01 Initial Loan..........................................................................................20 5.02 Initial and Subsequent Loans..........................................................................21 Section 6. Representations and Warranties.......................................................................22 6.01 Existence.............................................................................................22 6.02 Financial Condition...................................................................................23 6.03 Litigation............................................................................................23 6.04 No Breach.............................................................................................23 6.05 Action................................................................................................23 6.06 Approvals.............................................................................................23 6.07 Margin Regulations....................................................................................24 6.08 Taxes.................................................................................................24 6.09 Investment Company Act................................................................................24 6.10 Collateral; Collateral Security.......................................................................24 6.11 Chief Executive Office................................................................................25 6.12 Location of Books and Records.........................................................................25 6.13 Hedging...............................................................................................25 6.14 True and Complete Disclosure..........................................................................25 6.15 ERISA.................................................................................................25 6.16 Pass-Through Certificates.............................................................................25
-ii- 4 Section 7. Covenants of the Borrowers...........................................................................26 7.01 Financial Statements..................................................................................26 7.02 Litigation............................................................................................28 7.03 Existence, etc........................................................................................28 7.04 Prohibition of Fundamental Changes....................................................................28 7.05 Borrowing Base Deficiency.............................................................................28 7.06 Notices...............................................................................................29 7.07 Hedging...............................................................................................29 7.08 Reports...............................................................................................29 7.09 Underwriting Guidelines...............................................................................29 7.10 Transactions with Affiliates..........................................................................29 7.11 Limitation on Liens...................................................................................30 7.12 Servicing Tape........................................................................................30 7.13 Pooling and Servicing Agreement.......................................................................30 Section 8. Events of Default....................................................................................30 Section 9. Remedies Upon Default................................................................................32 Section 10. No Duty of Lender...................................................................................32 Section 11. Miscellaneous.......................................................................................33 11.01 Waiver...............................................................................................33 11.02 Notices..............................................................................................33 11.03 Indemnification and Expenses.........................................................................33 11.04 Amendments...........................................................................................34 11.05 Successors and Assigns...............................................................................34 11.06 Survival.............................................................................................34 11.07 Captions.............................................................................................34
-iii- 5 11.08 Counterparts.........................................................................................34 11.09 Loan Agreement Constitutes Security Agreement; Governing Law.........................................34 11.10 Submission to Jurisdiction; Waivers..................................................................34 11.11 Waiver of Jury Trial.................................................................................35 11.12 Acknowledgments......................................................................................35 11.13 Hypothecation or Pledge of Loans.....................................................................35 11.14 Servicing............................................................................................36 11.15 Periodic Due Diligence Review........................................................................36 11.16 Intent...............................................................................................37 11.17 Joint and Several Liability..........................................................................37 11.18 Conflict.............................................................................................37
-iv- 6 SCHEDULES SCHEDULE 1 Representations and Warranties re: Mortgage Loans EXHIBITS EXHIBIT A Form of Promissory Note EXHIBIT B Amendment #1 to Pooling and Servicing Agreement EXHIBIT C Form of Opinion of Counsel to Borrower EXHIBIT D Form of Request for Borrowing EXHIBIT E Underwriting Guidelines EXHIBIT F Officer's Certificate - Pooling and Servicing Agreement EXHIBIT G Mortgage Loan Tape Fields EXHIBIT H Amended and Restated Affiliate Guaranty -v- 7 AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT, dated as of August 21, 1998, among Advanta Mortgage Holding Company, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. USA, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic II, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midwest, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. of New Jersey, a New Jersey corporation, as a Borrower; Advanta Mortgage Corp. Northeast, a New York corporation, as a Borrower; Advanta Mortgage Conduit Services, Inc., a Delaware corporation, as a Borrower; Advanta Finance Corp., a Nevada corporation, as a Borrower (collectively, the "Borrowers") and Morgan Stanley Mortgage Capital Inc., a New York corporation (the "Lender"). RECITALS The Borrowers entered into the Loan and Security Agreement, dated May 1, 1997 (the "Existing Agreement") with the Lender to finance the purchase by the Borrower of certain Mortgage Loans (as defined herein) on the terms and conditions as set forth in the Existing Agreement. The Borrowers have requested that the Lender from time to time make revolving credit loans to it to finance certain Mortgage Loans owned or to be acquired by the Borrowers. The Borrower and the Lender desire to amend and restate the Existing Agreement to provide terms and conditions under which the Lender is prepared to make further loans to the Borrower from and after the date hereof. The Borrowers are also party (as Pledgors thereunder) to that certain Master Repurchase Agreement dated as of August 21, 1998 between Advanta National Bank (as Seller thereunder) the Lender (as Buyer thereunder) and the Borrowers (the "Repurchase Agreement"). The Lender is prepared to make loans to the Borrowers upon the terms and conditions hereof, provided it obtains a first lien security interest in the Mortgage Loans. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular to have the same meanings when used in the plural and vice versa). Terms otherwise not defined herein shall have the meanings set forth in the Repurchase Agreement. "Affiliate" shall mean with respect to each Borrower, any "affiliate" of such Borrower as such term is defined in the United States Bankruptcy Code in effect from time to time. "Affiliate Guaranty" shall mean the Amended and Restated Affiliate Guaranty, by Advanta Corp. dated as of the date hereof. -1- 8 "Applicable Collateral Percentage" shall mean (a) with respect to all Eligible Mortgage Loans other than Delinquent Mortgage Loans and High LTV Mortgage Loans, 96%; (b) with respect to all High LTV Mortgage Loans, 94%; (c) with respect to all Eligible Mortgage Loans that are Delinquent Mortgage Loans, 90%; "Applicable Margin" shall mean 60 basis points (0.60%). "Appraised Value" shall mean the value of the Mortgaged Property as set forth in an appraisal, prepared in accordance with the Underwriting Guidelines, made in connection with the origination of the related Mortgage Loan. "Available Committed Loan Amount" shall mean the Maximum Committed Loan Amount, minus the sum of (i) the aggregate amount of Loans outstanding hereunder and (ii) the aggregate amount of Transactions outstanding under the Repurchase Agreement. "Available Loan Amount" shall mean the Non-Transaction Amount minus the aggregate amount of Loans outstanding hereunder. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Balloon Mortgage Loan" shall mean any Mortgage Loan for which the related monthly payments, other than the monthly payment due on the maturity date thereof, are computed on the basis of a period to full amortization ending on a date that is later than such maturity date. "Borrower" and "Borrowers" shall have the meaning provided in the heading hereof. "Borrowing Base" shall mean the aggregate Collateral Value of all Eligible Mortgage Loans. "Borrowing Base Deficiency" shall have the meaning provided in Section 2.06 hereof. "Business Day" shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or the Trustee is authorized or obligated by law or executive order to be closed or (iii) a day in which banks are authorized or obligated by law or executive order to be closed in the Commonwealth of Pennsylvania, the State of California or the State of Delaware. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall have the meaning provided in Section 4.01(b) hereof. "Collateral Value" shall mean, with respect to each Eligible Mortgage Loan, the lesser of (i) the Applicable Collateral Percentage of the Market Value of such Mortgage Loan, and (ii) the outstanding principal balance of such Mortgage Loan; provided, that, (i) the Collateral Value shall be deemed to be zero with respect to each Mortgage Loan (1) in respect of which there is a material breach of a representation and warranty set forth on Schedule 1 (assuming each representation and warranty is made as of the date Collateral Value is determined), (2) which is a Mortgage Loan of the type specified in -2- 9 subparagraphs (ii)-(viii) hereof, which is in excess of the limits permitted under subparagraphs (ii)-(viii) hereof, (3) which remains pledged to the Lender hereunder later than 180 days after the date on which it is first included in the Collateral, (4) which has been released from the possession of the Trustee under the Pooling and Servicing Agreement to the Borrowers for a period in excess of 14 days, (5) which is a Delinquent Mortgage Loan and remains pledged to the Lender hereunder upon removal of some or all of the Mortgage Loans pledged to the Lender hereunder (in accordance with the terms of this Loan Agreement) for the purpose of issuing securities backed by such Mortgage Loans and (6) for which the Trustee does not have in its possession the original Mortgage Note, unless such possession has been otherwise waived by the Lender in writing; (ii) the aggregate Collateral Value of Eligible Mortgage Loans which are Second Lien Mortgage Loans may not exceed 20% of the aggregate principal amount outstanding under the Loans; (iii) the aggregate Collateral Value of Eligible Mortgage Loans which are secured by a Manufactured Dwelling may not exceed 5% of the Maximum Credit; (iv) the aggregate Collateral Value of Eligible Mortgage Loans which are Mixed Use Mortgage Loans may not exceed 1% of the Maximum Credit; (v) the aggregate Collateral Value of Eligible Mortgage Loans which are Balloon Mortgage Loans may not exceed 25% of the Maximum Credit; (vi) the aggregate Collateral Value of first lien Eligible Mortgage Loans that are High LTV Mortgage Loans may not exceed 10% of the Maximum Credit; (vii) the aggregate Collateral Value of Eligible Mortgage Loans which are 59-Day Delinquent Mortgage Loans may not exceed 3% of the aggregate principal amount outstanding under the Loans; and (viii) the aggregate Collateral Value of Eligible Loans which are 89-Day Delinquent Mortgage Loans may not exceed 1% of the aggregate principal amount outstanding under the Loans. "Collection Account" shall have the meaning set forth in Section 6.01 of the Pooling and Servicing Agreement. "Combined LTV" or "CLTV" shall mean with respect to any Mortgage Loan, the ratio of (a) the outstanding principal balance as of the related date of origination of such Mortgage Loan of (i) the Mortgage Loan plus (ii) the mortgage loan constituting the first lien (if any) to (b) the Appraised Value of the Mortgaged Property. "Committed Loan" shall have the meaning assigned thereto in Section 2.01(a) hereof. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. -3- 10 "Delinquent Mortgage Loan" shall mean 59-Day Delinquent Mortgage Loans and 89-Day Delinquent Mortgage Loans. "Dollars" and "$" shall mean lawful money of the United States of America. "Due Diligence Review" shall mean the performance by the Lender of any or all of the reviews permitted under Section 11.15 hereof with respect to any or all of the Mortgage Loans, as desired by the Lender from time to time. "Effective Date" shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied. "89-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan made by the Borrower to a Mortgagor or acquired by the Borrower and underwritten substantially in accordance with the Underwriting Guidelines, a copy of the current version of which is attached hereto as Exhibit E, and which is at least 60 days, but not more than 89 days, delinquent with respect to the payment of principal or interest (without regard to any applicable grace period). "Eligible Mortgage Loan" shall mean (a) a Mortgage Loan secured by a first or second mortgage lien (as reflected on the Mortgage Loan Tape) on a one-to-four family residential property (i) as to which the representations and warranties in Section 6.10 and Part I of Schedule 1 hereof are correct in all material respects and (ii) which is underwritten substantially in accordance with the Borrowers' Underwriting Guidelines, a copy of which is attached hereto as Exhibit E, provided that, notwithstanding the foregoing, a mortgage loan that is purchased from an Affiliate shall only be an Eligible Mortgage Loan if such Affiliate is a Borrower hereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which any Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which any Borrower is a member. "Eurocurrency Reserve Requirements" shall mean, for any day as applied to a Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements applicable to the Lender in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Governmental Authority. "Eurodollar Base Rate" shall mean, with respect to each day a Loan is outstanding (or if such day is not a Business Day, the next succeeding Business Day), the rate per annum equal to the rate appearing at page 5 of the Telerate Screen as one-month LIBOR on such date, and if such rate shall not be so quoted, the arithmetic average determined in good faith by the Lender, of the rate per annum at which the Lender is offered Dollar deposits at or about 10:00 A.M., New York City time, on -4- 11 such date by at least three unaffiliated prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of its Loans are then being conducted for delivery on such day for a period of 30 days and in an amount comparable to the amount of the Loans to be outstanding on such day. "Eurodollar Rate" shall mean, with respect to each day a Loan is outstanding, a rate per annum determined by the Lender in its sole discretion in accordance with the following formula (rounded upwards to the nearest 1/100th of one percent), which rate as determined by the Lender shall be conclusive absent manifest error by the Lender: Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Event of Default" shall have the meaning provided in Section 8 hereof. "Federal Funds Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Board of Governors of the Federal Reserve System in "Statistical Release H.15(519), Selected Interest Rates" or any successor publication, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Lender from three unaffiliated federal funds brokers of recognized standing selected by it. "59-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan made by the Borrower to a Mortgagor or acquired by the Borrower and underwritten substantially in accordance with the Underwriting Guidelines, a copy of the current version of which is attached hereto as Exhibit E, and which is at least 30 days, but not more than 59 days, delinquent with respect to the payment of principal or interest (without regard to any applicable grace period). "Funding Date" shall mean the date on which a Loan is made hereunder. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over any Borrower, any of its Subsidiaries or any of their properties. "Guarantor" shall mean Advanta Corp., a Delaware corporation. "High LTV Mortgage Loans" shall mean first and second lien Eligible Mortgage Loans with an LTV greater than 90% and less than or equal to 100%. "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans, any short sale of US Treasury Security, or futures contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by any Borrower or the Guarantor. -5- 12 "Lender" shall have the meaning provided in the heading hereto. "Lien" shall mean any mortgage, lien, pledge, charge, security interest or similar encumbrance. "Loan" shall mean any Committed Loan or Uncommitted Loan, as applicable, and collectively "Loans" shall mean the sum of all Committed Loans and Uncommitted Loans. "Loan Agreement" shall mean this Amended and Restated Master Loan and Security Agreement, as the same may be further amended, supplemented or otherwise modified in accordance with the terms hereof. "Loan Documents" shall mean, collectively, this Loan Agreement, the Note, the Pooling and Servicing Agreement and the Affiliate Guaranty. "Loan Parties" shall mean each of the Borrowers and the Guarantor. "Loan-to-Value Ratio" or "LTV" shall have the meaning assigned thereto in Schedule 1 of this Loan Agreement. "Manufactured Dwelling" shall mean a fully attached manufactured home which is considered and treated as "real estate" under applicable state law. "Market Value" shall mean as of any date in respect of an Eligible Mortgage Loan, the price at which such Eligible Mortgage Loan could readily be sold as reasonably determined in good faith by the Lender, which price may be determined to be zero. The Lender's determination of Market Value shall be conclusive upon the parties absent manifest error on the part of the Lender. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations or financial condition of the Loan Parties taken as a whole, (b) the ability of the Loan Parties to perform their obligations under any of the Loan Documents to which they are a party, (c) the validity or enforceability of any of the Loan Documents, (d) the practical realization of the Lender's rights and remedies under the Loan Documents, taken as a whole, (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith or (f) the value of the Collateral taken as a whole. "Maximum Committed Loan Amount" shall mean $375,000,000. "Maximum Credit" shall mean the sum of the Maximum Committed Loan Amount and the Maximum Uncommitted Loan Amount, which shall equal $500,000,000. "Maximum Combined Amount" shall equal $750,000,000. "Maximum Uncommitted Loan Amount" shall mean $125,000,000. "Misclassified Mortgage Loan" shall have the meaning assigned thereto in Section 2.05(c) hereof. -6- 13 "Mixed Use Mortgage Loan" shall mean a Mortgage Loan secured by a Mortgaged Property that is used primarily for residential purposes, but which is also used for non-residential purposes. "Mortgage" shall mean with respect to a Mortgage Loan, the mortgage, deed of trust or other instrument securing a Mortgage Note, which creates a first or second lien (as indicated on the Mortgage Loan Tape) on the fee in real property securing the Mortgage Note. "Mortgage File" shall have the meaning assigned thereto in the Pooling and Servicing Agreement. "Mortgage Loan" shall mean a mortgage loan pledged to the Lender hereunder and which the Trustee has been instructed to hold for the Lender pursuant to the Pooling and Servicing Agreement, and which Mortgage Loan includes, without limitation, (i) a Mortgage Note and related Mortgage and (ii) all right, title and interest of any Borrower in and to the Mortgaged Property covered by such Mortgage. "Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan, the documents comprising the Mortgage File for such Mortgage Loan. "Mortgage Loan Schedule" shall have the meaning assigned thereto in the Pooling and Servicing Agreement. "Mortgage Loan Schedule and Collateral Report" shall mean the mortgage loan schedule and exception report prepared by the Trustee pursuant to the Pooling and Servicing Agreement. "Mortgage Loan Tape" shall mean a computer readable magnetic tape containing the fields set forth on Exhibit G hereto. "Mortgage Note" shall mean the original executed promissory note or other evidence of the indebtedness of a mortgagor/borrower with respect to a Mortgage Loan. "Mortgaged Property" shall mean the real property (including all improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations and replacements made at any time with respect to the foregoing) and all other collateral securing repayment of the debt evidenced by a Mortgage Note. "Mortgagor" shall mean the obligor on a Mortgage Note. "Multiemployer Plan" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been or are required to be made by any Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "Non-Transaction Amount" shall mean the Maximum Combined Amount minus the aggregate amount of Transactions outstanding under the Repurchase Agreement; provided, however, that if such calculation results in an amount greater than $500,000,000, the Non-Transaction Amount shall equal $500,000,000. -7- 14 "Note" shall mean the promissory note provided for by Section 2.02(a) hereof for Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Plan" shall mean an employee benefit or other plan established or maintained by any Borrower or any ERISA Affiliate and covered by Title IV of ERISA, other than a Multiemployer Plan. "Pledged Certificate" shall mean a certificate substantially in the form of Exhibit C to the Pooling and Servicing Agreement authenticated by the Trustee, issued in the name of the Lender and pledged and delivered to the Lender, representing a 100% interest in a Pledged Series Pool of Eligible Mortgage Loans held by Trustee for the benefit of the Lender, as to which the representations and warranties in Section 6.16 and Part II of Schedule 1 hereof are correct in all material respects. "Pledged Series Pool" shall mean, as of any date and with respect to any Borrower, all Mortgage Loans pledged to the Lender hereunder and held by the Trustee under the Pooling and Servicing Agreement. "Pooling and Servicing Agreement" shall mean the Pooling and Servicing Agreement, dated as of May 1, 1997, among Advanta Mortgage Conduit Services, Inc. as "Sponsor", Advanta Mortgage Corp. USA as "Master Servicer", the Borrowers and the Trustee, as amended by Amendment # 1 to the Pooling and Servicing Agreement, dated as of the date hereof, as the same shall be modified and supplemented and in effect from time to time. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to the Lender (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% per annum plus the Eurodollar Base Rate then in effect. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Regulations G, T, U and X" shall mean Regulations G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Repurchase Agreement" shall mean that certain Master Repurchase Agreement for purchases of mortgage loans between Advanta National Bank as Seller, Lender as Buyer and the Borrowers as Pledgors, dated as of August 21, 1998. "Repurchase Documents" shall mean the Repurchase Agreement, the Affiliate Guaranty and the Pooling and Servicing Agreement. -8- 15 "Responsible Officer" shall mean, as to any Person, the chief executive officer, the president, any vice president or the treasurer of such Person. "Restricted Transaction" shall mean any transaction of merger or consolidation or amalgamation by the Borrowers or the Guarantor; or any voluntary or involuntary liquidation, winding up or dissolution of the Borrowers or the Guarantor; or sale of all or substantially all of the Borrowers' or the Guarantor's assets (it being understood that a securitization of loan assets, a sale of mortgage loans subject to a repurchase agreement or a pledge of mortgage loans subject to a conduit warehouse line shall not be deemed a sale of all or substantially all assets). "Second Lien Mortgage Loan" shall mean any Mortgage Loan underwritten substantially in accordance with the Underwriting Guidelines with respect to which the lien of the mortgage, deed of trust or other instrument securing a mortgage note creates a second lien on the Mortgaged Property. "Secured Obligations" shall have the meaning provided in Section 4.01(c) hereof. "Servicer" shall have the meaning provided in Section 11.14(c) hereof. "Servicing Agreement" shall have the meaning provided in Section 11.14(c) hereof and shall include but not be limited to the Pooling and Servicing Agreement. "Servicing Records" shall have the meaning provided in Section 11.14(b) hereof. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Termination Date" means the date which shall be 364 days from the date hereof, which shall be August 20, 1999. "Transaction Documents" shall mean the Loan Documents and the Repurchase Documents. "Transaction Party" shall mean each of the Borrowers, the Guarantor and Advanta National Bank. "Trustee" shall mean Bankers Trust Company of California, N.A., a national banking corporation. "Uncommitted Loan" shall have the meaning assigned thereto in Section 2.01(b) hereof. -9- 16 "Underwriting Guidelines" shall mean the underwriting guidelines delivered by the Loan Parties to the Lender on or prior to the Effective Date and as may be supplemented from time to time thereafter. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 1.02 Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lender hereunder shall be prepared, in accordance with GAAP. Section 2. Loans, Note and Prepayments. 2.01 Loans. (a) Subject to fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02 hereof, and provided that no Default shall have occurred and be continuing hereunder, the Lender agrees from time to time, on the terms and conditions of this Loan Agreement, to make loans (individually, a "Committed Loan"; collectively, the "Committed Loans") to the Borrowers in Dollars, from and including the Effective Date to and including the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the Available Committed Loan Amount as in effect from time to time. (b) In addition to the foregoing, the Lender may from time to time in its sole discretion, on the terms and conditions of this Loan Agreement, make loans (individually, an "Uncommitted Loan"; collectively, the "Uncommitted Loans") to the Borrowers in Dollars during the period from and including the Effective Date to and including the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the Available Loan Amount as in effect from time to time. (c) In determining whether Loans outstanding are Committed Loans or Uncommitted Loans, such Loans shall first be deemed Committed Loans up to the Available Committed Loan Amount, and then the remainder shall be deemed Uncommitted Loans. (d) Subject to the terms and conditions of this Loan Agreement, during such period the Borrower may borrow, repay and reborrow hereunder. (e) In no event shall a Loan be made when any Default or Event of Default has occurred and is continuing. 2.02 Notes. (a) The Loans made by the Lender shall be evidenced by a single promissory note of the Borrowers substantially in the form of Exhibit A hereto (the "Note"), dated the date hereof, -10- 17 payable to the Lender in a principal amount equal to the amount of the Maximum Credit as originally in effect and otherwise duly completed. The Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise. (b) The date, amount, interest rate, and whether such Loan is a Committed Loan or Uncommitted Loan made by the Lender to the Borrowers, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, endorsed by the Lender on the schedule attached to the Note or any continuation thereof; provided, that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrowers to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. 2.03 Procedure for Borrowing. (a) The Borrowers may request a borrowing hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to the Lender, with a copy to the Trustee, an irrevocable written request for borrowing, substantially in the form of Exhibit D attached hereto (a "Request for Borrowing"), which request must be received by the Lender prior to 4:00 p.m., New York City time, one day prior to the requested Funding Date. Such request for borrowing shall (i) attach a schedule identifying the Eligible Mortgage Loans that the applicable Borrower proposes to pledge to the Lender and to be included in the Borrowing Base in connection with such borrowing, (ii) specify the requested Funding Date, (iii) include a Mortgage Loan Tape containing information with respect to the Eligible Mortgage Loans that the applicable Borrower proposes to pledge to the Lender and to be included in the Borrowing Base in connection with such borrowing, and (iv) attach an officer's certificate signed by a Responsible Officer of the respective Borrower as required by Section 5.02(b) hereof. (b) Upon any Borrower's Request for Borrowing (which, for purposes hereof shall be deemed a request by all of the Borrowers hereunder) pursuant to Section 2.03(a), the Lender shall, assuming all conditions precedent set forth in Section 5.01 and 5.02 have been met and provided no Default shall have occurred and be continuing, make a Committed Loan on the requested Funding Date, on the terms and conditions of this Loan Agreement, to the Borrowers in Dollars, from and including the Effective Date to and including the Termination Date, in an aggregate principal amount up to but not exceeding the Available Committed Loan Amount as in effect from time to time. (c) In addition to the foregoing, upon any Borrower's Request for Borrowing (which, for purposes hereof shall be deemed a request by all of the Borrowers hereunder) pursuant to Section 2.03(a), the Lender may at its sole option, assuming all conditions precedent set forth in Section 5.01 and 5.02 have been met and provided no Default shall have occurred and be continuing, make an Uncommitted Loan to the Borrowers in Dollars on the requested Funding Date, during the period from and including the Effective Date to and including the Termination Date, on the requested Funding Date, in an aggregate principal amount up to but not exceeding the Available Loan Amount. (d) No later than 4:00 p.m., New York City time, one day prior to the requested Funding Date, the Borrower shall deliver to the Trustee the Mortgage File pertaining to each Eligible Mortgage Loan to be pledged to the Lender. Not later than 12:00 noon, New York City time, on the requested Funding Date, the Trustee shall issue and deliver the relevant Pledged Certificate to the Lender, to be included in the Borrowing Base on such requested Funding Date, in accordance with the terms and conditions of the Pooling and Servicing Agreement. -11- 18 (e) Pursuant to the Pooling and Servicing Agreement, the Trustee shall deliver to the Lender and the Borrowers, by no later than 3:00 p.m. New York City time on a Funding Date, a Mortgage Loan Schedule and Collateral Report in respect of all Mortgage Loans pledged to the Lender on such Funding Date. Subject to Section 5 hereof, such borrowing will then be made available to the Borrowers by the Lender transferring, via wire transfer, in the aggregate amount of such borrowing in funds immediately available pursuant to Wire Instructions set forth in the Request for Borrowing. 2.04 Limitation on Types of Loans; Illegality. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Base Rate: (a) the Lender determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Loans as provided herein; or (b) the Lender determines, which determination shall be conclusive, that the relevant rate of interest referred to in the definition of "Eurodollar Base Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Loans is to be determined is not likely adequately to cover the cost to the Lender of making or maintaining Loans; or (c) it becomes unlawful for the Lender to honor its obligation to make or maintain Loans hereunder using a Eurodollar Rate; then the Lender shall give the Borrowers prompt notice thereof and, so long as such condition remains in effect, the Lender shall be under no obligation to make additional Loans, and the Borrowers shall, at their option, within 5 Business Days following receipt of such notice either prepay, without penalty or premium, all such Loans as may be outstanding or pay interest on such Loans at a rate per annum equal to the Federal Funds Rate plus 1%. 2.05 Repayment of Loans; Interest. (a) The Borrowers hereby promise to repay in full on the Termination Date the then aggregate outstanding principal amount of the Loans. (b) The Borrowers hereby promise to pay to the Lender interest on the unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to the Eurodollar Rate plus the Applicable Margin. Notwithstanding the foregoing, the Borrowers hereby promise to pay to the Lender interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by the Borrower hereunder or under the Note that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable monthly in arrears on the first Business Day of each month and on the date such Loan shall be repaid in full, except that interest payable at the Post-Default Rate shall accrue daily and shall be payable upon such accrual. Promptly after the determination of any interest rate provided for herein or any change therein, the Lender shall give notice thereof to the Borrowers. (c) Following each Funding Date and from time to time (as further described in Section 11.15 hereof) the Lender shall have the right to perform a Due Diligence Review with respect -12- 19 to any or all of the Mortgage Loans. In the event that the Lender discovers any discrepancy between the information set forth on the Mortgage Loan Tape and the information discovered as a result of the Lender's Due Diligence Review, in all cases, based upon the Underwriting Guidelines and the Borrower's credit classification criteria (in each case, a "Discrepancy"), then the Lender shall give notice thereof to the applicable Borrower and such Borrower shall promptly correct the information set forth on the related Mortgage Loan Tape. In the event that any Discrepancy affects the classification of a Mortgage Loan (in each case, a "Misclassified Mortgage Loan"), then such Mortgage Loan shall be re-classified. (d) It is understood and agreed that, unless and until an Event of Default shall have occurred and be continuing and Lender shall have exercised its remedies under Section 9(a) hereof, the Borrower shall be entitled to the proceeds of the Collateral pledged to the Lender hereunder. 2.06 Mandatory Prepayments or Pledge. If at any time the aggregate outstanding principal amount of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the Lender and notified to the Borrowers on any Business Day, the Borrowers shall no later than one Business Day after receipt of such notice, either prepay the Loans in part or in whole, without penalty or premium, or include additional Eligible Mortgage Loans in the trust represented by the Pledged Certificate and pledge such additional Eligible Mortgage Loans (which Collateral shall be in all respects acceptable to the Lender) to the Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Loans does not exceed the Borrowing Base. 2.07 Optional Prepayments. The Borrowers may prepay the Loans, without penalty or premium, on any date. Any amounts prepaid shall be applied to repay the outstanding principal amount of the Loan or Loans specified by the Borrowers (together with accrued interest thereon) until paid in full. Amounts repaid may be reborrowed in accordance with the terms of this Loan Agreement. If such Borrower intends to prepay a Loan in whole or in part, such Borrower shall give one (1) Business Day's prior written notice thereof to the Lender. If such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. 2.08 Release of Excess Collateral . On any day on which the Borrowing Base exceeds the aggregate outstanding principal amount of the Loans, so long as no Default or Event of Default has occurred and is continuing: (a) The Borrower may prepare a Request for Release of Mortgage Loans in the form of Exhibit K to the Pooling and Servicing Agreement ("Notice of Release of Pledge"), specifying (1) the Eligible Mortgage Loans to be released and the requested release date, (2) the Borrowing Base with respect to such Eligible Mortgage Loans pledged hereunder, (3) the remaining Borrowing Base after giving effect to the release of the Eligible Mortgage Loans to be released, (4) the unpaid principal balance of the Loans, and (5) a certification from the Borrower that, upon release of the Eligible Mortgage Loans to be released, the Borrowing Base would be equal to or greater than the unpaid principal balance of the Loans. -13- 20 (b) The Borrower shall transmit the Notice of Release of Pledge by facsimile transmission to the Lender. Upon confirming that the Notice of Release of Pledge correctly reflects the information set forth in Section 2.08(a) and that, after giving effect to the requested release the amount of the Borrowing Base would be equal to or greater than the unpaid principal balance of the Loans, the Lender shall countersign the Notice of Release of Pledge and transmit the countersigned Notice of Release of Pledge to the Trustee. In the event that the Lender's assessment of the Borrowing Base would alter the information set forth in any Request for Release, the Lender shall promptly notify the Borrower in writing of such assessment. (c) Upon receipt of the countersigned Notice of Release of Pledge and upon approval of the Notice of Release of Pledge by the Lender, the Trustee shall take the actions set forth in the Pooling and Servicing Agreement with respect to the Eligible Mortgage Loan to be released. (d) The Lender shall not be obligated to countersign a Notice of Release of Pledge (i) which the Lender reasonably determines is based on erroneous information or would result in a release of Collateral other than in accordance with the terms of this Loan Agreement, or (ii) which does not reflect the Lender's current determination of Market Value. Section 3. Payments; Computations; Etc. 3.01 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrowers under this Loan Agreement and the Note shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Lender at the following account maintained by the Lender: Account No. 40615114, For the A/C of MSMCI, Citibank, N.A., ABA# 021000089, not later than 3:00 p.m., New York City time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Each Borrower acknowledges that it has no rights of withdrawal from the foregoing account. (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 3.02 Computations. Interest on the Loans shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 3.03 U.S. Taxes. (a) The Borrowers agree to pay to the Lender such additional amounts as are necessary in order that the net payment of any amount due to the Lender hereunder after deduction for or withholding in respect of any U.S. Tax (as defined below) imposed with respect to such payment (or in lieu thereof, payment of such U.S. Tax by the Lender), will not be less than the amount stated herein to be then due and payable; provided that the foregoing obligation to pay such additional amounts shall not apply: -14- 21 (i) to any payment to the Lender hereunder unless the Lender is entitled to submit a Form 1001 (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by the Lender hereunder in respect of the Loans), or (ii) to any U.S. Tax imposed solely by reason of the failure by the Lender to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of the Lender if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Tax. For the purposes of this Section 3.03, (x) "Form 1001" shall mean Form 1001 (Ownership, Exemption, or Reduced Rate Certificate) of the Department of the Treasury of the United States of America, (y) "Form 4224" shall mean Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States) of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related form as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates), and (z) "U.S. Taxes" shall mean any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein. (b) Within 30 days after paying any such amount to the Lender, and within 30 days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Borrowers shall deliver to the Lender evidence satisfactory to the Lender of such deduction, withholding or payment (as the case may be). (c) The Lender represents and warrants to the Borrowers that on the date hereof the Lender is either incorporated under the laws of the United States or a State thereof or is entitled to submit a Form 1001 (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form 4224 (relating to all interest to be received by the Lender hereunder in respect of the Loans). Section 4. Collateral Security. 4.01 Collateral; Security Interest. (a) Pursuant to the Pooling and Servicing Agreement, the Trustee shall hold the Mortgage Loan Documents delivered to the Trustee as exclusive bailee and agent for the Lender pursuant to terms of the Pooling and Servicing Agreement and shall deliver to the Lender Pledged Certificates, each to the effect that it has reviewed such Mortgage Loan Documents in the manner and to the extent required by the Pooling and Servicing Agreement and identifying any deficiencies in such Mortgage Loan Documents for the Mortgage Loans identified in the Mortgage Loan Schedule and Collateral Report (in the form of Exhibit I to the Pooling and Servicing Agreement) as so reviewed. (b) All of each Borrowers' right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the "Collateral": (i) all Mortgage Loans; -15- 22 (ii) all Mortgage Loan Documents, including without limitation all promissory notes, and all Servicing Records (as defined in Section 11.14(b) below), servicing agreements and any other collateral pledged or otherwise relating to such Mortgage Loans, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto; (iii) all mortgage guaranties and insurance (issued by governmental agencies or otherwise) and any mortgage insurance certificate or other document evidencing such mortgage guaranties or insurance relating to any Mortgage Loan and all claims and payments thereunder; (iv) all other insurance policies and insurance proceeds relating to any Mortgage Loan or the related Mortgaged Property; (v) all purchase agreements or other agreements or contracts, (other than Interest Rate Protection Agreements, which are expressly excluded herefrom) and the rights relating to, constituting, or otherwise governing, any or all of the foregoing to the extent they relate to the Mortgage Loans, including the right to receive principal and interest payments and the right to enforce such payments; (vi) all Collection Accounts and any funds on deposit in Collection Accounts to the extent such funds represent proceeds from the Mortgage Loans (as defined in the Pooling and Servicing Agreement), if any; (vii) all Pledged Certificates evidencing any or all of the Mortgage Loans; (viii) the Pooling and Servicing Agreement as it relates to or constitutes any or all of the foregoing; (ix) all "general intangibles", "accounts", and "chattel paper" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; (x) any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing. (c) Each Borrower hereby assigns, pledges and grants a security interest in all of its right, title and interest in, to and under the Collateral to the Lender, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, to secure the repayment of principal of and interest on all Loans and all other amounts owing by the Borrowers to the Lender hereunder, under the Note and under the other Loan Documents and the Transactions entered into under the Repurchase Documents (collectively, the "Secured Obligations"). Each Borrower agrees to mark its computer records and tapes to evidence the interests granted to the Lender hereunder. 4.02 Further Documentation. At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Borrowers, the Borrowers will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as the Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. Each Borrower also hereby authorizes the Lender to file any such financing or continuation statement without -16- 23 the signature of such Borrower to the extent permitted by applicable law provided that the Lender shall promptly provide a copy thereof to the Borrowers. A carbon, photographic or other reproduction of this Loan Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 4.03 Changes in Locations, Name, etc. No Borrower shall (i) change the location of its chief executive office/chief place of business from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given the Lender at least 30 days prior written notice thereof and shall have delivered to the Lender all Uniform Commercial Code financing statements and amendments thereto as the Lender shall request and taken all other actions deemed reasonably necessary by the Lender to continue its perfected status in the Collateral with the same or better priority. 4.04. Lender's Appointment as Attorney-in-Fact. (a) Each Borrower hereby irrevocably constitutes and appoints the Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Borrower and in the name of such Borrower or in its own name, from time to time in the Lender's discretion, for the purpose of carrying out the terms of this Loan Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, each Borrower hereby gives the Lender the power and right, on behalf of each Borrower, as applicable, without assent by, but with notice to, such Borrower, if an Event of Default shall have occurred and be continuing, to do the following: (i) in the name of such Borrower, or in its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Lender for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; (iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Lender or as the Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against such Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and -17- 24 make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Lender's option and such Borrower's expense, at any time, and from time to time, all acts and things which the Lender deems necessary to protect, preserve or realize upon the Collateral and the Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as such Borrower might do; and (iv) to direct the actions of the Trustee with respect to the Collateral under the Pooling and Servicing Agreement. The Borrowers hereby ratify all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The Borrowers also authorize the Lender, if an Event of Default shall have occurred and be continuing, from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on the Lender are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Lender nor any of its officers, directors, or employees shall be responsible to the Borrowers for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 4.05. Performance by Lender of Borrowers' Obligations. If any Borrower fails to perform or comply with any of its agreements contained in the Loan Documents and the Lender may itself perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable expenses of the Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by the Borrowers to the Lender on demand and shall constitute Secured Obligations. 4.06. Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by any Borrower consisting of cash, checks and other near-cash items shall be held by such Borrower in trust for the Lender, segregated from other funds of such Borrower, and shall forthwith upon receipt by such Borrower be turned over to the Lender in the exact form received by such Borrower (duly endorsed by such Borrower to the Lender, if required) and (b) any and all such proceeds received by the Lender (whether from a Borrower or otherwise) may, in the sole discretion of the Lender, be held by the Lender as collateral security for, and/or then or at any time thereafter may be applied by the Lender against, the Secured Obligations (whether matured or unmatured), such application to be in such order as the Lender shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be paid promptly over to the Borrowers or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral. -18- 25 4.07. Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in the Pooling and Servicing Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Borrowers or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrowers, which right or equity is hereby waived or released. The Borrowers further agree, at the Lender's request, to assemble the Collateral and make it available to the Lender at places which the Lender shall reasonably select, whether at the Borrowers' premises or elsewhere. The Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including without limitation reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required or permitted by any provision of law, including without limitation Section 9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the surplus, if any, to the Borrowers. To the extent permitted by applicable law, the Borrowers waive all claims, damages and demands they may acquire against the Lender arising out of the exercise by the Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Borrowers shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 2.05(b) hereof) if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Lender to collect such deficiency. 4.08. Limitation on Duties Regarding Preservation of Collateral. The Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar property for its own account. Neither the Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Borrower or otherwise. 4.09. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10 Release of Security Interest. -19- 26 (a) Upon termination of this Loan Agreement and repayment to the Lender of all Secured Obligations and the performance of all obligations under the Loan Documents the Lender shall release its security interest in any remaining Collateral. (b) So long as no Event of Default has occurred and is continuing, the Borrower may, subject to the Pooling and Servicing Agreement, and subject to Section 2.08 hereof, request the release of one or more Eligible Mortgage Loans constituting Collateral pursuant to a Notice of Release of Pledge. Section 5. Conditions Precedent. 5.01 Initial Loan. The obligation of the Lender to make its initial Loan hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the condition precedent that the Lender shall have received all of the following documents, each of which shall be satisfactory to the Lender and its counsel in form and substance: (a) The following Loan Documents delivered to the Lender: (i) Loan Agreement, duly completed and executed by the parties thereto. In addition, the Borrowers shall have taken such other action as the Lender shall have requested in order to perfect the security interests created pursuant to this Loan Agreement, including execution of UCC-1 and UCC-3 financing statements in form and substance satisfactory to the Lender. (ii) Note, duly completed and executed by the parties thereto. (iii) Amendment #1 to the Pooling and Servicing Agreement, duly completed and executed by the parties thereto. (iv) Affiliate Guaranty, duly completed and executed by the Guarantor. (b) Officer's Certificate. An officer's certificate in the form attached hereto as Exhibit F certifying that the Pooling and Servicing Agreement dated as of May 1, 1997 among Bankers Trust Company of California, N.A., as Trustee, Advanta Mortgage Conduit Services, Inc., as Sponsor, Advanta Mortgage Corp. USA, as Master Servicer and the remaining Borrowers, has not been modified or amended, other than as amended by Amendment # 1 to the Pooling and Servicing Agreement, and remains in full force and effect as of the date hereof. (c) Repurchase Documents. The Repurchase Agreement between Advanta National Bank (as Seller thereunder), Borrowers (as Pledgors thereunder) and Lender (as Buyer thereunder), duly executed, with all required documents thereunder delivered to Lender. (d) Organizational Documents. A good standing certificate and certified copies of the charter and by-laws (or equivalent documents) of each Borrower and of all corporate or other authority for each Borrower with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by each Borrower from time to time in connection herewith (and the Lender may conclusively rely on such certificate until it receives notice in writing from each Borrower to the contrary); -20- 27 (e) Legal Opinion. A legal opinion of counsel to the Borrowers and Guarantor, substantially in the form attached hereto as Exhibit C; (f) Underwriting Guidelines. A copy of Borrowers' current Underwriting Guidelines, and any material changes to the Underwriting Guidelines made since the Underwriting Guidelines were last delivered to Lender. (g) Other Documents. Such other documents as the Lender may reasonably request. In addition, it shall be a further condition precedent to the funding of the initial Loan that the Lender shall have received from the Borrower full and final payment of all fees, disbursements, and expenses of Lender's counsel incurred in connection with consummation of this loan facility (the "Legal Fees"), on or before the date hereof, by wire transfer to the Lender's account as set forth in Section 3.01. However, if the initial Funding Date is the same date as the date hereof, payment of the Legal Fees shall be made by deduction of such Legal Fees from the Loan proceeds disbursed by the Lender to the Borrower on such Funding Date. 5.02 Initial and Subsequent Loans. The making of each Loan to the Borrowers (including the initial Loan) on any Business Day is subject to the satisfaction of the following further conditions precedent, both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof: (a) no Default or Event of Default shall have occurred and be continuing under the Loan Documents; (b) both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof, the representations and warranties made by the Borrowers in Section 6 hereof, and elsewhere in each of the Loan Documents, shall be true and complete on and as of the date of the making of such Loan in all material respects (in the case of the representations and warranties in Section 6.10 and Schedule 1, solely with respect to Mortgage Loans included in the Borrowing Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). The Lender shall have received an officer's certificate signed by a Responsible Officer of each Borrower certifying as to the truth and accuracy of the above, which certificate shall specifically include a statement that such Borrower is in compliance in all material respects with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions except where the failure to be in such compliance or so qualified would not have a Material Adverse Effect. (c) the aggregate outstanding principal amount of the Loans shall not exceed the Borrowing Base; (d) subject to the Lender's right to perform one or more Due Diligence Reviews pursuant to Section 11.15 hereof, the Lender shall have completed its due diligence review of the Mortgage Loan Documents for each Loan and such other documents, records, agreements, instruments, mortgaged properties or information relating to such Loans as the Lender in its -21- 28 sole discretion deems appropriate to review and such review shall be satisfactory to the Lender in its sole discretion; (e) the Lender shall have received from the Trustee a Mortgage Loan Schedule and Collateral Report with exceptions acceptable to the Lender in its sole discretion in respect of Eligible Mortgage Loans to be pledged hereunder on such Business Day; (f) the Lender shall have received duly authenticated Pledged Certificates representing the related pledged Mortgage Loans; (g) the Trustee shall have received a Pledge Notice substantially in the form provided in the Pooling and Servicing Agreement (a copy of which shall be delivered to the Lender); (h) none of the following shall have occurred and/or be continuing: (i) an event or events shall have occurred resulting in the effective absence of a "repo market" or comparable "lending market" for financing debt obligations secured by mortgage loans or securities for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Lender not being able to finance any Loans through the "repo market" or "lending market" with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events, provided that the Lender shall notify the Borrowers promptly upon the occurrence of any such event, provided further that this Section 5.02(g)(i) shall not take effect until 5 Business Days after such notice; or (ii) an event or events shall have occurred resulting in the effective absence of a "securities market" for securities backed by mortgage loans for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Lender not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events, provided that the Lender shall notify the Borrowers promptly upon the occurrence of any such event, provided further that this Section 5.02(g)(ii) shall not take effect until 5 Business Days after such notice. Each request for a borrowing by the Borrowers hereunder shall constitute a certification by the Borrowers that all the conditions set forth in this Section 5.02 have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing). Section 6. Representations and Warranties. The Borrowers represent and warrant to the Lender that throughout the term of this Loan Agreement: 6.01 Existence. Each Loan Party (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite corporate or other power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a material adverse effect on its Property, business or financial condition taken as a whole; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where the failure so to qualify -22- 29 would not be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its Property, business or financial condition taken as a whole. 6.02 Financial Condition. Guarantor has heretofore furnished to the Lender a copy of (a) its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the fiscal year of the Guarantor ended December 31, 1997, and the related consolidated statements of income and retained earnings and of cash flows for the Guarantor and its consolidated Subsidiaries for such fiscal year, with the opinion thereon of Arthur Andersen LLP. All such financial statements are complete and correct and fairly present, in all material respects, the consolidated financial condition of the Guarantor and its Subsidiaries and the consolidated results of their operations as at such dates and for such fiscal periods, all in accordance with GAAP applied on a consistent basis except, in the case of interim financial statements, for the absence of footnotes and subject to year-end adjustments. Since March 31, 1998, there has been no material adverse change in the consolidated business, operations or financial condition of the Guarantor and its consolidated Subsidiaries taken as a whole from that set forth in said financial statements. 6.03 Litigation. Except as (1) previously disclosed to Lender prior to the date of this Loan Agreement or (2) disclosed and approved in writing by the Lender, there are no actions, suits, arbitrations, investigations or proceedings pending or, to the Borrowers' knowledge, threatened against any Loan Party or any of their Subsidiaries or affecting any of the Property of any of them before any Governmental Authority (i) as to which individually or in the aggregate there is a reasonable likelihood of an adverse decision which would be reasonably likely to have a material adverse effect on the Property, business or financial condition of any Loan Party, or (ii) which questions the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby. 6.04 No Breach. Neither (a) the execution and delivery of the applicable Loan Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or by-laws of any Loan Party, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which any Loan Party or any of their Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument which breach or conflict will have a Material Adverse Effect or result in the creation or imposition of any Lien (except for the Liens created pursuant to this Loan Agreement) upon any Property of any Loan Party, or any of their Subsidiaries pursuant to the terms of any such agreement or instrument. 6.05 Action. Each of the Loan Parties has all necessary corporate or other power, authority and legal right to execute, deliver and perform its obligations under each of the applicable Loan Documents; the execution, delivery and performance by such Loan Party of each of the applicable Loan Documents have been duly authorized by all necessary corporate or other action on its part; and each Loan Document has been duly and validly executed and delivered by the applicable Loan Party, and constitutes a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms except as may be limited by applicable bankruptcy, moratorium or other laws affecting creditors' rights generally and by general principles of equity. 6.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority or any securities exchange are necessary for the -23- 30 execution, delivery or performance by any Loan Party of the applicable Loan Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to the Loan Documents. 6.07 Margin Regulations. Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X. 6.08 Taxes. The Guarantor and its Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by it, which tax returns represent all Federal income tax returns and all other material tax returns that are required to be filed by the Guarantor and its Subsidiaries, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by it or any of its Subsidiaries, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Guarantor and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Borrowers, adequate. 6.09 Investment Company Act. No Loan Party or Subsidiary thereof is an "investment company", or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.10 Collateral; Collateral Security. (a) The Borrowers have not assigned, pledged, or otherwise conveyed or encumbered any Pledged Certificate or Mortgage Loan to any other Person, and immediately prior to the transfer of such Pledged Certificate or Mortgage Loan to the Lender, the applicable Borrower was the sole owner of such Pledged Certificate or Mortgage Loan and had good and marketable title thereto, free and clear of all Liens (other than the interest of the Trustee pursuant to the Pooling and Servicing Agreement), in each case except for Liens to be released simultaneously with the Liens granted in favor of the Lender hereunder. No Pledged Certificate or Mortgage Loan pledged to the Lender hereunder was acquired by the applicable Borrower from an Affiliate of the applicable Borrower (other than another Borrower). (b) The provisions of this Loan Agreement are effective to create in favor of the Lender a valid security interest in all right, title and interest of each Borrower in, to and under the Collateral. (c) Upon receipt by (i) the Lender of each Pledged Certificate issued in Lender's name and (ii) the Trustee of each Mortgage Note, endorsed as prescribed in the Pooling and Servicing Agreement by a duly authorized officer of the applicable Borrower, and the related Pledge Notice (as defined in the Pooling and Servicing Agreement) the Lender shall have a fully perfected first priority security interest in, respectively, the applicable Pledged Certificate, and in the related Mortgage Note and in such Borrower's interest in the related Mortgaged Property. (d) The Form UCC-1 filing statements, previously filed on the dates indicated in Schedule 2 of Exhibit C attached hereto, naming the Lender as "Secured Party", the Borrowers as "Debtor" and describing the Collateral, filed in the jurisdictions and recording offices listed on Schedule 2 of Exhibit C attached hereto, have fully perfected the security interests granted hereunder in the Collateral to the extent such security interests can be perfected by the filing of such Form UCC-1 -24- 31 filing statements, as of the date of their filing, under the Uniform Commercial Code in all right, title and interest of the Borrowers in, to and under such Collateral, which security interests continue to be perfected thereto. 6.11 Chief Executive Office. The chief executive offices of the Guarantor and each Borrower (other than Advanta Finance Corp) on the Effective Date is located at Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477; Advanta Finance Corp.'s chief executive office is located at 16875 West Bernardo Drive, San Diego, California 92127; and Advanta National Bank's chief executive office on the Effective Date is One Righter Parkway, Wilmington DE 19803. 6.12 Location of Books and Records. The location where each Loan Party keeps its books and records is its chief executive office. All servicing records, including all computer tapes and records relating to the Collateral, are kept at 16875 West Bernardo Drive, San Diego, California 92127. 6.13 Hedging. The Loan Parties have entered into Interest Rate Protection Agreements, having a notional amount not less than 70% of the aggregate unpaid principal amount of the fixed-rate Mortgage Loans. 6.14 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of each Loan Party to the Lender in connection with the negotiation, preparation or delivery of the Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of each Loan Party to the Lender in connection with this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. 6.15 ERISA. Each Plan to which any Loan Party or any of their Subsidiaries make direct contributions, and, to the knowledge of the Borrowers, each other Plan and each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law. To any Borrowers' knowledge, no event or condition has occurred and is continuing as to which a Loan Party would be under an obligation to furnish a report to the Lender under Section 7.01(d) hereof. 6.16 Pledged Certificates. Borrower represents and warrants to Lender with respect to each Pledged Certificate, that (a) such Pledged Certificate is registered in the name of Lender, (b) immediately prior to the transfer to the Lender of the interest represented by such Pledged Certificate, such interest is owned by a Borrower free from all liens and encumbrances, (c) prior to or concurrently with such transfer to the Lender of the interest represented by such Pledged Certificate shall have been issued in the name of and delivered to the Lender, (d) such Pledged Certificate represents a 100% ownership interest in the Eligible Mortgage Loans referenced therein, (e) the Eligible Mortgage Loans referenced in such Pass-Through Certificate or Pledged Certificate are being held by the Trustee for the benefit of the holder of such Pledged Certificate, (f) each Borrower has notified the Trustee or other -25- 32 registrar issuing such Pledged Certificate that Lender is the holder of such Pledged Certificate for all purposes and (g) all representations and warranties set forth in Part II of Schedule 1 are true and correct. Section 7. Covenants of the Borrowers. Each Borrower covenants and agrees with the Lender that, so long as any Loan is outstanding and until payment in full of all Secured Obligations: 7.01 Financial Statements. Borrowers shall deliver to the Lender: (a) as soon as available and in any event within 60 days after the end of each of the first three quarterly fiscal periods of each fiscal year of Guarantor, the unaudited consolidated balance sheets of Guarantor and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated statements of income and retained earnings and of cash flows for Guarantor and its consolidated Subsidiaries for such period and the portion of the fiscal year through the end of such period, accompanied by a certificate of a Responsible Officer of Guarantor, which certificate shall state that said consolidated financial statements fairly present in all material respects the consolidated financial condition and results of operations of Guarantor and its consolidated Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (except for the absence of footnotes thereto and subject to normal year-end audit adjustments); (b) as soon as available and in any event within 95 days after the end of each fiscal year of Guarantor, the consolidated balance sheets of Guarantor and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Guarantor and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Guarantor and its consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; (c) from time to time such other information regarding the financial condition, operations, or business of the Loan Parties as the Lender may reasonably request; and (d) as soon as reasonably possible, and in any event within thirty (30) days after a Responsible Officer of the Guarantor knows, or with respect to any Plan or Multiemployer Plan to which the Guarantor or any of its Subsidiaries makes direct contributions, has reason to believe, that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Guarantor setting forth details respecting such event or condition and the action, if any, that the Guarantor or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Guarantor or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(c) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by -26- 33 regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including without limitation the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by such Loan Party or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by such Loan Party or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Guarantor or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) that would have a Material Adverse Effect or the receipt by the Guarantor or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Guarantor or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Guarantor or an ERISA Affiliate fails to provide timely security to such Plan in accordance with the provisions of said Sections. Each Loan Party will furnish to the Lender, at the time the Borrowers furnish each set of financial statements of the Guarantor pursuant to paragraphs (a) and (b) above, a certificate of a Responsible Officer of such Loan Party to the effect that, to the best of such Responsible Officer's knowledge, such Loan Party during such fiscal period or year has observed or performed in all material respects all of its covenants and other agreements, and satisfied every condition, contained in this Loan Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action such Loan Party has taken or proposes to take with respect thereto). -27- 34 7.02 Litigation. The Loan Parties will promptly, and in any event within 10 days after service of process on any of the following, give to the Lender notice of all legal or arbitrable proceedings affecting any Loan Party, the Master Servicer or any of their Subsidiaries that questions or challenges the validity or enforceability of any of the Loan Documents or as to which there is a reasonable likelihood of adverse determination which would result in a Material Adverse Effect. 7.03 Existence, etc. Each Loan Party will: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises necessary for the operation of its business (provided that nothing in this Section 7.03(a) shall prohibit any transaction expressly permitted under Section 7.04 hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its Property, business or financial condition; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office from the address referred to in Section 6.11 unless it shall have provided the Lender 30 days' prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and (f) permit representatives of the Lender, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Lender. 7.04 Prohibition of Fundamental Changes. Other than the asset sales completed and disclosed to the Lender prior to the date of this Loan Agreement, no Loan Party shall engage in any Restricted Transaction while there is any amount outstanding under the Loan Documents; provided, that a Loan Party may merge or consolidate with (a) any wholly owned direct or indirect subsidiary of Advanta Corp., or (b) any other Person if such Loan Party is the surviving corporation; and provided further, that if after giving effect thereto, no Default or Event of Default would exist under any Loan Document. If any Loan Party has entered into a Restricted Transaction when there was no amount outstanding under the Loans, the Borrowers must give the Lender notice and such details as the Lender may request about the Restricted Transaction(s) at least ten (10) days prior to any Request for Borrowing. The Lender may, in its sole discretion, cancel its commitment to lend hereunder and terminate this Loan Agreement and the other Loan Documents without liability, based on its assessment of the effect of such Restricted Transaction(s). 7.05 Borrowing Base Deficiency. If at any time there exists a Borrowing Base -28- 35 Deficiency the Borrowers shall cure same in accordance with Section 2.06 hereof. 7.06 Notices. The Borrowers shall give notice to the Lender: (a) promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default; (b) with respect to any Mortgage Loan pledged to the Lender hereunder, on a monthly basis, upon receipt of any principal prepayment (in full or partial) of such pledged Mortgage Loan; (c) with respect to any Mortgage Loan pledged to the Lender hereunder, on a monthly basis, promptly upon receipt of notice or knowledge that the underlying Mortgaged Property has been damaged by waste, fire, earthquake or earth movement, flood, tornado or other casualty, or otherwise damaged so as to affect adversely the Collateral Value of such pledged Mortgage Loan; and (d) promptly upon receipt of notice or knowledge of (i) any default related to any Collateral, (ii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral or (iii) any event or change in circumstances which could reasonably be expected to have a material adverse effect on the Property, business or financial condition of any Loan Party. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of such Borrower setting forth details of the occurrence referred to therein and stating what action the Loan Party has taken or proposes to take with respect thereto. 7.07 Hedging. The Loan Parties shall at all times maintain Interest Rate Protection Agreements, having a notional amount not less than 70% of the aggregate outstanding principal balance of all fixed-rate Mortgage Loans. 7.08 Reports. The Borrower shall provide the Lender with a quarterly report, which report shall include, among other items, a summary of such Borrower's delinquency and loss experience with respect to Mortgage Loans serviced by the Borrowers in the aggregate, any Servicer or any designee of either, plus any such additional reports as the Lender may reasonably request with respect to such Borrower's or any Servicer's servicing portfolio or pending origination's of Mortgage Loans. 7.09 Underwriting Guidelines. Without the prior written notice to the Lender, no Borrower shall amend or otherwise modify the Underwriting Guidelines in a manner that materially and adversely affects the value of the Collateral. 7.10 Transactions with Affiliates. Each of the Loan Parties will not (i) enter into any transaction, including without limitation any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) otherwise not prohibited under the Loan Documents, and (b) upon fair and reasonable terms no less favorable to such Loan Party than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate; provided, however, that nothing contained herein shall prohibit any Loan Party from making a capital contribution of Mortgage Loans to any other Transaction Party provided that such capital contribution is made subject to the Lender's Lien on any such Mortgage Loans (under any Transaction Document) -29- 36 that are the subject of such capital contribution. In no event shall a Borrower pledge to the Lender hereunder any Mortgage Loan acquired by the Borrower from an Affiliate of the Borrower, other than another Borrower. 7.11 Limitation on Liens. Each Borrower will defend the Collateral against, and will take such other action as is necessary to remove, any Lien, security interest or claim on or to the Collateral, other than the security interests created under this Loan Agreement and Liens for taxes and similar charges and assessments that are not yet due and payable or which are being contested in good faith by appropriate proceedings, and each Borrower will defend the right, title and interest of the Lenders in and to any of the Collateral against the claims and demands of all persons whomsoever. 7.12 Servicing Tape.The Borrowers shall prepare, as of the 15th calendar day (or if such 15th day is not a Business Day, the Business Day immediately preceding such 15th day) of each month (the "Servicing Cut-Off Date"), a computer readable magnetic tape containing servicing information, including without limitation those fields reasonably requested by the Lender from time to time, on a loan-by-loan basis, with respect to the Mortgage Loans serviced hereunder by the Borrowers or any Servicer (the "Servicing Tape"). The Borrowers shall deliver the Servicing Tape to the Lender within 2 Business Days after the Servicing Cut-off Date. 7.13 Pooling and Servicing Agreement. The parties to the Pooling and Servicing Agreement shall maintain such Pooling and Servicing Agreement in full force and effect and shall not amend or modify the Pooling and Servicing Agreement or waive compliance with any provisions thereunder without the prior written consent of the Lender. Section 8. Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: (a) the Borrowers shall default in any payment due hereunder when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment; or (b) the Borrowers shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after notification by the Lender of such default, and such default shall have continued unremedied for five Business Days; or (c) any representation, warranty or certification made or deemed made herein or in any other Loan Document by any Loan Party or any certificate furnished to the Lender pursuant to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Schedule 1, which shall be considered solely for the purpose of determining the Collateral Value of the Mortgage Loans; unless the applicable Borrower shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (d) any Loan Party shall fail to comply with the requirements of any of Section 7.03(a), Section 7.04, Section 7.06(a), or Sections 7.11 through 7.13 hereof; or any Loan Party shall default in the performance of any of its obligations under Section 7.05 hereof and such default shall continue unremedied for a period of one (1) Business Day; or any Loan Party -30- 37 shall otherwise fail to comply with any of the requirements of Section 7.03 (b) through (f), 7.06 (b) through (d), 7.09, 7.10 hereof and such default shall continue unremedied for a period of five Business Days; or any Loan Party shall fail to observe or perform any other covenant or agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of seven Business Days; or (e) a final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate shall be rendered against any Loan Party or any of their respective Affiliates by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof, and the applicable Loan Party or any such Affiliate shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (f) any Loan Party shall admit in writing its inability to pay its debts as such debts become due; or (g) any Loan Party, or any of their respective Affiliates shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or the FDIC Act, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (h) a proceeding or case shall be commenced, without the application or consent of any Loan Party, or any of their respective Affiliates in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of any Loan Party or any of their Affiliates or of all or any substantial part of its property, or (iii) similar relief in respect of any Loan Party, or any such Affiliate under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against any Loan Party or any such Affiliate shall be entered in an involuntary case under the Bankruptcy Code; or (i) the Pooling and Servicing Agreement or any Loan Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by any Loan Party; or -31- 38 (j) any Borrower shall grant, or suffer to exist, any Lien on any Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on any Collateral in favor of the Lender or shall be Liens in favor of any Person other than the Lender; or (k) the Lender determines that the number of Misclassified Mortgage Loans equals at least 5% of the Mortgage Loans reviewed pursuant to a Due Diligence Review of Mortgage Loans pledged to the Lender hereunder on any three consecutive Funding Dates; or (l) there is a material default, breach, violation or event of default under the Pooling and Servicing Agreement or any Borrower has waived any such material default, breach, violation or event of default thereunder; or (m) any material adverse change in the Property, business or financial condition of the Loan Parties taken as a whole shall occur, which, constitutes a material impairment of the ability of (i) any Loan Party with Loans outstanding hereunder or (ii) Guarantor to perform their obligations under any Loan Document; as determined by the Lender in its sole good faith discretion; or (n) the Lender determines, after receipt of notice provided pursuant to Section 7.04, that it wishes to cancel its commitment to lend hereunder and terminate this Loan Agreement; or (o) there shall have occurred an "Event of Default" under the Repurchase Agreement. Section 9. Remedies Upon Default. (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 8(g) or (h), the Lender may immediately declare the principal amount of the Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Loan Agreement. Upon the occurrence of an Event of Default referred to in Sections 8(g) and (h) such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrowers. (b) Upon the occurrence of one or more Events of Default, the Lender shall have the right to obtain physical possession of the Servicing Records (subject to the provisions of the Pooling and Servicing Agreement) and all other files of any Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of any Loan Party or any third party acting for any Loan Party and such Loan Party shall deliver to the Lender such assignments as the Lender shall request. The Lender shall be entitled to specific performance of all agreements of the Loan Parties contained in the Loan Documents, and to the rights conferred on Lender under Section 4.07 of the Pooling and Servicing Agreement. Section 10. No Duty of Lender. The powers conferred on the Lender hereunder are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon it to -32- 39 exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Loan Parties for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of the Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein and under the Pooling and Servicing Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including without limitation by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or thereof, or at such other address as shall be designated by a party in writing; or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Indemnification and Expenses. (a) Each Borrower agrees to hold the Lender harmless from and indemnify the Lender against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against the Lender (collectively, "Costs"), relating to or arising out of this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than the Lender's gross negligence or willful misconduct. In any suit, proceeding or action brought by the Lender in connection with any Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any Mortgage Loan, the Borrowers will save, indemnify and hold the Lender harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by any Loan Party of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Loan Party. The Borrowers also agree to reimburse the Lender as and when billed by the Lender for all the Lender's costs and expenses incurred in connection with the enforcement or the preservation of the Lender's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. The Borrowers hereby acknowledge that, notwithstanding the fact that the Note is secured by the Collateral, the obligation of the Borrowers under the Note is a recourse obligation of the Borrowers. -33- 40 (b) The Borrowers agree to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred by the Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. The Borrowers agree to pay as and when billed by the Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation all the reasonable fees, disbursements and expenses of counsel to the Lender which amount shall be deducted from the first Loan disbursement. Subject to the limitations set forth in Section 11.15 hereof, the Borrowers agree to pay the Lender all the due diligence, inspection, testing and review costs and expenses incurred by the Lender with respect to Collateral under this Loan Agreement, including, but not limited to, those costs and expenses incurred by the Lender pursuant to Sections 11.03(a), 11.14 and 11.15 hereof. 11.04 Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by each Borrower and the Lender and any provision of this Loan Agreement may be waived by the Lender. 11.05 Successors and Assigns . This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.06 Survival. The obligations of each Borrower under Sections 3.03 and 11.03 hereof shall survive the repayment of the Loans and the termination of the Loan Documents. In addition, each representation and warranty made or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise because any such representation or warranty shall have proved to be false or misleading, notwithstanding that the Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.07 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08 Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. 11.09 Loan Agreement Constitutes Security Agreement; Governing Law. This Loan Agreement shall be governed by New York law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON- -34- 41 EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.12 Acknowledgments. Each Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the Loan Documents; (b) the Lender has no fiduciary relationship to the Loan Parties, and the relationship between the Borrowers and the Lender is solely that of debtor and creditor; and (c) no joint venture exists between the Lender and the Loan Parties. 11.13 Hypothecation or Pledge of Loans. The Lender shall have free and unrestricted use of all Collateral and nothing in this Loan Agreement shall preclude the Lender from engaging in repurchase transactions with its interest in the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating its interest in the Collateral. Nothing contained in this Loan Agreement shall obligate the Lender to segregate any Collateral delivered to the Lender by the Borrowers. Notwithstanding the foregoing, Lender agrees to take such actions as are necessary or desirable to release or cause to be released its lien and security interest in any Mortgage Loan which is securitized (which release shall be deemed to occur not later than simultaneously with such securitization) and to promptly deliver or cause to be delivered to the Borrowers the Mortgage File -35- 42 relating to any such Mortgage Loan. Upon payment in full of the Secured Obligations, Lender shall take such actions as are necessary to release or cause to be released its lien and security interest in the Collateral and to cause all Mortgage Files to be returned to the Borrowers. 11.14 Servicing. (a) Each Borrower covenants to maintain or cause the servicing of the Mortgage Loans to be maintained in conformity with the requirements set forth in the Pooling and Servicing Agreement. (b) If the Mortgage Loans are serviced by a Borrower, (i) each Borrower agrees that the Lender is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii) each Borrower grants the Lender a security interest in all servicing fees to which such Borrower is entitled pursuant to the Pooling and Servicing Agreement and rights relating to the Mortgage Loans and all Servicing Records to secure the obligation of a Borrower or its designee to service in conformity with this Section and any other obligation of a Borrower to the Lender. Each Borrower covenants to safeguard such Servicing Records and to deliver them promptly to the Lender or its designee (including the Trustee) at the Lender's request, and subject to the Pooling and Servicing Agreement. (c) In the event any Borrower or its respective Affiliate is servicing the Mortgage Loans, such Borrower shall permit the Lender to inspect the Borrower's or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying the Lender that such Borrower or its Affiliate, as the case may be, has the ability to service the Mortgage Loans as provided in this Loan Agreement. 11.15 Periodic Due Diligence Review. Each Borrower acknowledges that the Lender has the right to perform continuing due diligence reviews with respect to the Mortgage Loans, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and each Borrower agrees that upon reasonable (but no less than 10 Business Days') prior notice (with no notice being required upon the occurrence of an Event of Default) to any Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Mortgage Files and any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession or under the control of such Borrower and/or the Trustee or any Bailee. The Borrowers also shall make available to the Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Mortgage Files and the Mortgage Loans. Without limiting the generality of the foregoing, each Borrower acknowledges that the Lender may make Loans to the Borrowers based solely upon the information provided by the Borrowers to the Lender in the Mortgage Loan Tape and the representations, warranties and covenants contained herein, and that the Lender, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Mortgage Loans securing such Loan, including without limitation ordering new credit reports and new appraisals on the related Mortgaged Properties and otherwise re-generating the information used to originate such Mortgage Loan. The Lender may underwrite such Mortgage Loans itself or engage a mutually agreed upon third party underwriter to perform such underwriting. Each Borrower agrees to cooperate with the Lender and any third party underwriter in connection with such underwriting, -36- 43 including, but not limited to, providing the Lender and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession, or under the control, of the Borrowers. Each Borrower further agrees that the Borrowers shall reimburse the Lender for any and all reasonable out-of-pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section 11.15, provided that, unless a Default shall occur, the sum of (i) the aggregate reimbursement obligation of the Borrowers under this Loan Agreement, and (ii) the reimbursement obligation of the Buyer pursuant to Section 27 of the Repurchase Agreement, shall be limited to $25,000 per annum. Lender agrees (on behalf of itself and its Affiliates, directors, officers, employees and representatives) to use reasonable precaution to keep confidential, in accordance with its customary procedures for handling confidential information and in accordance with safe and sound practices, and not to disclose to any third party, any non-public information supplied to it or otherwise obtained by it hereunder with respect to any of the Borrowers, Advanta Corp. or any of its Affiliates; provided, however, that nothing herein shall prohibit the disclosure of any such information to the extent required by statute, rule, regulation or judicial process; provided, further that, unless specifically prohibited by applicable law or court order, Lender shall, prior to disclosure thereof, notify Borrowers of any request for disclosure of any such non-public information. Lender further agrees not to use any such non-public information for any purpose unrelated to this Loan Agreement. 11.16 Intent. The parties recognize that each Loan is a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. 11.17 Joint and Several Liability. Each Borrower hereby acknowledged and agrees that such Borrower shall be jointly and severally liable for all representations, warranties, covenants, obligations and indemnities of the Borrowers hereunder. 11.18 Conflict. In the event of any conflict between the terms of this Loan Agreement and any other Loan Document, the terms of this Loan Agreement shall prevail. [SIGNATURE PAGE FOLLOWS] -37- 44 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. Lender MORGAN STANLEY MORTGAGE CAPITAL INC. 1585 Broadway New York, New York 10036 By:/s/ ------------------------------- Name: Title: Borrowers: ADVANTA MORTGAGE HOLDING COMPANY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: -38- 45 ADVANTA MORTGAGE CORP. MIDATLANTIC II Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDWEST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. OF NEW JERSEY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. NORTHEAST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: -39- 46 ADVANTA MORTGAGE CONDUIT SERVICES, INC. Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA FINANCE CORP. 16875 West Bernardo San Diego, California 92127 By:/s/ ---------------------------- Name: Title: -40- 47 SCHEDULE 1 REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS Part I. Eligible Mortgage Loans As to each residential Mortgage Loan included in the Borrowing Base on a Funding Date (and the related Mortgage, Mortgage Note, Assignment of Mortgage and Mortgaged Property), the Borrower shall be deemed to make the following representations and warranties to the Lender as of such date and as of each date Collateral Value is determined (certain defined terms used herein and not otherwise defined in the Loan Agreement appearing in Part III to this Schedule 1). With respect to any representations and warranties made to the best of any Borrower's knowledge, in the event that it is discovered that the circumstances with respect to the related Mortgage Loan are not accurately reflected in such representation and warranty notwithstanding the knowledge or lack of knowledge of such Borrower, then, notwithstanding that such representation and warranty is made to the best of such Borrower's knowledge, such Mortgage Loan shall be assigned a Collateral Value of zero: (a) Mortgage Loans as Described. The information set forth in the Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and correct in all material respects as of the date thereof. (b) Payments Current. With respect to each Mortgage Loan other than a Delinquent Mortgage Loan, no payment required under the Mortgage Loan is delinquent beyond the applicable grace period. With respect to each 59-Day Delinquent Mortgage Loan, no payment required under the Mortgage Loan is delinquent in excess of 59 days (without regard to any grace period) and with respect to each 89-Day Delinquent Loan, no payment required under the Mortgage Loan is delinquent in excess of 89 days (without regard to any grace period). (c) No Outstanding Charges. There are no material defaults in complying with the terms of the Mortgage securing the Mortgage Loan, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Neither the Borrowers nor the Qualified Originator from which the Borrowers acquired the Mortgage Loan has advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Mortgage Note or date of disbursement of the proceeds of the Mortgage Loan, whichever is earlier, to the day which precedes by one month the Due Date of the first installment of principal and interest thereunder. (d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage have not been impaired, waived, altered or modified in any respect, from the date of origination (other than those which would not result in a Material Adverse Effect); except by a written instrument which has been recorded, if necessary to protect the interests of the Lender, and which has been delivered to the Trustee or the Bailee, as applicable, and the terms of which are reflected in the Mortgage Loan Schedule 1-1 48 Schedule. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor in respect of the Mortgage Loan has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by such policy, and which assumption agreement is part of the Mortgage File delivered to the Trustee and the terms of which are reflected in the Mortgage Loan Schedule. (e) Modification of Mortgage Loan. The Mortgage Loan has not been amended or modified in a manner that would materially and adversely effect the value of such Mortgage Loan. (f) No Defenses. The Mortgage Loan is not subject to any valid and enforceable right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto, and no, to the Borrowers' knowledge, Mortgagor in respect of the Mortgage Loan was a debtor in any state or Federal bankruptcy or insolvency proceeding at the time the Mortgage Loan was originated other than in cases in which the Mortgage Loan was originated in connection with a Mortgagor emerging from a bankruptcy and such Mortgage Loan was approved by the trustee in bankruptcy. No Borrower has knowledge nor has any Borrower received any notice that any Mortgagor in respect of the Mortgage Loan is a debtor in any state or federal bankruptcy or insolvency proceeding. (g) Hazard Insurance. The improvements upon the Mortgaged Property is insured by a fire and extended perils insurance policy, issued by a Qualified Insurer, and such other hazards as are customary in the area where the Mortgaged Property is located, and to the extent required by the applicable Borrower as of the date of origination consistent with the Underwriting Guidelines in an amount not less than the lesser of (i) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Lien Mortgage Loan, with the outstanding principal balance of the First Lien), (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis or, (iii) the full insurable value of the Mortgaged Property. If required by the Federal Emergency Management Agency, if any portion of the Mortgaged Property is in an area identified by any federal Governmental Authority as having special flood hazards, and flood insurance is available, a flood insurance policy meeting the current guidelines of the Federal Insurance Administration is in effect with a generally acceptable insurance carrier (unless the Underwriting Guidelines provide that such insurance is not necessary if the portion of the Mortgaged Property in the flood area is limited to the lot, and does not include the location of any structures), in an amount representing coverage not less than the least of (1) the outstanding principal balance of the Mortgage Loan, (2) the full insurable value of the Mortgaged Property, and (3) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973, as amended. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Borrower, its successors and assigns (including without limitation, subsequent owners of the Mortgage Loan), as mortgagee, and may not be reduced, terminated or canceled without 30 days' prior written notice to the mortgagee. No such notice has been received by the Borrower. All premiums on such insurance policy have been paid. The related Mortgage obligates the Mortgagor to maintain all such insurance and, at such Mortgagor's failure to do so, authorizes the mortgagee to maintain such insurance at the Mortgagor's cost and expense and to seek reimbursement therefor from such Mortgagor. Where required by state law or regulation, the Mortgagor has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a "master" or "blanket" hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit Schedule 1-2 49 development. The hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect. The Borrower has not engaged in, and has no knowledge of the Mortgagor's having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by the Borrower. (h) Compliance with Applicable Laws. Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan at the time it was originated have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations. (i) No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission. No Borrower has waived the performance by the Mortgagor of any action, if the Mortgagor's failure to perform such action would cause the Mortgage Loan to be in default, nor has any Borrower waived any default resulting from any action or inaction by the Mortgagor. (j) Location and Type of Mortgaged Property. The Mortgaged Property is located in an Acceptable State as identified in the Mortgage Loan Schedule and consists of a single parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a low-rise condominium project, or an individual unit in a planned unit development or a de minimis planned unit development, provided, however, that no residence or dwelling is a mobile home. Other than with respect to Mixed Use Mortgage Loans, no portion of the Mortgaged Property is used for commercial purposes. (k) Valid Lien. The Mortgage is a valid, subsisting, enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) and perfected (A) first lien and first priority security interest with respect to each Mortgage Loan which is indicated by such Borrowers to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien and second priority security interest with respect to each Mortgage Loan which is indicated by such Borrowers to be a Second Lien (as reflected on the Mortgage Loan Tape), in either case, on the real property included in the Mortgaged Property, including all buildings on the Mortgaged Property located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to: (1) the lien of current real property taxes and assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other exceptions to title acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and (a) referred to or otherwise considered in the appraisal made for the originator of the Mortgage Loan or (b) which do not materially and adversely affect the Appraised Value of the Mortgaged Property set forth in such appraisal; Schedule 1-3 50 (3) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property; and (4) with respect to each Mortgage Loan which is indicated by the Borrowers to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape) a First Lien on the Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) (A) first lien and first priority security interest with respect to each Mortgage Loan which is indicated by a Borrower to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien and second priority security interest with respect to each Mortgage Loan which is indicated by a Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), in either case, on the property described therein and such Borrower has full right to pledge and assign the same to the Lender. (l) Validity of Mortgage Documents. The Mortgage Note and the Mortgage and any other agreement executed and delivered by a Mortgagor or guarantor, if applicable, in connection with a Mortgage Loan are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) in accordance with its terms. All parties to the Mortgage Note, the Mortgage and any other such related agreement had legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage and any other such related agreement have been duly and properly executed by such related parties. To the Borrowers' knowledge, no fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to a Mortgage Loan has taken place on the part of any Person, including, without limitation, the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan. The Borrowers have reviewed all of the documents constituting the Servicing File and has made such inquiries as they deem necessary to make and confirm the accuracy of the representations set forth herein. (m) Full Disbursement of Proceeds. The Mortgage Loan has been closed and the proceeds of the Mortgage Loan have been fully disbursed and there is no further requirement for future advances thereunder, and either (i) any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with or (ii) an escrow of funds for the completion of any on-site or off-site improvements has been established in an amount sufficient to make all repairs required by the Qualified Originator to the Mortgaged Property. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage. (n) Ownership. A Borrower is the sole owner and holder of the Mortgage Loan. The Mortgage Loan is not assigned or pledged, and a Borrower has good, indefeasible and marketable title thereto, and has full right to transfer, pledge and assign the Mortgage Loan to the Lender free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other Schedule 1-4 51 party (other than the interest of the Trustee pursuant to the Pooling and Servicing Agreement), to assign, transfer and pledge each Mortgage Loan pursuant to this Loan Agreement and following the pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest except any such security interest created pursuant to the terms of this Loan Agreement. (o) Doing Business. All parties which have had any interest in the Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (ii) either (A) organized under the laws of such state, (B) qualified to do business in such state, (C) a federal savings and loan association, a savings bank or a national bank having a principal office in such state, or (D) not doing business in such state. (p) LTV. No Mortgage Loan has an LTV greater than 100% or a CLTV greater than 125%. (q) Title Insurance. The Mortgage Loan is covered by either (i) an attorney's opinion of title and abstract of title, the form and substance of which is acceptable to mortgage lending institutions making mortgage loans in the area wherein the Mortgaged Property is located or (ii) an ALTA lender's title insurance policy or other generally acceptable form of policy or insurance and each such title insurance policy is issued by a title insurer qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring the Borrowers, their respective successors and assigns, as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan (or to the extent a Mortgage Note provides for negative amortization, the maximum amount of negative amortization in accordance with the Mortgage), subject only to the exceptions contained in clauses (1), (2), (3), and, with respect to each Mortgage Loan which is indicated by the Borrowers to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape) clause (4) of paragraph (j) of this Part I of Schedule 1. Where required by state law or regulation, the Mortgagor has been given the opportunity to choose the carrier of the required mortgage title insurance. Additionally, such lender's title insurance policy affirmatively insures ingress and egress and against encroachments by or upon the Mortgaged Property or any interest therein. The title policy does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading. Each Borrower, its respective successors and assigns, are the sole insureds of such lender's title insurance policy, and such lender's title insurance policy is valid and remains in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Loan Agreement. No claims have been made under such lender's title insurance policy, and, to the best of such Borrower's knowledge, no prior holder or servicer of the related Mortgage, including any Borrower, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy, including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by any Borrower. (r) No Defaults. There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note (other than with respect to 59-Day Delinquent Mortgage Loans for which payments are delinquent for no more than fifty-nine (59) days and 89-Day Delinquent Mortgage Loans for which payments are delinquent for no more than eighty-nine (89) days) Schedule 1-5 52 and no event has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither the Borrowers nor their respective predecessors have waived any default, breach, violation or event of acceleration. With respect to each Mortgage Loan which is indicated by a Borrower to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Schedule) (i) the prior mortgage is in full force and effect, (ii) there is no default, breach, violation or event of acceleration existing under such prior mortgage or the related mortgage note, (iii) no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration thereunder, and either (A) the prior mortgage contains a provision which allows or (B) applicable law requires, the mortgagee under the Second Lien Mortgage Loan to receive notice of, and affords such mortgagee an opportunity to cure any default by payment in full or otherwise under the prior mortgage. (s) No Mechanics' Liens. There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage. (t) Location of Improvements; No Encroachments. All improvements which were considered in determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning and building law, ordinance or regulation. (u) Origination; Payment Terms. The Mortgage Loan was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar banking institution which is supervised and examined by a federal or state authority. Principal payments on the Mortgage Loan commenced no more than 60 days after funds were disbursed in connection with the Mortgage Loan. The Mortgage Interest Rate is adjusted, with respect to adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal the Index plus the Gross Margin (rounded up or down to the nearest .125%), subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable in equal monthly installments of principal and interest, which installments of interest, with respect to adjustable rate Mortgage Loans, are subject to change due to the adjustments to the Mortgage Interest Rate on each Interest Rate Adjustment Date, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date, over an original term of not more than 30 years from commencement of amortization; provided, however, in the case of a Balloon Mortgage Loan, the Mortgage Loan matures prior to full amortization thereby requiring a balloon payment of the then outstanding principal balance prior to full amortization of the Mortgage Loan. The due date of the first payment under the Mortgage Note is no more than 60 days from the date of the Mortgage Note. (v) Customary Provisions. The Mortgage Note has a stated maturity. The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage Loan will be able to deliver good and merchantable title to the Mortgaged Schedule 1-6 53 Property. There is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. (w) Conformance with Underwriting Guidelines and Agency Standards. The Mortgage Loan was underwritten substantially in accordance with the applicable Underwriting Guidelines. The Mortgage Note and Mortgage are on forms similar to those used by FHLMC or FNMA and the Borrowers have not made any representations to a Mortgagor that are inconsistent with the mortgage instruments used. (x) Occupancy of the Mortgaged Property. As of the Funding Date the Mortgaged Property is lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. The Borrowers have not received notification from any governmental authority that the Mortgaged Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspection, licenses or certificates, as the case may be. The Borrowers have not received notice of any violation or failure to conform with any such law, ordinance, regulation, standard, license or certificate. (y) No Additional Collateral. The Mortgage Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in clause (j) above other than collateral which is not included in any calculation of the LTV of such Mortgage Loan. (z) Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Trustee or the Lender to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor. (aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the Assignment of Mortgage and any other documents required to be delivered under the Pooling and Servicing Agreement for each Mortgage Loan have been delivered to the Trustee. The Borrowers or their respective agents are in possession of a complete, true and accurate Mortgage File in compliance with the Pooling and Servicing Agreement, except for such documents the originals of which have been delivered to the Trustee. (bb) Transfer of Mortgage Loans. The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located. (cc) Due-On-Sale. The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder. (dd) Consolidation of Future Advances. Any future advances made to the Mortgagor prior to the Cut-off Date have been consolidated with the outstanding principal amount secured by the Schedule 1-7 54 Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having (A) first lien priority with respect to each Mortgage Loan which is indicated by the Borrowers to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien priority with respect to each Mortgage Loan which is indicated by the Borrowers to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), in either case, by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to FNMA and FHLMC. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan. (ee) Mortgaged Property Undamaged. To the best of the Borrower's knowledge, the Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended and each Mortgaged Property is in good repair. There have not been any condemnation proceedings with respect to the Mortgaged Property and no Borrower has knowledge of any such proceedings. (ff) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The origination and collection practices used by the originator, each servicer of the Mortgage Loan and any Borrower with respect to the Mortgage Loan have been in all respects in compliance with applicable laws and regulations and in all material respects in compliance with Accepted Servicing Practices, and have been in all respects legal. With respect to escrow deposits and Escrow Payments (other than with respect to each Mortgage Loan which is indicated by the Borrowers to be a Second Lien Mortgage Loan and for which the mortgagee under the First Lien is collecting Escrow Payments (as reflected on the Mortgage Loan Tape), all such payments are in the possession of, or under the control of, the Borrowers and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in full compliance with state and federal law. An escrow of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due the Borrowers have been capitalized under the Mortgage or the Mortgage Note. All Mortgage Interest Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state, federal and local law has been properly paid and credited. (gg) Other Insurance Policies. No action, inaction or event has occurred and no state of facts exists or has existed that has resulted or will result in the exclusion from, denial of, or defense to coverage under any applicable special hazard insurance policy, PMI Policy or bankruptcy bond, irrespective of the cause of such failure of coverage. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by the Borrowers or by any officer, director, or employee of the Borrowers or any designee of the Borrowers or any corporation in which the Borrowers or any officer, director, or employee had a financial interest at the time of placement of such insurance. (hh) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not notified any Borrower, and no Borrower has knowledge, of any relief requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940. Schedule 1-8 55 (ii) Appraisal. The Mortgage File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the Borrowers, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan. (jj) Disclosure Materials. The Mortgagor has executed a statement to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of adjustable rate mortgage loans, and the Borrowers maintain such statement in the Mortgage File. (kk) Construction or Rehabilitation of Mortgaged Property. No Mortgage Loan was made in connection with the construction or rehabilitation of a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged Property. (ll) No Defense to Insurance Coverage. No action has been taken or failed to be taken, no event has occurred and no state of facts exists or has existed on or prior to the Funding Date (whether or not known to the Borrowers on or prior to such date) which has resulted or will result in an exclusion from, denial of, or defense to coverage under any private mortgage insurance (including, without limitation, any exclusions, denials or defenses which would limit or reduce the availability of the timely payment of the full amount of the loss otherwise due thereunder to the insured) whether arising out of actions, representations, errors, omissions, negligence, or fraud of the Borrowers, the related Mortgagor or any party involved in the application for such coverage, including the appraisal, plans and specifications and other exhibits or documents submitted therewith to the insurer under such insurance policy, or for any other reason under such coverage, but not including the failure of such insurer to pay by reason of such insurer's breach of such insurance policy or such insurer's financial inability to pay. (mm) Capitalization of Interest. The Mortgage Note does not by its terms provide for the capitalization or forbearance of interest. (nn) No Equity Participation. No document relating to the Mortgage Loan provides for any contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage Note is not convertible to an ownership interest in the Mortgaged Property or the Mortgagor and the Borrowers have not financed nor do they own directly or indirectly, any equity of any form in the Mortgaged Property or the Mortgagor. (oo) Withdrawn Mortgage Loans. If the Mortgage Loan has been released to any Borrower pursuant to a Request for Release as permitted under Section 5 of the Pooling and Servicing Agreement, then the promissory note relating to the Mortgage Loan was returned to the Trustee within 14 days (or if such fourteenth day was not a Business day, the next succeeding Business Day). (pp) No Exception. Neither the Trustee nor the Bailee has noted any material exceptions on an Exception Report (as defined in the Pooling and Servicing Agreement or the Bailee Agreement) with respect to the Mortgage Loan which would materially adversely affect the Mortgage Loan or the Lender's security interest, granted by the Borrower, in the Mortgage Loan. Schedule 1-9 56 (qq) Qualified Originator. The Mortgage Loan has been originated by, and, if applicable, purchased by the Borrowers from, a Qualified Originator. (rr) Mortgage Submitted for Recordation. The Mortgage either has been or will promptly be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (ss) Securitization. Each Mortgage Loan conforms to the Loan Parties' Underwriting Guidelines and otherwise conforms to the current standards of institutional securitization applicable to loans similar in nature to the Mortgage Loans. All Mortgage Loans, individually and in the aggregate, substantially comply with each related representation or warranty customarily required under the current standards of investment grade institutional securitization applicable to mortgage loans similar in nature to the Mortgage Loans. (tt) Delinquent Loan Sublimit The inclusion of any Mortgage Loan included in the Borrowing Base shall not cause the aggregate Collateral Value of Eligible Mortgage Loans (i) which are 59-Day Delinquent Mortgage Loans to exceed 3% of the aggregate principal amount outstanding under the Loans, or (ii) which are 89-Day Delinquent Mortgage Loans to exceed 1% of the aggregate principal amount outstanding under the Loans. Schedule 1-10 57 Part II. Pledged Certificates As to each Mortgage Loan which is related to a Pledged Certificate, and as to the related Pooling and Servicing Agreement, the following eligibility criteria shall be met as of the applicable Funding Date and as of each date Collateral Value is determined: (a) Validity of Pooling and Servicing Agreement. The Pooling and Servicing Agreement and any other agreement executed and delivered by the Trustee in connection with the Pledged Certificates are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. The Trustee, Sponsor and Master Servicer (as the last two such terms are defined in the Pooling and Servicing Agreement) had legal capacity to execute and deliver the Pooling and Servicing Agreement and any such other related agreement to which such Trustee, Sponsor or Master Servicer are parties have been duly and properly executed by such Trustee, Sponsor or Master Servicer, as applicable. The Pooling and Servicing Agreement is in full force and effect, and the enforceability of the Pooling and Servicing Agreement has not been contested by Trustee. (b) Original Terms Unmodified. The terms of the Pooling and Servicing Agreement have not been impaired, altered or modified in any respect. (c) No Defenses. The Pledged Certificates are not subject to any right of rescission, set-off, counterclaim or defense nor will the operation of any of the terms of the Pooling and Servicing Agreement, or the exercise of any right thereunder, render the Pooling Servicing Agreement unenforceable in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. (d) No Waiver. The Borrowers have not waived the performance by the Trustee or Master Servicer of any action, if the Trustee's failure to perform such action would cause any Mortgage Loan or Pledged Certificate to be in default, nor has any Borrower waived any default resulting from any action or inaction by the Trustee or Master Servicer. (e) No Defaults. There is no material default, breach, violation or event of acceleration existing under the Pooling and Servicing Agreement and no event has occurred which, with the passage of time or giving of notice or both and the expiration of any grace or cure period, would constitute a material default, breach, violation or event of acceleration under the Pooling and Servicing Agreement, and neither such Borrowers nor their predecessors in interest have waived any such default, breach, violation or event of acceleration. (f) Delivery of Pooling and Servicing Agreement. A copy of the Pooling and Servicing Agreement has been delivered to the Lender. (g) Pooling and Servicing Agreement Assignable. The Pooling and Servicing Agreement is assignable to the Lender. The Pooling and Servicing Agreement Schedule 1-11 58 permits the holder of the Pledged Certificate to sell, assign, pledge, transfer or rehypothecate the Pledged Certificates issued pursuant to the Pooling and Servicing Agreement. Schedule 1-12 59 Part VI Defined Terms In addition to terms defined elsewhere in the Loan Agreement, the following terms shall have the following meanings when used in this Schedule 1: "Acceptable State" shall mean any state unless the Borrower is otherwise notified by the Lender. "Accepted Servicing Practices" shall mean, with respect to any Mortgage Loan, those mortgage servicing practices of mortgage lending institutions which service mortgage loans of the same type as such Mortgage Loans in the jurisdiction where the related Mortgaged Property is located. "ALTA" means the American Land Title Association. "Appraised Value" shall mean the value set forth in an appraisal made in connection with the origination of the related Mortgage Loan as the value of the Mortgaged Property. "Assignment of Mortgage" shall mean, with respect to any Mortgage, an assignment of the mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related mortgaged property is located to reflect the assignment and pledge of the mortgage. "Best's" means Best's Key Rating Guide, as the same shall be amended from time to time. "Cut-off Date" means the first day of the month in which the related Funding Date occurs. "Due Date" means the day of the month on which the Monthly Payment is due on a Mortgage Loan, exclusive of any days of grace. "Escrow Payments" means with respect to any Mortgage Loan, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condominium charges, and any other payments required to be escrowed by the Mortgagor with the mortgagee pursuant to the Mortgage or any other document. "FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor thereto. "FNMA" means the Federal National Mortgage Association, or any successor thereto. "Gross Margin" means with respect to each adjustable rate Mortgage Loan, the fixed percentage amount set forth in the related Mortgage Note. "Index" means with respect to each adjustable rate Mortgage Loan, the index set forth in the related Mortgage Note for the purpose of calculating the interest rate thereon. Schedule 1-13 60 "Insurance Proceeds" means with respect to each Mortgage Loan, proceeds of insurance policies insuring the Mortgage Loan or the related Mortgaged Property. "Interest Rate Adjustment Date" means with respect to each adjustable rate Mortgage Loan, the date, specified in the related Mortgage Note and the Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted. "Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage Loan, the ratio of the original outstanding principal amount of the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at origination or (b) if the Mortgaged Property was purchased within 12 months of the origination of the Mortgage Loan, the purchase price of the Mortgaged Property. "Monthly Payment" means the scheduled monthly payment of principal and interest on a Mortgage Loan as adjusted in accordance with changes in the Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an adjustable rate Mortgage Loan. "Mortgage Interest Rate" means the annual rate of interest borne on a Mortgage Note, which shall be adjusted from time to time with respect to adjustable rate Mortgage Loans. "Mortgage Interest Rate Cap" means with respect to an adjustable rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth in the related Mortgage Note. "Mortgagee" means a Borrower or any subsequent holder of a Mortgage Loan. "Origination Date" shall mean, with respect to each Mortgage Loan, the date of the Mortgage Note relating to such Mortgage Loan, unless such information is not provided by a Borrower with respect to such Mortgage Loan, in which case the Origination Date shall be deemed to be the date that is 40 days prior to the date of the first payment under the Mortgage Note relating to such Mortgage Loan. "PMI Policy" or "Primary Insurance Policy" means a policy of primary mortgage guaranty insurance issued by a Qualified Insurer. "Qualified Insurer" means an insurance company duly qualified as such under the laws of the states in which the Mortgaged Property is located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, and approved as an insurer pursuant to the applicable Underwriting Guidelines. "Qualified Originator" means an originator of Mortgage Loans reasonably acceptable to the Lender. "Servicing File" means with respect to each Mortgage Loan, the file retained by the Borrowers consisting of originals of all documents in the Mortgage File which are not delivered to a Trustee and copies of the Mortgage Loan Documents set forth in Section 2 of the Pooling and Servicing Agreement. Schedule 1-14 61 FORM OF AMENDED AND RESTATED PROMISSORY NOTE $ 500,000,000.00 Dated May 1, 1997 as amended and restated as of August 21, 1998 New York, New York FOR VALUE RECEIVED, Advanta Mortgage Holding Company, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. USA, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic II, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midwest, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. of New Jersey, a New Jersey corporation, as a Borrower; Advanta Mortgage Corp. Northeast, a New York corporation, as a Borrower; Advanta Mortgage Conduit Services, Inc., a Delaware corporation, as a Borrower; and Advanta Finance Corp., a Nevada corporation, as a Borrower (each a "Borrower" collectively, the "Borrowers"), hereby promises to pay to the order of MORGAN STANLEY MORTGAGE CAPITAL INC. (the "Lender"), at the principal office of the Lender at 1585 Broadway, New York, New York, 10036, in lawful money of the United States, and in immediately available funds, the principal sum of FIVE HUNDRED MILLION DOLLARS ($500,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Lender to the Borrowers under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by the Lender to the Borrowers, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrowers to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by the Lender. This Amended and Restated Promissory Note is the Note referred to in the Loan and Security Agreement dated as of May 1, 1997, among the Borrowers and the Lender as amended by the Amended and Restated Master Loan and Security Agreement dated as of August 21, 1998 (as so amended and as further amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement") between the Borrowers and the Lender, and evidences Loans made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. The Borrowers agree to pay all the Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, the Borrowers hereby acknowledge, admit and agree that the Borrowers' obligations under this Note are recourse obligations of each Borrower to which each Borrower pledges its full faith and credit. 62 Each Borrower, and any indorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that, except as expressly otherwise provided in the Affiliate Guaranty, it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrowers or any other party liable hereon or against any Collateral for this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrowers, even if the Borrowers are not a party to such agreement; provided, however, that the Lender and the Borrowers, by written agreement among them, may affect the liability of the Borrowers. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. Each Borrower hereby acknowledges and agrees that such Borrower shall be jointly and severally liable for all representations, warranties, covenants, obligations and indemnities of the Borrowers under the Loan Documents. This Amended and Restated Promissory Note amends and restates in its entirety the Promissory Note dated May 1, 1997 (the "Existing Promissory Note") and is given as a continuation, rearrangement and extension, and not a novation, release or satisfaction, of the Existing Promissory Note. The issuance and delivery of this Amended and Restated Promissory Note is in substitution for the Existing Promissory Note. This Amended and Restated Promissory Note does not create or evidence any principal indebtedness other than the principal indebtedness evidenced by the Existing Promissory Note. Each Borrower hereby acknowledges and agrees that simultaneously with such Borrower's execution and delivery of this Amended and Restated Promissory Note to the Lender, the Lender has delivered to the Borrowers the Existing Promissory Note. 63 THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS THE BORROWERS EXPRESSLY ELECT TO APPLY TO THIS NOTE. THE BORROWERS AGREE THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. Borrowers: ADVANTA MORTGAGE HOLDING COMPANY By:_______________________________ Name: Title: ADVANTA MORTGAGE CORP. USA By:____________________________ Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC By:____________________________ Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC II By:____________________________ Name: Title: ADVANTA MORTGAGE CORP. MIDWEST By:____________________________ Name: Title: 64 ADVANTA MORTGAGE CORP. OF NEW JERSEY By:____________________________ Name: Title: ADVANTA MORTGAGE CORP. NORTHEAST By:____________________________ Name: Title: ADVANTA MORTGAGE CONDUIT SERVICES, INC. By:____________________________ Name: Title: ADVANTA FINANCE CORP. By:____________________________ Name: Title: 65 SCHEDULE OF LOANS This Note evidences Loans made under the within-described Loan Agreement to the Borrowers, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below:
PRINCIPAL AMOUNT OF INTEREST AMOUNT PAID UNPAID PRINCIPAL NOTATION DATE MADE LOAN RATE OR PREPAID AMOUNT MADE BY - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- -------------- - ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
66 AMENDMENT NO. 1 TO AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT Amendment No. 1 dated as of September 25, 1998 ("Amendment No. 1"), among Advanta Mortgage Holding Company, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. USA, a Delaware corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midatlantic II, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. Midwest, a Pennsylvania corporation, as a Borrower; Advanta Mortgage Corp. of New Jersey, a New Jersey corporation, as a Borrower; Advanta Mortgage Corp. Northeast, a New York corporation, as a Borrower; Advanta Mortgage Conduit Services, Inc., a Delaware corporation, as a Borrower; Advanta Finance Corp., a Nevada corporation, as a Borrower (each a "Borrower", collectively the "Borrowers") and MORGAN STANLEY MORTGAGE CAPITAL INC., a New York corporation (the "Lender"). RECITALS The Borrowers entered into that certain Master Loan and Security Agreement, dated May 1, 1997 as amended and restated in the Amended and Restated Master Loan and Security Agreement, dated August 21, 1998, with the Lender (the "Existing Loan Agreement" as amended by this Amendment No. 1, the "Loan Agreement") to finance the purchase by the Borrowers of certain mortgage loans, and to finance the obligations of each of the Borrowers on the terms and conditions as set forth in the Existing Loan Agreement. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Loan Agreement or the Sale and Servicing Agreement (as defined below), each as applicable. The Borrowers are also party (as Pledgors thereunder) to that certain Master Repurchase Agreement dated as of August 21, 1998, as amended by Amendment No. 1 to Master Repurchase Agreement dated as of September 25, 1998, between Advanta National Bank (as Seller thereunder) and the Lender (as Buyer thereunder). The Borrowers and the Lender wish to amend the Existing Loan Agreement to provide for the existence of the Indenture Notes (as defined below). Accordingly, the parties hereby agree, in consideration of the mutual premises and mutual obligations set forth herein, to the terms and conditions of the Existing Loan Agreement as amended by this Amendment No. 1. SECTION 1. Definitions. Section 1.01 of the Existing Loan Agreement is hereby amended by: (a) adding the following definitions in proper alphabetical order therein. "Indenture" shall mean the Indenture dated as of September 25, 1998 between Advanta Home Equity Loan Owner Trust 1998-MS1 and Bankers Trust Company of California, N.A. -2- 67 "Indenture Note" shall mean any note authorized by and authenticated and delivered under the Indenture. "Indenture Note Principal Balance" means the principal balance of each Indenture Note as calculated in the Sale and Servicing Agreement. "Sale and Servicing Agreement" means the Sale and Servicing Agreement dated as of September 25, 1998, among Advanta Home Equity Loan Owner Trust 1998-MS1, as Issuer, Advanta Loan Warehouse Corporation, as Depositor, Advanta Mortgage Corp. USA ("AMCUSA"), as Servicer, Advanta National Bank, Advanta Bank Corp. and AMCUSA, as Loan Originators, Bankers Trust Company of California, N.A., as Indenture Trustee on behalf of the Noteholders, and Advanta Corp. together with AMCUSA, as Transfer Obligors. (b) deleting the definitions of "Available Committed Loan Amount" and "Non-Transaction Amount" in their entirety and replacing them with the following, in proper alphabetical order therein: "Available Committed Loan Amount" shall mean the Maximum Committed Loan Amount, minus the sum of (i) the aggregate amount of Loans outstanding hereunder (ii) the aggregate amount of Transactions outstanding under the Repurchase Agreement and (iii) the aggregate Indenture Note Principal Balance of the Indenture Notes. "Non-Transaction Amount" shall mean the Maximum Combined Amount minus the sum of (i) the aggregate amount of Transactions outstanding under the Repurchase Agreement and (ii) the aggregate Indenture Note Principal Balance of the Indenture Notes; provided, however, that if such calculation results in an amount greater than $500,000,000, the Non-Transaction Amount shall equal $500,000,000. SECTION 2. Conditions Precedent to Amendment Effective Date. This Amendment No. 1 shall become effective on the date (the "Amendment Effective Date") on which the following conditions precedent shall have been satisfied: 2.1 Delivered Documents. On the Amendment Effective Date, the Lender shall have received the following documents, each of which shall be satisfactory to the Lender in form and substance: (a) this Amendment No. 1, executed and delivered by a duly authorized officer of each of the Borrower and the Lender; (b) such other documents as the Lender or counsel to the Lender may reasonably request. 2.2 No Default. On the Amendment Effective Date, (i) the Borrowers shall be in compliance with all the terms and provisions set forth in the Loan Agreement on their part to be observed or performed, (ii) the representations and warranties made and restated by the Borrowers pursuant to Section 3 of this Amendment No. 1 shall be true and complete on and as of such date in all material respects with the same force and effect as if made on and as of such date (or, if such representation or warranty is expressly stated to have been made as of a specific date, as of such date), and (iii) no Default shall have occurred and be continuing on such date. -3- 68 SECTION 3. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender that they are in compliance with all the terms and provisions set forth in the Loan Agreement (as amended hereby, if applicable) on their part to be observed or performed, and that no Default has occurred or is continuing, and hereby confirm and reaffirm the representations and warranties contained in Section 6 and Schedule 1, Part I and Part II of the Loan Agreement. SECTION 4. Limited Effect. Except as expressly set forth in this Amendment No. 1, the Existing Loan Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. SECTION 5. Counterparts. This Amendment No. 1 may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. SECTION 6. GOVERNING LAW. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS THEREOF. [SIGNATURE PAGE FOLLOWS] -4- 69 IN WITNESS WHEREOF, the parties have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. Lender MORGAN STANLEY MORTGAGE CAPITAL INC. 1585 Broadway New York, New York 10036 By:/s/ ------------------------------- Name: Title: Borrowers: ADVANTA MORTGAGE HOLDING COMPANY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ------------------------------- Name: Title: 70 ADVANTA MORTGAGE CORP. MIDATLANTIC II Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDWEST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. OF NEW JERSEY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. NORTHEAST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: -6- 71 ADVANTA MORTGAGE CONDUIT SERVICES, INC. Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA FINANCE CORP. 16875 West Bernardo San Diego, California 92127 By:/s/ ---------------------------- Name: Title: -7- EX-10.W 8 MASTER REPURCHASE AGREEMENT 1 Exhibit 10-W MASTER REPURCHASE AGREEMENT Dated as of August 21, 1998 Between: MORGAN STANLEY MORTGAGE CAPITAL INC., AS BUYER and ADVANTA NATIONAL BANK, AS SELLER and ADVANTA MORTGAGE HOLDING COMPANY AS A PLEDGOR, ADVANTA MORTGAGE CORP. USA, AS A PLEDGOR, ADVANTA MORTGAGE CORP. MIDATLANTIC, AS A PLEDGOR, ADVANTA MORTGAGE CORP. MIDLANTIC II, AS A PLEDGOR, ADVANTA MORTGAGE CORP. MIDWEST, AS A PLEDGOR, ADVANTA MORTGAGE CORP. OF NEW JERSEY, AS A PLEDGOR, ADVANTA MORTGAGE CORP. NORTHEAST, AS A PLEDGOR, ADVANTA MORTGAGE CONDUIT SERVICES, INC., AS A PLEDGOR, AND ADVANTA FINANCE CORP., AS A PLEDGOR (COLLECTIVELY, THE "PLEDGORS") 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which Advanta National Bank ("Seller"), agrees to transfer to Morgan Stanley Mortgage Capital Inc. ("Buyer") Mortgage Loans against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Mortgage Loans at a date certain not later than 180 days after the date of transfer or on demand, as specified in the Confirmation, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Repurchase Agreement and the related Confirmation, unless otherwise agreed in writing. The Pledgors are Affiliates of the Seller which may from time to time transfer Mortgage Loans to the Seller. It is a condition of the transfer of the Mortgage Loans by the Pledgors to the Seller that the Pledgors grant a security interest in all of their right, title and interest, if any, in such Mortgage Loans to the Buyer. 2 The Pledgors are also party to that certain Master Loan and Security Agreement dated as of the date hereof between the Pledgors (as Borrowers thereunder) and the Buyer (as Lender thereunder) (the "Loan Agreement"). In consideration of the benefits derived by the Pledgors, and as a further condition to the Lender agreeing to enter into the Loan Agreement and the Repurchase Agreement, the Pledgors are parties hereto with respect to their interests in the Mortgage Loans. 2. DEFINITIONS As used herein, the following terms shall have the following meanings (all terms defined in this Section 2 or in other provisions of this Repurchase Agreement in the singular to have the same meanings when used in the plural and vice versa) Terms otherwise not defined herein shall have the meanings set forth in the Loan Agreement and/or the related Confirmation: "Adequately Capitalized" shall mean, with respect to any Insured Depository Institution, the maintenance by such Insured Depository Institution of capital ratios at or above the required minimum levels for such capital category under the regulations promulgated pursuant to Section 1831(o) ("Prompt Corrective Action") of the United States Code, as amended from time to time, by the Appropriate Federal Banking Agency for such institution, as such regulation may be amended from time to time. "Additional Purchased Loans" means Mortgage Loans or cash provided by Seller to Buyer or its designee pursuant to Section 4(a). "Affiliate" means, (i) with respect to the Buyer, Morgan Stanley Group, Inc. and Morgan Stanley & Co. Incorporated, and (ii) with respect to the Seller, any "affiliate" of the Seller as such term is defined in the United States Bankruptcy Code in effect from time to time. "Affiliate Guaranty" shall mean the Amended and Restated Affiliate Guaranty, entered into by the Guarantor on the date hereof. "Affiliate Transfer" shall mean the transfer of Mortgage Loans or any interest therein by an Affiliate of the Seller to the Seller. "Affiliate Transfer Documents" with respect to any Affiliate Transfer shall mean all documents and agreements evidencing or related to the Affiliate Transfer, including without limitation all agreements pursuant to which any Affiliate of the Seller transfers the Mortgage Loans or any interest therein or any other collateral securing the Underlying Obligation, including without limitation all guarantees, copies of acknowledgment, copies of all Uniform Commercial Code financing statements and assignments thereof filed in connection with the Underlying Obligation or in connection with the pledge thereof to the Buyer hereunder and any and all Affiliate Transfer Documents. -2- 3 "Agency" means FNMA, FHLMC or GNMA. "Appraised Value" shall mean the value of the Mortgaged Property as set forth in an appraisal, prepared in accordance with the Underwriting Guidelines, made in connection with the origination of the related Mortgage Loan. "Appropriate Federal Banking Agency" shall have the meaning ascribed to it by Section 1813(q) of Title 12 of the United States Code, as amended from time to time. "Available Committed Purchase Amount" shall mean the Maximum Committed Amount, minus the sum of (i) the aggregate amount of Transactions outstanding hereunder, and (ii) the aggregate amount of Loans outstanding under the Loan Agreement. "Available Purchase Amount" shall mean the Maximum Purchase Amount minus the sum of (i) the aggregate amount of Transactions outstanding hereunder and (ii) the aggregate amount of Loans outstanding under the Loan Agreement. "Balloon Mortgage Loan" shall mean any Mortgage Loan for which the related monthly payments, other than the monthly payment due on the maturity date thereof, are computed on the basis of a period to full amortization ending on a date that is later than such maturity date. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Business Day" shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or the Trustee is authorized or obligated by law or executive order to be closed or (iii) a day in which banks are authorized or obligated by law or executive order to be closed in the Commonwealth of Pennsylvania, the State of California or the State of Delaware. "Buyer" shall mean Morgan Stanley Mortgage Capital Inc. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" has the meaning specified in Section 6. "Collateral Value" shall mean, with respect to each Mortgage Loan the lesser of (i) the applicable Margin Amount Percentage multiplied by the Market Value of such Mortgage Loan and (ii) the outstanding principal balance of such Mortgage Loan, provided, that (i) the Collateral Value shall be deemed to be zero with respect to each Mortgage Loan (1) in respect of which there is a material breach of a representation and warranty set forth on Exhibit 2 (assuming each representation and warranty is made as of the date Collateral Value is determined), (2) which is a Mortgage -3- 4 Loan of the type specified in subparagraphs (ii)-(viii) hereof, which is in excess of the limits permitted under subparagraphs (ii)-(viii) hereof, (3) which has not been repurchased by the Seller by 180 days after the date on which it is first purchased by Buyer, (4) which has been released from the possession of the Trustee under the Pooling and Servicing Agreement to the Seller for a period in excess of 14 days, (5) which is a Delinquent Mortgage Loan and is not repurchased by the Seller hereunder upon repurchase of some or all of the Mortgage Loans purchased by the Buyer hereunder (in accordance with the terms of this Repurchase Agreement) for the purpose of issuing securities backed by such Mortgage Loans and (6) for which the Trustee does not have in its possession the original Mortgage Note, unless such possession has been otherwise waived by the Buyer in writing; (ii) the aggregate Collateral Value of Eligible Mortgage Loans which are Second Lien Mortgage Loans may not exceed 20% of the aggregate Purchase Price for all Purchased Mortgage Loans subject to then-outstanding Transactions under this Repurchase Agreement; (iii) the sum of (a) the aggregate Collateral Value of Eligible Mortgage Loans which are secured by a Manufactured Dwelling and (b) the aggregate Collateral Value of Mortgage Loans pledged under the Loan Agreement which are secured by Manufactured Dwellings may not exceed 5% of the Maximum Purchase Amount; (iv) the sum of (a) the aggregate Collateral Value of Eligible Mortgage Loans which are Mixed Use Mortgage Loans and (b) the aggregate Collateral Value of Mortgage Loans pledged under the Loan Agreement which are Mixed Use Mortgage Loans may not exceed 1% of the Maximum Purchase Amount; (v) the sum of (a) the aggregate Collateral Value of Eligible Mortgage Loans which are Balloon Mortgage Loans and (b) the aggregate Collateral Value of Mortgage Loans pledged under the Loan Agreement which are Balloon Mortgage Loans may not exceed 25% of the Maximum Purchase Amount; (vi) the sum of (a) the aggregate Collateral Value of first lien Eligible Mortgage Loans that are High LTV Mortgage Loans and (b) the aggregate Collateral Value of Mortgage Loans pledged under the Loan Agreement that are High LTV Mortgage Loans may not exceed 10% of the Maximum Purchase Amount; (vii) the aggregate Collateral Value of Eligible Mortgage Loans which are 59-Day Delinquent Mortgage Loans may not exceed 3% of the aggregate Purchase Price for all Purchased Mortgage Loans that are subject to then outstanding Transactions under this Repurchase Agreement; and (viii) the aggregate Collateral Value of Eligible Loans which are 89-Day Delinquent Mortgage Loans may not exceed 1% of the aggregate Purchase Price for all -4- 5 Purchased Mortgage Loans that are subject to then outstanding Transactions under this Repurchase Agreement. "Collection Account" shall have the meaning set forth in Section 6.01 of the Pooling and Servicing Agreement. "Combined LTV" or "CLTV" shall mean with respect to any Mortgage Loan, the ratio of (a) the outstanding principal balance as of the related date of origination of such Mortgage Loan of (i) the Mortgage Loan plus (ii) the mortgage loan constituting the first lien (if any) to (b) the Appraised Value of the Mortgaged Property. "Committed Purchase" shall mean a Transaction which is subject to Buyer's commitment to purchase hereunder. "Confirmation" has the meaning specified in Section 3(b). "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Delinquent Mortgage Loan" shall mean 59-Day Delinquent Mortgage Loans and 89-Day Delinquent Mortgage Loans. "Discrepancy" shall mean any discrepancy between the information set forth on the Mortgage Loan Tape and the information discovered as a result of the Buyer's Due Diligence Review, in all cases, based upon the Underwriting Guidelines and the Borrower's credit classification criteria. "Due Diligence Review" shall mean the performance by the Buyer of any or all of the reviews permitted under Section 27 hereof with respect to any or all of the Mortgage Loans, as desired by the Buyer from time to time. "Effective Date" shall mean the date upon which the conditions precedent set forth in Section 3(a) shall have been satisfied. "89-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan made by the Seller to a Mortgagor or acquired by the Seller and underwritten substantially in accordance with the Underwriting Guidelines, a copy of the current version of which is attached hereto as Exhibit III, and which is at least 60 days, but not more than 89 days, delinquent with respect to the payment of principal or interest (without regard to any applicable grace period). "Eligible Mortgage Loan" shall mean (a) a Mortgage Loan secured by a first or second mortgage lien (as reflected on the Mortgage Loan Tape) on a one-to-four family residential property (i) as to which the representations and warranties in Section 6.10 and Part I of Schedule 1 hereof are correct in all material respects and (ii) which is underwritten substantially in accordance with the Seller's Underwriting Guidelines, a -5- 6 copy of which is attached hereto as Exhibit III, provided that notwithstanding the foregoing, a Mortgage Loan that is transferred from an Affiliate shall only be an Eligible Mortgage Loan if such Affiliate is a Pledgor hereunder. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which any Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which any Borrower is a member. "Eurocurrency Reserve Requirements" shall mean, for any day as applied to a Transaction, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements applicable to the Buyer in effect on such day (including without limitation basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Governmental Authority. "Eurodollar Base Rate" shall mean, with respect to each day a transaction is outstanding (or if such day is not a Business Day, the next succeeding Business Day), the rate per annum equal to the rate appearing at page 5 of the Telerate Screen as one-month LIBOR on such date, and if such rate shall not be so quoted, the arithmetic average determined in good faith by the Buyer, of the rate per annum at which the Buyer is offered Dollar deposits at or about 10:00 A.M., New York City time, on such date by at least three unaffiliated prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of its Transactions are then being conducted for delivery on such day for a period of 30 days and in an amount comparable to the amount of the Transactions to be outstanding on such day. "Eurodollar Rate" shall mean, with respect to each day a transaction is outstanding, a rate per annum determined by the Buyer in its sole discretion in accordance with the following formula (rounded upwards to the nearest 1/100th of one percent), which rate as determined by the Buyer shall be conclusive absent manifest error by the Buyer: Eurodollar Base Rate ------------------------------------------ 1.00 - Eurocurrency Reserve Requirements "Event of Default" has the meaning specified in Section 12. "FHA" means the Federal Housing Administration, an agency within HUD. -6- 7 "FHLMC" means the Federal Home Loan Mortgage Corporation. "FHLMC Guide" means the FHLMC Sellers/Servicers Guide, as amended from time to time. "59-Day Delinquent Mortgage Loan" shall mean a Mortgage Loan made by the Seller to a Mortgagor or acquired by the Seller and underwritten substantially in accordance with the Underwriting Guidelines, a copy of the current version of which is attached hereto as Exhibit III, and which is at least 30 days, but not more than 59 days, delinquent with respect to the payment of principal or interest (without regard to any applicable grace period). "FNMA" means the Federal National Mortgage Association. "FNMA Guide" means the FNMA Selling, Servicing and MBS Guides, as amended from time to time. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States. "GNMA" means the Government National Mortgage Association. "GNMA Guide" means the GNMA Mortgage-Backed Securities Guide, as amended from time to time. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over the Seller, any of its Subsidiaries or any of their properties. "Guarantor" shall mean Advanta Corp., a Delaware corporation. "High LTV Mortgage Loans" shall mean first and second lien Eligible Mortgage Loans with an LTV greater than 90% and less than or equal to 100%. "HUD" means the United States Department of Housing and Urban Development. "Income" means, with respect to any Mortgage Loan at any time, any principal thereof then payable and all interest, dividends or other distributions payable thereon less any related servicing fee(s) charged by the Servicer. "Insured Depository Institution" shall have the meaning ascribed to such term by Section 1813(c)(2) of Title 12 of the United States Code, as amended from time to time. -7- 8 "Interest Rate Protection Agreement" shall mean, with respect to any or all of the Mortgage Loans, any short sale of US Treasury Security, or futures contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by any Borrower or the Guarantor. "Lien" shall mean any mortgage, lien, pledge, charge, security interest or similar encumbrance. "Loan" shall mean any loan made pursuant to the Loan Agreement. "Loan Agreement" shall mean that certain Amended and Restated Master Loan and Security Agreement, dated as of the date hereof by and among the Seller (as Pledgor thereunder), the Pledgors (as Borrowers thereunder) and the Buyer (as Lender thereunder). "Loan-to-Value Ratio" or "LTV" shall have the meaning assigned thereto in Exhibit II of this Master Purchase Agreement. "Manufactured Dwelling" shall mean a fully attached manufactured home which is considered and treated as "real estate" under applicable state law. "Margin Amount" means, with respect to any Transaction, the amount obtained by application of the Margin Amount Percentage to the Purchase Price for such Transaction. "Margin Amount Percentage" shall mean (a) with respect to all Eligible Mortgage Loans other than Delinquent Mortgage Loans and High LTV Mortgage Loans, 96%; (b) with respect to all Eligible Mortgage Loans that are Delinquent Mortgage Loans, 90%; and (c) with respect to all Eligible Mortgage Loans that are High LTV Mortgage Loans, 94%. "Margin Deficit" has the meaning specified in Section 4(a). "Margin Excess" has the meaning specified in Section 4(b). "Market Value" shall mean as of any date in respect of a Mortgage Loan, the price at which such Mortgage Loan could readily be sold as reasonably determined in good faith by the Buyer, which price may be determined to be zero. The Buyer's determination of Market Value shall be conclusive upon the parties absent manifest error on the part of the Buyer. "Material Adverse Effect" shall mean a material adverse effect on (a) the Property, business, operations or financial condition of the Repurchase Agreement Parties taken -8- 9 as a whole, (b) the ability of the Seller or the Guarantor to perform their obligations under any of the Transaction Documents to which they are a party, (c) the validity or enforceability of any of the Repurchase Documents, (d) the practical realization of the Buyer's rights and remedies under any of the Repurchase Documents, taken as a whole, (e) the timely payment of any amounts payable in connection with any Transaction or (f) the value of the Purchased Mortgage Loans taken as a whole. "Maximum Committed Amount" shall mean $375,000,000. "Maximum Purchase Amount" shall mean the sum of the Maximum Committed Amount and the Maximum Uncommitted Amount, which shall equal $750,000,000. "Maximum Uncommitted Amount" shall mean $375,000,000. "Misclassified Mortgage Loan" shall mean any Mortgage Loan for which the Buyer discovers a Discrepancy which affects the classification of the Mortgage Loan. "Mixed Use Mortgage Loan" shall mean a Mortgage Loan secured by a Mortgaged Property that is used primarily for residential purposes, but which is also used for non-residential purposes. "Mortgage" means a mortgage, deed of trust, deed to secure debt or other instrument, creating a valid and enforceable first or second lien on or first or second priority ownership interest in an estate in fee simple in real property and the improvements thereon, securing a Mortgage Note or similar evidence of indebtedness. "Mortgage Backed Securities Program" means the mortgage loan securitization programs of GNMA, FNMA, and FHLMC, collectively. "Mortgage File" means the documents specified as the "Mortgage File" in Exhibit a of the Pooling and Servicing Agreement. "Mortgage Loan" shall mean a mortgage loan purchased by the Buyer hereunder and which the Trustee has been instructed to hold for the Buyer pursuant to the Pooling and Servicing Agreement, and which Mortgage Loan includes, without limitation, (i) a Mortgage Note and related Mortgage and (ii) all right, title and interest of the Seller and the Pledgors in and to the Mortgaged Property covered by such Mortgage. "Mortgage Loan Schedule" has the meaning assigned thereto in the Pooling and Servicing Agreement. "Mortgage Note" means a promissory note or other evidence of indebtedness of a Mortgagor with respect to a Mortgage Loan, secured by a Mortgage. "Mortgaged Property" means the real property (including all improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations -9- 10 and replacements made at any time with respect to the foregoing) and all other collateral securing repayment of the debt evidenced by a Mortgage Note. "Mortgagee" means the record holder of a Mortgage Note secured by a Mortgage. "Mortgagor" means the obligor on a Mortgage Note and the grantor of the related Mortgage. "Periodic Advance Repurchase Payment" has the meaning specified in Section 5(b). "Plan" shall mean an employee benefit or other plan established or maintained by any Borrower or any ERISA Affiliate and covered by Title IV of ERISA, other than a Multiemployer Plan. "Pledged Certificate" shall mean a certificate substantially in the form of Exhibit C to the Pooling and Servicing Agreement authenticated by the Trustee, issued in the name of the Buyer and pledged and delivered to the Buyer hereunder, representing a 100% interest in a Pledged Series Pool of Eligible Mortgage Loans held by Trustee for the benefit of the Buyer, as to which the representations and warranties in Section 10 and Part II of Exhibit II hereof are correct in all material respects. "Pledgor" has the meaning specified in Section 1. "Pooling and Servicing Agreement" means the Pooling and Servicing Agreement, dated as of May 1, 1997, among Advanta Mortgage Conduit Services, Inc, as Sponsor, Advanta Mortgage Corp. USA as Master Servicer, Advanta Mortgage Holding Company, Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp. Midatlantic II, Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp. Northeast; Advanta Mortgage Conduit Services, Inc., and Advanta Finance Corp. and Advanta National Bank as Borrowers, and Bankers Trust Company of California, N.A. as Trustee as amended by Amendment # 1 to the Pooling and Servicing Agreement, dated as of the date hereof which added Advanta National Banks as a party thereto. "Borrower" shall mean Advanta National Bank as Seller hereunder. "Lender" shall mean Morgan Stanley Mortgage Capital Inc. as Buyer hereunder. "Loan Agreement" shall mean this Repurchase Agreement. "Loan Agreement Event of Default" shall mean an Event of Default under this Repurchase Agreement. "Pledge" shall mean a purchase under a Transaction. -10- 11 "Pledge Date" shall mean Purchase Date. "Pledge Notice" shall mean the notice of purchase by Buyer of Mortgage Loans hereunder, provided by Seller to Trustee. "Pledge Review Procedures" shall mean the review procedures applicable to Purchased Mortgage Loans. "Pledged Certificate" shall mean the certification of purchase provided by the Trustee to the Buyer, acknowledging the Buyer's interest in Purchase Mortgage Loans. "Pledged Mortgage Loan" shall mean "Purchased Mortgage Loan" "Release of Pledge Notice" shall mean the release of Buyer's interest in Purchase Mortgage Loans, delivered by Buyer to Trustee. "Price Differential" means, with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the Repurchase Date (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction). "Pricing Rate" means the per annum percentage rate specified in the Confirmation for determination of the Price Differential which shall not exceed the Eurodollar rate plus the applicable Pricing Spread. "Pricing Spread" means 0.60%. "Property" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Purchase Date" means the date on which Purchased Mortgage Loans are transferred by Seller to the Buyer or its designee (including the Trustee) as specified in the Confirmation. "Purchase Price" means on each Purchase Date, the price at which Purchased Mortgage Loans are transferred by Seller to Buyer or its designee (including the Trustee) which shall equal lesser of (i) the Margin Amount Percentage of the Market Value of such Mortgage Loan or (2) the outstanding principal balance of such Mortgage Loan. "Purchased Mortgage Loans" means the Mortgage Loans sold by Seller to Buyer in a Transaction, and any Additional Purchased Loans. -11- 12 "Regulations T, U and X" shall mean Regulations T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Replacement Assets" has the meaning specified in Section 13(b). "Repurchase Agreement" shall mean this Master Repurchase Agreement among Buyer, Seller and Pledgors, dated as of the date hereof as the same may be further amended, supplemented or otherwise modified in accordance with the terms hereof. "Repurchase Agreement Parties" shall mean each of the Pledgors, the Guarantor, and the Seller. "Repurchase Date" means the date on which Seller is to repurchase the Purchased Mortgage Loans from Buyer, including any date determined by application of the provisions of Sections 3 or 13, as specified in the Confirmation. "Repurchase Documents" shall mean this Repurchase Agreement, the Affiliate Guaranty and the Pooling and Servicing Agreement. "Repurchase Price" means the price at which Purchased Mortgage Loans are to be transferred from Buyer or its designee (including the Trustee) to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination decreased by all cash, Income and Periodic Advance Repurchase Payments actually received by Buyer pursuant to Sections 5(a) and 5(b), respectively. "Responsible Officer" shall mean, as to any Person, the chief executive officer, the president, any vice president or the treasurer of such Person. "Restricted Transaction" shall mean any transaction of merger or consolidation or amalgamation by the Seller or the Guarantor; or any voluntary or involuntary liquidation, winding up or dissolution of the Seller or the Guarantor; or sale of all or substantially all of the Seller's or the Guarantor's assets (it being understood that a securitization of loan assets shall not be deemed a sale of all or substantially all assets). "Second Lien Mortgage Loan" shall mean any Mortgage Loan underwritten substantially in accordance with the Underwriting Guidelines with respect to which the lien of the mortgage, deed of trust or other instrument securing a mortgage note creates a second lien on the Mortgaged Property. "Seller" shall mean Advanta National Bank. "Servicer" has the meaning specified in Section 24 hereof. -12- 13 "Servicing Agreement" has the meaning specified in Section 24 hereof, and shall include but not be limited to the Pooling and Servicing Agreement. "Servicing Records" has the meaning specified in Section 24 hereof. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "Swap Agreement" means any interest rate swap, cap or collar agreement, interest rate future or option contract, currency swap agreement, currency future or option contract and other similar agreement. "Termination Date" means the date which is 364 days from the date hereof which shall be August 20, 1999. "Transaction" has the meaning specified in Section 1. "Transaction Documents" shall mean the Loan Documents and the Repurchase Documents. "Transaction Party" shall mean each of the Seller, the Pledgors and the Guarantor. "Trustee" means Bankers Trust Company of California N.A. as Trustee under the Pooling and Servicing Agreement. "Underlying Obligation" means the obligations of the related Pledgor to the Seller with respect to an Affiliate Transfer. "Underwriting Guidelines" shall mean the underwriting guidelines delivered by the Repurchase Agreement Parties to the Buyer on or prior to the Effective Date and as may be supplemented from time to time thereafter. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of -13- 14 the provisions hereof relating to such perfection or effect of perfection or non-perfection. "Well Capitalized" shall mean, with respect to any Insured Depository Institution, the maintenance by such Insured Depository Institution of capital ratios at or above the required minimum levels for such capital category under the regulations promulgated pursuant to Section 1831(o) ("Prompt Corrective Action") of the United States Code, as amended from time to time, by the Appropriate Federal Banking Agency for such institution, as such regulation may be amended from time to time. 3. INITIATION; CONFIRMATION; TERMINATION (a) Conditions Precedent to Initial Transaction. Buyer's obligation to enter into the initial Transaction hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Transaction, of the condition precedent that Buyer shall have received from Seller any fees and expenses payable hereunder, and all of the following documents, each of which shall be satisfactory to Buyer and its counsel in form and substance: (i) The following Repurchase Documents delivered to the Buyer: (A) Master Repurchase Agreement, duly completed and executed by the parties thereto. In addition, the Seller and the Pledgors shall have taken such other action as the Buyer shall have requested in order to perfect the security interests created pursuant to this Repurchase Agreement, including execution of UCC-1 and UCC-3 financing statements in form and substance satisfactory to the Buyer. (B) Amendment No. 1 to the Pooling and Servicing Agreement, duly completed and executed by the parties thereto. (C) Affiliate Guaranty, duly completed and executed by the Guarantor. (D) Loan Agreement. The Loan Agreement between the Pledgors (as Borrowers thereunder) and the Buyer (as Lender thereunder), duly executed, with all required documents thereunder delivered to Buyer. (ii) Officer's Certificate. An officer's certificate certifying that the Pooling and Servicing Agreement dated as of May 1, 1997 among Bankers Trust Company of California, N.A., as Trustee, Advanta Mortgage Conduit Services, Inc., as Sponsor, Advanta Mortgage Corp. USA, as Master Servicer and the remaining Borrowers, has not been modified or amended, other than as amended by Amendment # 1 to the Pooling and Servicing Agreement, and remains in full force and effect as of the date hereof. -14- 15 (iii) Opinions of Counsel. An opinion or opinions of counsel to the Seller and to the Guarantor, substantially in the form of Exhibit C to the Loan Agreement; (iv) Organizational Documents. A good standing certificate and certified copies of the charter and by-laws (or equivalent documents) of the Seller and Pledgors and of all corporate or other authority for the Seller and the Pledgors with respect to the execution, delivery and performance of the Repurchase Documents and each other document to be delivered by each Seller and Pledgor from time to time in connection herewith (and the Buyer may conclusively rely on such certificate until it receives notice in writing from each Seller or Pledgor to the contrary); (v) Underwriting Guidelines. A copy of Seller's current Underwriting Guidelines, and any material changes to the Underwriting Guidelines made since the Underwriting Guidelines were last delivered to Purchaser. (vi) Organizational Documents for Guarantor. Certificate of Incumbency of Guarantor attaching the charter, bylaws, good standing certificate, and resolutions of the Executive Committee of the Board of Directors of Guarantor, authorizing execution and performance of the Affiliate Guaranty; (vii) Other Documents. Such other documents as Buyer may reasonably request, in form and substance reasonably acceptable to Buyer. (b) Conditions Precedent to all Transactions. Buyer's obligation to enter into each Transaction (including the initial Transaction) is subject to the satisfaction of the following further conditions precedent, both immediately prior to entering into such Transaction and also after giving effect thereto to the intended use thereof: (i) no Default or Event of Default shall have occurred and be continuing under the Repurchase Documents; (ii) both immediately prior to the Transaction and also after giving effect thereto and to the intended use thereof, the representations and warranties made by the Seller in Section 10 hereof, shall be true and complete on and as of such Purchase Date in all material respects (in the case of the representations and warranties in Section 10(xv) and Exhibit 2, solely with respect to Purchased Mortgage Loans) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). The Buyer shall have received an officer's certificate signed by a Responsible Officer of the Seller certifying as to the truth and accuracy of the above, which certificate shall specifically include a statement that such Seller is in compliance in all material respects with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions except where the failure to be in such compliance or so qualified would not have a Material Adverse Effect. -15- 16 (iii) subject to the Buyer's right to perform one or more Due Diligence Reviews pursuant to Section 27 hereof, the Buyer shall have completed its due diligence review of the Mortgage Loan Documents for each Purchased Mortgage Loan and such other documents, records, agreements, instruments, mortgaged properties or information relating to such Mortgage Loans as the Buyer in its sole discretion deems appropriate to review and such review shall be satisfactory to the Buyer in its sole discretion; (iv) the Buyer shall have received from the Trustee a Mortgage Loan Schedule and Collateral Report with exceptions acceptable to the Buyer in its sole discretion in respect of Eligible Mortgage Loans to be purchased hereunder on such Business Day; (v) the Trustee shall have received a Pledge Notice substantially in the form provided in the Pooling and Servicing Agreement (a copy of which shall be delivered to the Buyer); (vi) the Seller shall have received duly authenticated Pledged Certificates representing the Mortgage Loans purchased under the Transaction; (vii) none of the following shall have occurred and/or be continuing: (A) an event or events shall have occurred resulting in the effective absence of a "repo market" or comparable "lending market" for financing debt obligations secured by mortgage loans or securities for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Buyer not being able to finance Purchased Mortgage Loans through the "repo market" or "lending market" with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events, provided that the Buyer shall notify the Seller promptly upon the occurrence of any such event, provided further that this Section 3(b)(vi)(A) shall not take effect until 5 Business Days after such notice; or (B) an event or events shall have occurred resulting in the effective absence of a "securities market" for securities backed by mortgage loans for a period of (or reasonably expected to be) at least 30 consecutive days or an event or events shall have occurred resulting in the Buyer not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events, provided that the Buyer shall notify the Seller promptly upon the occurrence of any such event, provided further that this Section 3(b)(vi)(B) shall not take effect until 5 Business Days after such notice. Each Request for Purchase by the Seller hereunder shall constitute a certification by the Seller that all the conditions set forth in this Section 3(b) have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing). -16- 17 (c) No later than 4:00 p.m. (New York time) one Business Day prior to the specified Purchase Date, Buyer, and Trustee, shall have received via facsimile, and in electronic form, a Request for Purchase in the form of Exhibit IV hereof (i) attach a schedule identifying the Eligible Mortgage Loans that the Seller proposes to sell to the Buyer on such Purchase Date, (ii) specifying the requested Purchase Date, (iii) including a Mortgage Loan Tape containing information with respect to the Eligible Mortgage Loans that the Seller proposes to sell to the Buyer, and (iv) attach an Officer's Certificate of the Seller as required by Section 3(b)(ii) hereof. (d) An agreement to enter into a Transaction may be entered into orally or in writing at the initiation of either Buyer or Seller. In any event, Buyer shall confirm the terms of each Transaction by issuing a written confirmation to the Seller, via telecopy or delivered by hand, in the form of Exhibit I attached hereto (a "Confirmation") promptly after the parties enter into such Transaction. Such Confirmation shall describe the Purchased Mortgage Loans, identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand of the Seller, (iv) the Pricing Rate applicable to the Transaction, and (v) may contain additional terms or conditions not inconsistent with this Repurchase Agreement. (e) Any Confirmation by Buyer shall be deemed to have been received by Seller when delivered by hand, or, if sent via telecopy, when sent. (f) Each Confirmation, together with this Repurchase Agreement, shall be conclusive evidence of the terms of the Transaction(s) covered thereby unless objected to in writing by the Seller no more than three (3) Business Days after the date the Confirmation was received by the Seller or unless a corrected Confirmation is sent by Buyer. An objection sent by the Seller must state specifically that the writing is an objection, must specify the provision(s) being objected to by the Seller, must set forth such provision(s) in the manner that the Seller believes they should be stated, and must be received by Buyer no more than three (3) Business Days after the Confirmation was received by the Seller. (g) No later than 4:00 p.m., New York City time, one day prior to the requested Purchase Date, the Seller shall deliver to the Trustee the Mortgage File pertaining to each Eligible Mortgage Loan to be purchased by the Buyer. Not later than 12:00 noon, New York City time, on the requested Purchase Date, the Trustee shall issue and deliver the relevant Pledged Certificate to the Buyer, in accordance with the terms and conditions of the Pooling and Servicing Agreement. (h) Pursuant to the Pooling and Servicing Agreement, the Trustee shall deliver to the Buyer and the Seller, by no later than 3:00 p.m. New York City time on a Purchase Date, a Mortgage Loan Schedule and Collateral Report in respect of all Mortgage Loans purchased by the Buyer on such Purchase Date. Subject to Sections 3(a) and 3(b) hereof, the Purchase Price will then be made available to the Seller by the Buyer -17- 18 transferring, via wire transfer, in the aggregate amount of such borrowing in funds immediately available pursuant to Wire Instructions set forth in the Request for Purchase (subject to the purchase limits set forth in Section 3(k) hereof). (i) In the case of Transactions terminable upon demand by Seller, such demand shall be made by Seller by telephone or otherwise, no later than 3 p.m. (New York time) on the Business Day prior to the day on which such termination will be effective. (j) The Seller may repurchase Purchased Mortgage Loans without penalty or premium, on any date. The Repurchase Price payable for the repurchase of any such Mortgage Loan shall be reduced as provided in Section 5(c). If the Seller intends to make such a repurchase other than on a Repurchase Date, the Seller shall give one (1) Business Day's prior written notice thereof to the Buyer, designating the Purchased Mortgage Loans to be repurchased. If such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, and, on receipt, such amount shall be applied to the Repurchase Price for the designated Mortgage Loans. The amount of the original Purchase Price of the Mortgage Loan thus repurchased shall be available for subsequent Transactions subject to the terms of this Repurchase Agreement. (k) On the Repurchase Date, termination of the Transaction will be effected by transfer to Seller or its designee of the Purchased Mortgage Loans (and any Income in respect thereof received by Buyer not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Section 5) against the simultaneous transfer of the Repurchase Price to an account of Buyer. Seller is obligated to obtain the Mortgage Files from Buyer or its designee (including the Trustee) at Seller's expense on the Repurchase Date. (l) With respect to all Transactions hereunder, the aggregate Purchase Price for all Purchased Mortgage Loans at any one time subject to then outstanding Transactions under this Repurchase Agreement shall not exceed the Maximum Purchase Amount minus the aggregate principal amount of outstanding Loans under the Loan Agreement. Notwithstanding the preceding sentence, Buyer shall have no obligation to enter into any Transaction if, as a result of such transaction the aggregate Purchase Price for all Transactions subject to then outstanding Transactions under this Repurchase Agreement shall exceed the Available Committed Purchase Amount. Buyer shall not enter into any Transaction if the aggregate Purchase Price of such Purchased Mortgage Loans exceeds the Available Purchase Amount. 4. MARGIN AMOUNT MAINTENANCE (a) If at any time the aggregate Collateral Value of the related Purchased Mortgage Loans subject to all Transactions is less than the aggregate Purchase Price for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller to transfer to Buyer or its designee (including the Trustee) Mortgage Loans or cash ("Additional Purchased Loans"), so that the cash and aggregate Collateral Value of the -18- 19 Purchased Mortgage Loans, including any such Additional Purchased Loans, will thereupon equal or exceed the aggregate Margin Amount. (b) If at any time the aggregate Collateral Value of all Purchased Mortgage Loans subject to all Transactions exceeds the aggregate Purchase Price for all such Transactions (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, to transfer or cause to be transferred to Seller or its designee Purchased Mortgage Loans or cash so that the cash and aggregate Collateral Value of the Purchased Mortgage Loans, after deduction of any such Mortgage Loans or cash so transferred, will thereupon not exceed the aggregate Margin Amount. (c) Seller may provide notice pursuant to subsection (b) hereof by preparing a Request for Release of Mortgage Loans in the form of Exhibit K to the Pooling and Servicing Agreement ("Notice of Release of Pledge"), specifying (1) the Purchased Mortgage Loans to be released and the requested release date, (2) the aggregate Collateral Value with respect to such Purchased Mortgage Loans, (3) the remaining aggregate Collateral Value after giving effect to the transfer of the Purchased Mortgage Loans, (4) the aggregate Purchase Price of the Transactions, and (5) a certification from the Seller that, upon release of the Purchased Mortgage Loans, there will not be a Margin Deficit. (d) The Seller shall transmit the Notice of Release of Pledge by facsimile transmission to the Buyer. Upon confirming that the Notice of Release of Pledge correctly reflects the information set forth in Section 4(c) and that, after giving effect to the requested release the Collateral Value would be equal to or greater than the aggregate Purchase Price of the Transactions, the Buyer shall countersign the Notice of Release of Pledge and transmit the countersigned Notice of Release of Pledge to the Trustee. In the event that the Buyer's assessment of the Collateral Value would alter the information set forth in any Request for Release, the Buyer shall promptly notify the Seller in writing of such assessment. (e) Upon receipt of the countersigned Notice of Release of Pledge and upon approval of the Notice of Release of Pledge by the Buyer, the Trustee shall take the actions set forth in the Pooling and Servicing Agreement with respect to the Purchased Mortgage Loan to be released. (f) The Buyer shall not be obligated to countersign a Notice of Release of Pledge (i) which the Buyer reasonably determines is based on erroneous information or would result in a transfer of Purchased Mortgage Loans other than in accordance with the terms of this Repurchase Agreement, or (ii) which does not reflect the Buyer's current determination of Collateral Value. 5. INCOME PAYMENTS (a) Where a particular Transaction's term extends over an Income payment date on the Purchased Mortgage Loans subject to that Transaction such Income shall be the -19- 20 property of Buyer. Notwithstanding the foregoing, Buyer agrees that until an Event of Default has occurred and is continuing and Buyer otherwise directs, Servicer shall continue to remit Income to Seller in accordance with the Pooling and Servicing Agreement. (b) Notwithstanding that Buyer and Seller intend that the Transactions hereunder be sales to Buyer of the Purchased Mortgage Loans, Seller shall pay to Buyer the accreted value of the Price Differential (less any amount of such Price Differential previously paid by Seller to Buyer) (each such payment, a "Periodic Advance Repurchase Payment") on the first Business Day of each month (each, a "Payment Date"). If Seller fails to make all or part of the Periodic Advance Repurchase Payment by 3:00 p.m. (New York time) on the Payment Date, Seller shall be obligated to pay to Buyer (in addition to, and together with, the Periodic Advance Repurchase Payment) interest on the unpaid amount of the Periodic Advance Repurchase Payment at a rate per annum equal to the Eurodollar Base Rate plus 2.00% (the "Late Payment Fee") until the Periodic Advance Repurchase Payment is received in full by Buyer. (c) Buyer shall offset against the Repurchase Price of each such Transaction all Income and Periodic Advance Repurchase Payments actually received by Buyer pursuant to Sections 5(a) and (b), respectively, excluding any Late Payment Fees paid pursuant to Section 5(b). 6. SECURITY INTEREST (a) Each of the following items or types of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the ("Collateral"): all Mortgage Loans, all Underlying Obligations and all Affiliate Transfers, all Affiliate Transfer Documents and all Mortgage Loan Documents, including without limitation all promissory notes, all servicing records, servicing agreements and any other collateral pledged or otherwise relating to such Mortgage Loans, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, computer storage media, accounting records and other books and records relating thereto, all mortgage guaranties and insurance (issued by governmental agencies or otherwise) and any mortgage insurance certificate or other document evidencing such mortgage guaranties or insurance relating to any Mortgage Loan and all claims and payments thereunder, all other insurance policies and insurance proceeds relating to any Mortgage Loan or the related Mortgaged Property or to any Affiliate Transfer or to any Underlying Obligation, all purchase agreements or other agreements or contracts (other than Interest Rate Protection Agreements, which are expressly excluded herefrom), relating to, constituting, or otherwise governing, any or all of the foregoing to the extent they relate to the Mortgage Loans including the right to receive principal and interest payments with respect to the Purchased Mortgage Loans and the right to enforce such payments, all Collection Accounts and any funds on deposit in Collection Accounts to the extent such funds represent proceeds from the Mortgage Loans -20- 21 (as defined in the Pooling and Servicing Agreement), if any, all Pledged Certificates evidencing any or all of the Mortgage Loans, the Pooling and Servicing Agreement as it relates to or constitutes any or all of the foregoing, all "general intangibles", "accounts", and "chattel paper" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing, all collateral under the Loan Agreement, any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing. (b) All right, title and interest of the Seller in and to (i) the Collateral and (ii) any and all replacements or substitutions for, distributions on or proceeds of any of the foregoing is hereinafter referred to as the "Seller Collateral". All right, title and interest of the Pledgors in and to (i) the Collateral (but excluding any and all obligations of the Pledgors thereunder) and (ii) any and all replacements or substitutions for, distributions on or proceeds of any of the foregoing is hereinafter referred to as the "Pledgor Collateral". (c) The Buyer and the Seller intend that the Transactions hereunder be sales to the Buyer of the Purchased Mortgage Loans and not loans from the Buyer to the Seller secured by the Purchased Mortgage Loans. However, in order to preserve the Buyer's rights under this Repurchase Agreement in the event that a court or other forum recharacterizes the Transactions hereunder as loans and as security for the performance by the Seller of all of the Seller's obligations to the Buyer hereunder and the Transactions entered into hereunder (the "Secured Obligations"), the Seller hereby assigns and pledges to the Buyer for its benefit and the ratable benefit of its assignees hereunder, and grants to the Buyer and its assignees hereunder, a security interest in the Collateral. The assignment, pledge and grant of security interest contained herein shall be, and the Seller hereby represents and warrants to the Buyer that it is, a first priority security interest. All Collateral shall secure the payment of all obligations of the Seller now or hereafter existing under the Repurchase Agreement, including, without limitation, Seller's obligation to repurchase Mortgage Loans, or if such obligation is so recharacterized as a loan, to repay such loan, for the Repurchase Price and to pay any and all other amounts owing to the Buyer hereunder. (d) To further secure the Secured Obligations and to induce the Buyer to enter into Transactions with the Seller, the Pledgors hereby assign and pledge to the Buyer for its benefit and the ratable benefit of its assignees hereunder, and grants to the Buyer and its assignees hereunder, a security interest in the Pledgor Collateral. The parties hereto recognize that the Pledgors are not obligors hereunder and are entering into this Repurchase Agreement solely for the purpose of pledging their interest in the Pledgor Collateral to secure the Seller's obligations hereunder and the Buyer will have no recourse against the Pledgors (except to the extent of the Pledgor's interest in the Pledgor Collateral) for any obligations of the Pledgors or Seller to the Buyer. The assignment, pledge and grant of security interest contained herein shall -21- 22 be, and the Pledgors hereby represent and warrant to the Buyer that it is, a first priority security interest. 7. PAYMENT, TRANSFER AND CUSTODY (a) Unless otherwise mutually agreed in writing, all transfers of funds hereunder shall be in immediately available funds. (b) On the Purchase Date for each Transaction, ownership of the Purchased Mortgage Loans shall be transferred to the Buyer or its designee (including the Trustee) against the simultaneous transfer of the Purchase Price to an account of Seller specified in the Confirmation. Seller, simultaneously with the delivery to the Trustee of the Purchased Mortgage Loans relating to each Transaction hereby sells, transfers, conveys and assigns to Buyer or its designee (including the Trustee) without recourse, but subject to the terms of this Repurchase Agreement, all the right, title and interest of Seller in and to the Purchased Mortgage Loans together with all right, title and interest in and to the proceeds of any related insurance policies. (c) Notwithstanding anything to the contrary in this Repurchase Agreement, including agreements to enter into a Transaction pursuant to Section 3, Buyer shall have no obligation to purchase any Mortgage Loans on any Purchase Date if, after such purchase: (i) an Event of Default by the Seller will have occurred and be continuing, or an Event of Default by the Seller would occur with notice or the passing of time; or (ii) the Repurchase Date for such Transaction would be later than the Termination Date or such other time period prescribed in the applicable Confirmation. (d) Pursuant to the Pooling and Servicing Agreement, the Trustee shall hold the Mortgage Loan Documents delivered to the Trustee as exclusive bailee and agent for the Buyer pursuant to terms of the Pooling and Servicing Agreement and shall deliver to the Buyer Pledged Certificates, each to the effect that it has reviewed such Mortgage Loan Documents in the manner and to the extent required by the Pooling and Servicing Agreement and identifying any deficiencies in such Mortgage Loan Documents for the Mortgage Loans identified in the Mortgage Loan Schedule and Collateral Report (in the form of Exhibit I to the Pooling and Servicing Agreement) as so reviewed. 8. HYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS Title to all Purchased Mortgage Loans shall pass to Buyer and Buyer shall have free and unrestricted use of all Purchased Mortgage Loans. Nothing in this Repurchase Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Mortgage Loans or otherwise pledging, repledging, transferring, -22- 23 hypothecating, or rehypothecating the Purchased Mortgage Loans, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Mortgage Loans to Seller pursuant to Section 3. Nothing contained in this Repurchase Agreement shall obligate Buyer to segregate any Purchased Mortgage Loans delivered to Buyer by Seller. Notwithstanding the foregoing, Buyer agrees to take such actions as are necessary or desirable to release or cause to be released its lien and security interest in any Purchased Mortgage Loans which are securitized (which release shall be deemed to occur not later than simultaneously with such securitization) and to promptly deliver or cause to be delivered to the Seller the Mortgage File relating to any such Mortgage Loan. Upon repurchase of the Purchased Mortgage Loans or payment in full of the Secured Obligations, Buyer shall take such actions as are necessary to release or cause to be released its lien and security interest in the Collateral and to cause all Mortgage Files with respect to such repurchased Purchased Mortgage Loans to be returned to the Seller. 9. INDEMNIFICATION AND EXPENSES (a) The Seller agrees to hold the Buyer harmless from and indemnify the Buyer against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against the Buyer (collectively, "Costs"), relating to or arising out of this Repurchase Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Repurchase Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than the Buyer's gross negligence or willful misconduct. In any suit, proceeding or action brought by the Buyer in connection with any Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any Mortgage Loan, the Seller will save, indemnify and hold the Buyer harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Seller or the Guarantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Seller or the Guarantor. The Seller also agrees to reimburse the Buyer as and when billed by the Buyer for all the Buyer's costs and expenses incurred in connection with the enforcement or the preservation of the Buyer's rights under this Repurchase Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. (b) The Seller agrees to pay as and when billed by the Buyer all of the out-of-pocket costs and expenses incurred by the Buyer in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Repurchase Agreement, any other Repurchase Document or any other documents prepared in connection herewith or therewith. The Seller agrees to pay as and when -23- 24 billed by the Buyer all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation all the reasonable fees, disbursements and expenses of counsel to the Buyer which amount shall be deducted from the Purchase Price paid for the first Transaction hereunder. Subject to the limitations set forth in Section 27 hereof, the Seller agrees to pay the Buyer all the due diligence, inspection, testing and review costs and expenses incurred by the Buyer with respect to Mortgage Loans submitted by Seller for purchase under this Repurchase Agreement, including, but not limited to, those costs and expenses incurred by the Buyer pursuant to Sections 9(a), 24 and 27 hereof. 10. REPRESENTATIONS (a) The Buyer represents and warrants to the Seller that as of the Purchase Date for the purchase of any Purchased Mortgage Loans by the Buyer from the Seller and as of the date of this Repurchase Agreement and any Transaction hereunder and at all times while the Repurchase Documents and any Transaction hereunder is in full force and effect: (i) Acting as Principal. The Buyer will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal); (ii) Due Authorization. The Buyer is duly authorized to execute and deliver this Repurchase Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance. The person signing this Repurchase Agreement on behalf of the Buyer is duly authorized to do so on the Buyer's behalf (or on behalf of any such disclosed principal). The Buyer has received approval and authorization to enter into this Repurchase Agreement and each and every Transaction actually entered into hereunder pursuant to its internal policies and procedures; (iii) No Consent Required. No approval, consent or authorization of the Transactions contemplated by this Repurchase Agreement from any federal, state, or local regulatory authority having jurisdiction over the Buyer is required or, if required, such approval, consent or authorization has been or will, prior to the Purchase Date, be obtained; (iv) No Conflicts. The execution, delivery, and performance of this Repurchase Agreement and the Transactions hereunder will not violate any law, regulation, order, judgment, decree, ordinance, charter, by-law, or rule applicable to the Buyer or its property or constitute a -24- 25 default (or an event which, with notice or lapse of time, or both would constitute a default) under or result in a breach of any agreement or other instrument by which it is bound or by which any of its assets are affected; and (v) Solvency. Neither this Repurchase Agreement nor any Transaction pursuant hereto are entered into in contemplation of insolvency or with intent to hinder, delay or defraud any creditor. (b) The Seller (and the Pledgors, as applicable) represents and warrants to the Buyer that as of the Purchase Date for the purchase of any Purchased Mortgage Loans by the Buyer from the Seller and as of the date of this Repurchase Agreement and any Transaction hereunder and at all times while the Transaction Documents and any Transaction or Loan thereunder is in full force and effect: (i) Acting as Principal. The Seller will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal); (ii) Solvency. Neither the Repurchase Documents nor any Transaction pursuant thereunder, or any Affiliate Transfer or Affiliate Transfer Documents are entered into in contemplation of insolvency or with intent to hinder, delay or defraud any creditor. Seller and Pledgors are not, and with the passage of time do not expect to become, insolvent; (iii) No Broker. The Seller has not dealt with any broker, investment banker, agent, or other person, except for the Buyer, who may be entitled to any commission or compensation in connection with the sale of Purchased Mortgage Loans pursuant to this Repurchase Agreement; (iv) Ability to Perform. Seller and Guarantor do not believe, nor do they have any reason or cause to believe, that they cannot perform each and every covenant contained in the Repurchase Documents to which they are a party on their part to be performed; (v) No Defaults. No Event of Default has occurred and is continuing hereunder; (vi) Existence Each Repurchase Agreement Party (a) is a legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite corporate or other power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a material adverse effect on its Property, business or financial condition taken as a whole; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of -25- 26 the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its Property, business or financial condition taken as a whole. (vii) Financial Condition. The Guarantor has heretofore furnished to the Buyer a copy of (a) its consolidated balance sheet and the consolidated balance sheets of their consolidated Subsidiaries for the fiscal year ended December 31, 1997, and the related consolidated statements of income and retained earnings and of cash flows for the Guarantor and its consolidated Subsidiaries for such fiscal year, with the opinion thereon of Arthur Andersen LLP. All such financial statements are complete and correct and fairly present, in all material respects, the consolidated financial condition of the Guarantor and its Subsidiaries and the consolidated results of their operations as at such dates and for such fiscal periods, all in accordance with GAAP applied on a consistent basis except, in the case of interim financial statements, for the absence of footnotes and subject to year-end adjustments. Since March 31, 1998, there has been no material adverse change in the consolidated business, operations or financial condition of the Guarantor and its consolidated Subsidiaries taken as a whole from that set forth in said financial statements. (viii) Litigation. Except as (1) previously disclosed to Buyer prior to the date of this Repurchase Agreement or (2) disclosed and approved in writing by the Buyer, there are no actions, suits, arbitrations, investigations or proceedings pending or, to the Seller's knowledge, threatened against the Seller or the Guarantor or any of their Subsidiaries or affecting any of the Property of any of them before any Governmental Authority (i) as to which individually or in the aggregate there is a reasonable likelihood of an adverse decision which would be reasonably likely to have a material adverse effect on the Property, business or financial condition of the Seller or the Guarantor, or (ii) which questions the validity or enforceability of any of the Repurchase Documents or any action to be taken in connection with the Transactions contemplated hereby. (ix) No Breach. Neither (a) the execution and delivery of the Repurchase Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or by-laws of the Repurchase Agreement Parties, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which the Repurchase Agreement Parties or any of their Subsidiaries is a party or by which any of them or any of their Property is bound or -26- 27 to which any of them is subject, or constitute a default under any such material agreement or instrument which breach or conflict will have a Material Adverse Effect or result in the creation or imposition of any Lien (except for the Liens created pursuant to the Transaction Documents) upon any Property of the Seller or Guarantor, or any of their Subsidiaries pursuant to the terms of any such agreement or instrument. (x) Action. Each Repurchase Agreement Party has all necessary corporate or other power, authority and legal right to execute, deliver and perform its obligations under each of the Repurchase Documents, as applicable; the execution, delivery and performance by the Repurchase Agreement Parties, as applicable, of each of the Repurchase Documents have been duly authorized by all necessary corporate or other action on its part; and each Repurchase Document has been duly and validly executed and delivered by the Repurchase Agreement Party, as applicable, and constitutes a legal, valid and binding obligation of the Repurchase Agreement Parties, as applicable, enforceable against such Repurchase Agreement Party in accordance with its terms except as may be limited by applicable bankruptcy, moratorium or other laws affecting creditors' rights generally and by general principles of equity. (xi) Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority or any securities exchange are necessary for the execution, delivery or performance by the Repurchase Agreement Parties of the Repurchase Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to the Repurchase Documents. (xii) Margin Regulations. Neither any Transaction hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X. (xiii) Taxes. The Guarantor has filed all Federal income tax returns and all other material tax returns that are required to be filed by them, which tax returns represent all Federal income tax returns and all other material tax returns that are required to be filed by the Guarantor, and have paid all taxes due pursuant to such returns or pursuant to any assessment received by them or any of its Subsidiaries, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of the Guarantor and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Guarantor, adequate. -27- 28 (xiv) Investment Company Act. Each of the Seller, the Guarantor or each Subsidiary thereof is not an "investment company", or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (xv) Collateral; Collateral Security (a) The Seller and Pledgors have not assigned, pledged, or otherwise conveyed or encumbered any Pledged Certificate or Mortgage Loan to any other Person, and immediately prior to the pledge of such Pledged Certificate or Mortgage Loan to the Buyer, the Seller and the Pledgors, if applicable, were the sole owner of such Pledged Certificate or Mortgage Loan and had good and marketable title thereto, free and clear of all Liens (other than the interest of the Trustee pursuant to the Pooling and Servicing Agreement), in each case except for Liens to be released simultaneously with the Liens granted in favor of the Buyer hereunder. No Pledged Certificate or Mortgage Loan pledged to the Buyer hereunder was acquired by the Seller from an Affiliate of the Seller (other than from a Pledgor). (b) The provisions of this Repurchase Agreement are effective to create in favor of the Buyer a valid security interest in all right, title and interest of each Pledgor and the Seller in, to and under the Collateral. (c) Upon receipt by (i) the Buyer of each Pledged Certificate issued in Buyer's name and (ii) the Trustee of each Mortgage Note, endorsed as prescribed in the Pooling and Servicing Agreement by a duly authorized officer of the Seller, and the related Pledge Notice (as defined in the Pooling and Servicing Agreement) the Buyer shall have a fully perfected first priority security interest in the applicable Pledged Certificate, and in the related Mortgage Note and in such Seller's interest in the related Mortgaged Property. (d) The Form UCC-1 filing statements, previously filed on the dates indicated in Schedule 2 of Exhibit C attached hereto, naming the Buyer as "Secured Party", the Seller as "Debtor" and describing the Collateral, filed in the jurisdictions and recording offices listed on Schedule 2 of Exhibit C attached hereto, have fully perfected the security interests granted hereunder in the Collateral to the extent such security interests can be perfected by the filing of such Form UCC-1 filing statements, as of the date of their filing, under the Uniform Commercial Code in all right, title and interest of the Seller in, to and under such Collateral, which security interests continue to be perfected thereto. -28- 29 (xvi) Chief Executive Office. The Seller's chief executive office on the Effective Date is located at One Righter Parkway, Wilmington, DE 19803. The chief executive offices of Guarantor and the Pledgors (except for Advanta Finance Corp.) are located at Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477. The chief executive office of Advanta Finance Corp. is located at 16875 West Bernardo Drive, San Diego, California 92127. (xvii) Location of Books and Records. The location where the Seller and the Pledgors keeps their books and records is their chief executive offices. All servicing records, including all computer tapes and records, are kept at 16875 West Bernardo Drive, San Diego, California 92127. (xviii) Hedging. The Seller or the Guarantor have entered into Interest Rate Protection Agreements, having a notional amount not less than 70% of the aggregate unpaid principal amount of the fixed-rate Mortgage Loans. (xix) True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Seller and the Guarantor to the Buyer in connection with the negotiation, preparation or delivery of the Transaction Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of each of the Seller and the Guarantor to the Buyer in connection with this Repurchase Agreement and the other Repurchase Documents and the transactions contemplated hereby and thereby will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. (xx) ERISA. Each Plan to which the Seller, the Guarantor or any of their Subsidiaries make direct contributions, and, to the knowledge of the Seller, each other Plan and each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law. To the Seller's knowledge, no event or condition has occurred and is continuing as to which the Seller or the Guarantor would be under an obligation to furnish a report to the Buyer under Section 11(i)(e) hereof. -29- 30 (xxi) Pledged Certificates. The Seller represents and warrants to the Buyer with respect to each Pledged Certificate, that (a) such Pledged Certificate is registered in the name of the Buyer, (b) immediately prior to the transfer to the Buyer of the interest represented by such Pledged Certificate, such interest is owned by the Seller free from all liens and encumbrances, (c) prior to or concurrently with such transfer to the Buyer of the interest represented by such Pledged Certificate shall have been issued in the name of and delivered to the Buyer, (d) such Pledged Certificate represents a 100% ownership interest in the Eligible Mortgage Loans referenced therein, (e) the Eligible Mortgage Loans referenced in such Pledged Certificate are being held by the Trustee for the benefit of the holder of such Pledged Certificate, (f) the Seller has notified the Trustee or other registrar issuing such Pledged Certificate that Buyer is the holder of such Pledged Certificate for all purposes and (g) all representations and warranties set forth in Part II of Exhibit II are true and correct. (xxii) Insured Depository Institution Representations The Seller is an Insured Depository Institution and accordingly, the Seller makes the following additional representations and warranties: (a) The Repurchase Documents do not violate any statutory or regulatory requirements applicable to the Seller; (b) The Repurchase Documents have been (1) executed contemporaneously with the definitive agreement reached by the Buyer and the Seller, (2) approved by a specific resolution by the Seller board of directors, which approval shall be reflected in the minutes of said board, and (3) entered into the official records of the Seller, a copy of which approvals, certified by a vice president or higher officer of the Seller, has been provided to Buyer; (c) The aggregate amount of the Purchase Price of the Transactions, after giving effect to any Transactions being made on the date hereof, between the Buyer and the Seller does not exceed any restrictions or limitations imposed by the board of directors of the Seller. (d) The Seller is Well Capitalized or Adequately Capitalized. (xxiii) Pledgors. The Pledgors' obligations under this Repurchase Agreement are necessary or convenient to the conduct, promotion or attainment of the Pledgors' and the Seller's business, and the consideration contemplated by this Repurchase Agreement is fair and sufficient to support the agreements of, and pledges, liens, mortgages and other security interests, assignments and encumbrances granted by the Pledgors to the Buyer hereunder. -30- 31 (xxiv) Individual Mortgage Loan Representations. Each Mortgage Loan sold hereunder, as of the related Purchase Date, conforms to the representations and warranties set forth in Exhibit II attached hereto (except as otherwise permitted by the sublimits set forth in the definition of Collateral Value) and such additional representations and warranties provided in the Confirmation, if any, and each Mortgage Loan delivered hereunder as Additional Purchased Loans, as of the date of such delivery, conforms to the representations and warranties set forth in Exhibit II hereto (except as otherwise permitted by the sublimits set forth in the definition of Collateral Value) and the Confirmation, if any. It is understood and agreed that the representations and warranties set forth in Exhibit II hereto and the Confirmation, if any, shall survive delivery of the respective Mortgage File to Buyer or its designee (including the Trustee). 11. COVENANTS OF THE SELLER On and as of the date of this Repurchase Agreement and each Purchase Date and until this Repurchase Agreement is no longer in force with respect to any Transaction, the Seller covenants that it will: (i) Financial Statements. The Seller shall deliver to the Buyer: (a) as soon as available and in any event within 60 days after the end of each of the first three quarterly fiscal periods of each fiscal year of Guarantor, the unaudited consolidated balance sheets of Guarantor and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated statements of income and retained earnings and of cash flows of Guarantor and its consolidated Subsidiaries for such period and the portion of the fiscal year through the end of such period, accompanied by a certificate of a Responsible Officer of Guarantor, which certificate shall state that said consolidated financial statements fairly present in all material respects the consolidated financial condition and results of operations of Guarantor and its consolidated Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (except for the absence of footnotes thereto and subject to normal year-end audit adjustments); (b) as soon as available and in any event within 95 days after the end of each fiscal year of Guarantor, the consolidated balance sheets of Guarantor and its respective consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Guarantor and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of -31- 32 independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Guarantor and its respective consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; (c) promptly after filing its regulatory call report (or equivalent report) with the Appropriate Federal Banking Agency or with any applicable state bank regulatory agency, a copy of such report together with an analysis of the Seller's capital ratios demonstrating that it is Well Capitalized or Adequately Capitalized. (d) from time to time such other information regarding the financial condition, operations, or business of the Seller and the Guarantor as the Buyer may reasonably request; and (e) as soon as reasonably possible, and in any event within thirty (30) days after a Responsible Officer of the Guarantor knows, or with respect to any Plan or Multiemployer Plan to which the Guarantor or any of its Subsidiaries makes direct contributions, has reason to believe, that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Guarantor setting forth details respecting such event or condition and the action, if any, that the Guarantor or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Guarantor or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(c) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including without limitation the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); -32- 33 and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by the Guarantor or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Guarantor or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Guarantor or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) that would have a Material Adverse Effect or the receipt by the Guarantor or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Guarantor or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Guarantor or an ERISA Affiliate fails to provide timely security to such Plan in accordance with the provisions of said Sections. Each of the Seller and the Guarantor will furnish to the Buyer, at the time the Guarantor furnishes each set of financial statements pursuant to paragraphs (a) and (b) above, a certificate of a Responsible Officer of the Seller and the Guarantor to the effect that, to the best of such Responsible Officer's knowledge, the Seller and the Guarantor during such fiscal period or year has observed or performed in all material respects all of its covenants and other agreements, and satisfied every condition, contained in this Repurchase Agreement and the other Transaction Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default -33- 34 or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action the Seller or Guarantor has taken or proposes to take with respect thereto). (ii) Litigation. The Seller and the Guarantor will promptly, and in any event within 10 days after service of process on any of the following, give to the Buyer notice of all legal or arbitrable proceedings affecting the Seller or the Guarantor or any of their Subsidiaries that questions or challenges the validity or enforceability of any of the Repurchase Documents or as to which there is a reasonable likelihood of adverse determination which would result in a Material Adverse Effect. (iii) Existence, etc Each Repurchase Agreement Party will: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises necessary for the operation of its business (provided that nothing in this Section 11(iii)(a) shall prohibit any transaction expressly permitted under Section 11(iv) hereof); (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its Property, business or financial condition; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office from the address referred to in Section 10(xvii) unless it shall have provided the Buyer 30 days' prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and (f) permit representatives of the Buyer, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Buyer. -34- 35 (iv) Prohibition of Fundamental Changes. Other than the asset sales completed and disclosed to the Buyer prior to the date of this Repurchase Agreement, neither the Seller nor the Guarantor shall engage in any Restricted Transaction while there is any Transaction outstanding or other amount owing under the Repurchase Agreement; provided, that the Seller or the Guarantor may merge or consolidate with (a) any wholly owned direct or indirect subsidiary of Advanta Corp., or (b) any other Person if the Seller or the Guarantor is the surviving corporation; and provided further, that if after giving effect thereto, no Default or Event of Default would exist under any Repurchase Document. If either of the Seller or the Guarantor has entered into a Restricted Transaction when there was no amount outstanding under the Repurchase Documents, the Seller must give the Buyer notice and such details as the Buyer may request about the Restricted Transaction(s) at least ten (10) days prior to any Request for Purchase. The Buyer may, in its sole discretion, cancel its commitment to purchase and sell Mortgage Loans hereunder and terminate this Repurchase Agreement and the other Repurchase Documents without liability, based on its assessment of the effect of such Restricted Transaction(s). (v) Margin Deficit. If at any time there exists a Margin Deficit the Seller shall cure same in accordance with Section 4 hereof. (vi) Notices. The Seller shall give notice to the Buyer: (a) promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default; (b) with respect to any Purchased Mortgage Loan hereunder, on a monthly basis, upon receipt of any principal prepayment (in full or partial) of such Purchased Mortgage Loan; (c) with respect to any Purchased Mortgage Loan hereunder, on a monthly basis, promptly upon receipt of notice or knowledge that the underlying Mortgaged Property has been damaged by waste, fire, earthquake or earth movement, flood, tornado or other casualty, or otherwise damaged so as to affect adversely the Collateral Value of such pledged Mortgage Loan; and (d) promptly upon receipt of notice or knowledge of (i) any default related to any Collateral, (ii) any Lien or security interest (other than security interests created hereby or by the other Loan Documents) on, or claim asserted against, any of the Collateral or (iii) any event or change in circumstances which could reasonably be expected to have a material adverse effect on the Property, business or financial condition of Seller or Guarantor. -35- 36 Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Seller setting forth details of the occurrence referred to therein and stating what action the Repurchase Agreement Party has taken or proposes to take with respect thereto. (vii) Hedging. The Seller or the Guarantor shall at all times maintain Interest Rate Protection Agreements, having a notional amount not less than 70% of the aggregate outstanding principal balance of all fixed-rate Mortgage Loans. (viii) Reports. The Seller shall provide the Buyer with a quarterly report, which report shall include, among other items, a summary of such Seller's delinquency and loss experience with respect to Mortgage Loans serviced by the Seller, any Servicer or any designee of either, plus any such additional reports as the Buyer may reasonably request with respect to the Seller or any Servicer's servicing portfolio or pending origination's of Mortgage Loans. (ix) Underwriting Guidelines. Without the prior written notice to the Buyer, the Seller shall not amend or otherwise modify the Underwriting Guidelines in a manner that materially and adversely affects the value of the Purchased Mortgage Loans or the Collateral. (x) Transactions with Affiliates. Each of the Seller and the Guarantor shall not (i) enter into any transaction, including without limitation any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) not prohibited under the Repurchase Documents, (b) upon fair and reasonable terms no less favorable to the Seller or the Guarantor than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, and, (c) is consistent with regulatory requirements; provided, however, that nothing contained herein shall prohibit the Seller or the Guarantor from making a capital contribution of Mortgage Loans to any other Transaction Party provided that such capital contribution is made subject to the Buyer's Lien on any such Mortgage Loans (under any Transaction Document) that are the subject of such capital contribution. In no event shall the Seller transfer to the Buyer hereunder any Mortgage Loan acquired by the Seller from an Affiliate of the Seller, other than from a Pledgor. (xi) Limitation on Liens. The Seller and each Pledgor, as applicable, will (a) defend the Collateral against, and will take such other action as is necessary to remove, any Lien, security interest or claim on or to the Collateral, other than the security interests created under this Repurchase Agreement and Liens for taxes and similar charges and assessments that -36- 37 are not yet due and payable or which are being contested in good faith by appropriate proceedings, and the Seller and each Pledgor, as applicable, will defend the right, title and interest of the Buyer in and to any of the Collateral against the claims and demands of all persons whomsoever, (b) not take any action that would directly or indirectly impair or adversely affect the Buyer's title to or the value of the Purchased Mortgage Loans, or (c) not pledge, assign, convey, grant, bargain, sell, set over, deliver or otherwise transfer any interest in the Purchased Mortgage Loans to any person not a party to this Repurchase Agreement nor create, incur or permit to exist any lien, encumbrance or security interest in or on the Purchased Mortgage Loans except as described in Section 6 of this Repurchase Agreement; (xii) Servicing Tape. The Seller shall prepare, as of the 15th calendar day (or if such 15th day is not a Business Day, the Business Day immediately preceding such 15th day) of each month (the "Servicing Cut-Off Date"), a computer readable magnetic tape containing servicing information, including without limitation those fields reasonably requested by the Buyer from time to time, on a loan-by-loan basis, with respect to the Mortgage Loans serviced hereunder by the Seller or any Servicer (the "Servicing Tape"). The Seller shall deliver the Servicing Tape to the Buyer within 2 Business Days after the Servicing Cut-off Date. (xiii) Pooling and Servicing Agreement. The parties to the Pooling and Servicing Agreement shall maintain such Pooling and Servicing Agreement in full force and effect and shall not amend or modify the Pooling and Servicing Agreement or waive compliance with any provisions thereunder without the prior written consent of the Buyer. (xiv) Insured Depository Institution Covenants The Seller is an Insured Depository Institution and accordingly, the Seller makes the following additional covenants: (a) The Seller will continuously maintain all of the Transaction Documents, from the time of their execution, as official records of the Seller; (b) The Seller will maintain a record of each Transaction and the total amount of Transactions outstanding hereunder in its official books and records and shall make same available for Buyer's inspection and copying on one Business Day's notice; (c) The aggregate amount of the Transactions outstanding and the aggregate principal amount of similar transactions and loans outstanding under other agreement as of any date between the Buyer and the Seller -37- 38 shall not exceed any restrictions or limitations imposed by the board of directors of the Seller or its Appropriate Federal Banking Agency; and (d) The Seller shall be Well Capitalized or Adequately Capitalized at the time of each request for a borrowing hereunder and shall maintain its status as Well Capitalized or Adequately Capitalized at all times that a Transaction is outstanding under this Repurchase Agreement. (xv) The Seller shall cause each Mortgage Loan subject to this Repurchase Agreement to be serviced in conformity with the requirements set forth in the Pooling and Servicing Agreement. 12. EVENTS OF DEFAULT (a) If any of the following events (each an "Event of Default") occur (except if such event involves a Pledgor from which the Seller has not acquired any Mortgage Loans subject to Transactions hereunder at the time of such event), the Seller and Buyer shall have the rights set forth in Section 13, as applicable: (i) the Seller shall default in the payment of any principal of or interest under any Repurchase Documents or default in the payment of any Repurchase Price due or any amount due under Section 5 hereof when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (ii) the Seller shall default in the payment of any other amount payable by it hereunder or under any other Repurchase Document after notification by the Buyer of such default, and such default shall have continued unremedied for five Business Days; or (iii) any representation, warranty or certification made or deemed made herein or in any other Repurchase Document by the Seller or Guarantor or any certificate furnished to the Buyer pursuant to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Exhibit II, which shall be considered solely for the purpose of determining the Collateral Value of the Mortgage Loans; unless the Seller shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (iv) the Seller or Guarantor shall fail to comply with the requirements of any of Section 11(iii)(a), Section 11(iv), Section 11(vi)(a), or Sections 11(xi) through 11(xv) hereof; or the Seller or Guarantor shall default in the performance of any of its obligations under Section 11(v) hereof and such default shall continue unremedied for a period of one (1) Business -38- 39 Day; or the Seller or Guarantor shall otherwise fail to comply with any of the requirements of Section 11(iii)(b) through (f), 11(vi)(b) through (d), 11(ix), 11(x), 11(xiii) hereof and such default shall continue unremedied for a period of five Business Days; or the Seller or Guarantor shall fail to observe or perform any other covenant or agreement contained in this Repurchase Agreement or any other Transaction Document and such failure to observe or perform shall continue unremedied for a period of seven Business Days; or (v) a final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate shall be rendered against the Seller, the Guarantor or any of their respective Affiliates by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof, and the Seller, the Guarantor or any such Affiliate shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (vi) the Seller or the Guarantor shall admit in writing its inability to pay its debts as such debts become due; or (vii) the Seller, the Guarantor, or any of their respective Affiliates shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or the FDIC Act, or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (viii) a proceeding or case shall be commenced, without the application or consent of any of the Seller, the Guarantor, or any of their Affiliates in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of any of the Seller, the Guarantor or any of their Affiliates or of all -39- 40 or any substantial part of its property, or (iii) similar relief in respect of any of the Seller, the Guarantor, or any Affiliate under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against any of the Seller, the Guarantor or any Affiliate shall be entered in an involuntary case under the Bankruptcy Code; or (ix) the Pooling and Servicing Agreement or any Repurchase Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by the Seller; or (x) the Seller or any Pledgor shall grant, or suffer to exist, any Lien on any Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on any Collateral in favor of the Buyer or shall be Liens in favor of any Person other than the Buyer; or (xi) the Buyer determines that the number of Misclassified Mortgage Loans equals at least 5% of the Mortgage Loans reviewed pursuant to a Due Diligence Review of Purchased Mortgage Loans on any three consecutive Purchase Dates; or (xii) there is a material default, breach, violation or event of default under the Pooling and Servicing Agreement or the Seller has waived any such material default, breach, violation or event of default thereunder; or (xiii) any material adverse change in the Property, business or financial condition of the Repurchase Agreement Parties taken as a whole shall occur, which, constitutes a material impairment of the ability of any Repurchase Agreement Party's ability to perform its obligations under any Repurchase Document as determined by the Buyer in its sole good faith discretion; or (xiv) the Buyer determines, after receipt of notice provided pursuant to Section 11(iv), that it wishes to cancel its commitment to lend hereunder and terminate this Repurchase Agreement; or (xv) the Seller shall become the subject of a cease and desist order of the Appropriate Federal Banking Agency or enter into a memorandum of understanding or consent agreement with the Appropriate Federal Banking Agency, any of which, would have, or is purportedly the result of any condition which would have, a Material Adverse Effect; or -40- 41 (xvi) there shall be an "Event of Default" under the Loan Agreement (unless such cross-default is prohibited or limited by applicable federal banking law). 13. REMEDIES (a) If an Event of Default occurs with respect to the Seller, the following rights and remedies are available to the Buyer: (i) At the option of the Buyer, exercised by written notice to the Seller (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. (ii) If the Buyer exercises or is deemed to have exercised the option referred to in subsection (a)(i) of this Section, (A) the Seller's obligations hereunder to repurchase all Purchased Mortgage Loans in such Transactions shall thereupon become immediately due and payable, (B) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of, on a 360 day per year basis for the actual number of days during the period from and including the date of the exercise or deemed exercise of such option to but excluding the date of payment of the Repurchase Price as so increased, (x) a rate per annum equal to 2% per annum plus the Eurodollar Base Rate then in effect applied to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subsection (a)(xii) of this Section (decreased as of any day by (I) any amounts actually in the possession of Buyer pursuant to clause (C) of this subsection, (II) any proceeds from the sale of Purchased Mortgage Loans applied to the Repurchase Price pursuant to subsection (a)(xii) of this Section, and (III) any amounts applied to the Repurchase Price pursuant to subsection (a)(iii) of this Section), and (C) all Income actually received by the Buyer pursuant to Section 5 (excluding any Late Payment Fees paid pursuant to Section 5(b)) shall be applied to the aggregate unpaid Repurchase Price owed by the Seller. -41- 42 (iii) Upon the occurrence of one or more Events of Default, the Buyer shall have the right to obtain physical possession of the Servicing Records (subject to the provisions of the Pooling and Servicing Agreement) and all other files of the Seller relating to the Purchased Mortgage Loans and all documents relating to the Purchased Mortgage Loans which are then or may thereafter come in to the possession of any Repurchase Agreement Party or any third party acting for any Repurchase Agreement Party and such Repurchase Agreement Party shall deliver to the Buyer such assignments as the Buyer shall request. The Buyer shall be entitled to specific performance of all agreements of the Repurchase Agreement Parties contained in the Repurchase Documents, and to the rights conferred on Buyer under Section 4.07 of the Pooling and Servicing Agreement. (b) If an Event of Default shall occur and be continuing, the Buyer may exercise, in addition to all other rights and remedies granted to it in this Repurchase Agreement and in the Pooling and Servicing Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Buyer without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Sellers or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of the Buyer or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Buyer shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Sellers, which right or equity is hereby waived or released. The Sellers further agree, at the Buyer's request, to assemble the Collateral and make it available to the Buyer at places which the Buyer shall reasonably select, whether at the Sellers' premises or elsewhere. The Buyer shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Buyer hereunder, including without limitation reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Buyer may elect, and only after such application and after the payment by the Buyer of any other amount required or permitted by any provision of law, including without limitation Section 9-504(1)(c) of the Uniform Commercial -42- 43 Code, need the Buyer account for the surplus, if any, to the Sellers. To the extent permitted by applicable law, the Sellers waive all claims, damages and demands they may acquire against the Buyer arising out of the exercise by the Buyer of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Buyer. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. The Sellers shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 5(b) hereof) if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Buyer to collect such deficiency. (c) If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by any Seller consisting of cash, checks and other near-cash items shall be held by such Seller in trust for the Buyer, segregated from other funds of such Seller, and shall forthwith upon receipt by such Seller be turned over to the Buyer in the exact form received by such Seller (duly endorsed by such Seller to the Buyer, if required) and (b) any and all such proceeds received by the Buyer (whether from a Seller or otherwise) may, in the sole discretion of the Buyer, be held by the Buyer as collateral security for, and/or then or at any time thereafter may be applied by the Buyer against, the Secured Obligations (whether matured or unmatured), such application to be in such order as the Buyer shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Repurchase Agreement shall have been terminated shall be paid promptly over to the Sellers or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to the Collateral. (d) The Buyer's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Buyer deals with similar property for its own account. Neither the Buyer nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Seller or otherwise. 14. RECORDING OF COMMUNICATIONS Buyer and Seller shall have the right (but not the obligation) from time to time to make or cause to be made tape recordings of communications between its employees and those of the other party with respect to Transactions. Buyer and Seller consent to the admissibility of such tape recordings in any court, arbitration, or other proceedings. -43- 44 The parties agree that a duly authenticated transcript of such a tape recording shall be deemed to be a writing conclusively evidencing the parties' agreement. 15. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and that each has been entered into in consideration of the other Transactions. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transaction hereunder and (iii) that payments, deliveries, and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries, and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries, and other transfers may be applied against each other and netted. 16. NOTICES AND OTHER COMMUNICATIONS Except as otherwise expressly permitted by this Repurchase Agreement, all notices, requests and other communications provided for herein and under the Pooling and Servicing Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Repurchase Agreement) shall be given or made in writing (including without limitation by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof or thereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Repurchase Agreement and except for notices given under Section 3 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopy or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 17. ENTIRE AGREEMENT; SEVERABILITY This Repurchase Agreement together with the Pooling and Servicing Agreement, the Affiliate Guaranty and the applicable Confirmation constitutes the entire understanding between Buyer and Seller with respect to the subject matter it covers and shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions involving Purchased Mortgage Loans. By acceptance of this Repurchase Agreement, Buyer and Seller acknowledge that they have not made, and are not relying upon, any statements, representations, promises or undertakings not contained in this Repurchase Agreement. Each provision and agreement herein shall be treated as separate and independent from any other provision -44- 45 or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 18. NON-ASSIGNABILITY The rights and obligations of the parties under this Repurchase Agreement and under any Transaction shall not be assigned by Seller without the prior written consent of Buyer. Subject to the foregoing, this Repurchase Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. Nothing in this Repurchase Agreement express or implied, shall give to any person, other than the parties to this Repurchase Agreement and their successors hereunder, any benefit of any legal or equitable right, power, remedy or claim under this Repurchase Agreement. 19. TERMINABILITY This Repurchase Agreement may be canceled by either party upon giving written notice to the other except that this Repurchase Agreement shall, notwithstanding such notice, remain applicable to any Transaction then outstanding. Notwithstanding any such termination or the occurrence of an Event of Default, all of the representations, warranties and covenants hereunder shall continue and survive. 20. GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 21. SUBMISSION TO JURISDICTION; WAIVERS BUYER, AND EACH SELLER AND PLEDGOR HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS MASTER REPURCHASE AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY -45- 46 SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE BUYER SHALL HAVE BEEN NOTIFIED; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. (E) EACH OF THE BUYER, THE SELLER AND THE PLEDGORS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS REPURCHASE AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR THE TRANSACTIONS OR LOANS CONTEMPLATED HEREBY OR THEREBY. 22. NO WAIVERS, ETC. No failure on the part of the Buyer to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Repurchase Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Repurchase Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 23. INTENT The Seller is an "insured depository institution" as that term is defined in Section 18131(c)(2) of Title 12 of the United States Code, as amended, and the parties understand and intend that this Repurchase Agreement and each Transaction hereunder constitute a "qualified financial contract" as that term is defined in Section 1821 of Title 12 of the United States Code, as amended. -46- 47 24. SERVICING (a) The Seller covenants to maintain or cause the servicing of the Mortgage Loans to be maintained in conformity with the requirements set forth in the Pooling and Servicing Agreement. (b) If the Mortgage Loans are serviced by the Seller, (i) the Seller agrees that the Buyer is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii) the Seller grants the Buyer a security interest in all servicing fees to which such Seller is entitled pursuant to the Pooling and Servicing Agreement and rights relating to the Mortgage Loans and all Servicing Records to secure the obligation of the Seller or its designee to service in conformity with this Section and any other obligation of the Seller to the Buyer. Each Seller covenants to safeguard such Servicing Records and to deliver them promptly to the Buyer or its designee (including the Trustee) at the Buyer's request, and subject to the Pooling and Servicing Agreement. (c) In the event the Seller or its respective Affiliate is servicing the Mortgage Loans, the Seller shall permit the Buyer to inspect the Seller's or its Affiliate's servicing facilities, as the case may be, for the purpose of satisfying the Buyer that the Seller or its Affiliate, as the case may be, has the ability to service the Mortgage Loans as provided in this Repurchase Agreement. 25. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that in the case of Transactions in which one of the parties is an "insured depository institution" as that term is defined in Section 1831(c)(2) of Title 12 of the United States Code, as amended, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or the Bank Insurance Fund, as applicable. 26. NETTING The Seller is a "financial institution" as now or hereinafter defined in Section 4402 of Title 12 of the United States Code ("Section 4402") and any rules or regulations promulgated thereunder: (a) All amounts to be paid or advanced by one party to or on behalf of the other under this Repurchase Agreement or any Transaction hereunder shall be deemed to be "payment obligations" and all amounts to be received by or on behalf of one party from the other under this Repurchase Agreement or any Transaction hereunder shall be deemed to be "payment entitlements" within the meaning of Section 4402, and this -47- 48 Repurchase Agreement shall be deemed to be a "netting contract" as defined in Section 4402. (b) The payment obligations and the payment entitlements of the parties hereto pursuant to this Repurchase Agreement and any Transaction hereunder shall be netted as follows. In the event that either party (the "Defaulting Party") shall fail to honor any payment obligation under this Repurchase Agreement or any Transaction hereunder, the other party (the "Nondefaulting Party") shall be entitled to reduce the amount of any payment to be made by the Nondefaulting Party to the Defaulting Party by the amount of the payment obligation that the Defaulting Party failed to honor. 27. PERIODIC DUE DILIGENCE REVIEW The Seller acknowledges that the Buyer has the right to perform continuing due diligence reviews with respect to the Mortgage Loans, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and the Seller agrees that upon reasonable (but no less than 10 Business Days') prior notice (with no notice being required upon the occurrence of an Event of Default) to the Seller, the Buyer or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Mortgage Files and any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession or under the control of the Seller and/or the Trustee or any Bailee. The Seller also shall make available to the Buyer a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Mortgage Files and the Mortgage Loans. Without limiting the generality of the foregoing, the Seller acknowledges that the Buyer may purchase Mortgage Loans from the Seller based solely upon the information provided by the Seller to the Buyer in the Mortgage Loan Tape and the representations, warranties and covenants contained herein, and that the Buyer, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Mortgage Loans purchased in a Transaction, including without limitation ordering new credit reports and new appraisals on the related Mortgaged Properties and otherwise re-generating the information used to originate such Mortgage Loan. The Buyer may underwrite such Mortgage Loans itself or engage a mutually agreed upon third party underwriter to perform such underwriting. The Seller agrees to cooperate with the Buyer and any third party underwriter in connection with such underwriting, including, but not limited to, providing the Buyer and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Mortgage Loans in the possession, or under the control, of the Seller. The Seller further agrees that the Seller shall reimburse the Buyer for any and all reasonable out-of-pocket costs and expenses incurred by the Buyer in connection with the Buyer's activities pursuant to this Section 27, provided that, unless a Default shall occur, the sum of (i) the reimbursement obligation of Buyer under this Repurchase Agreement, and (ii) the aggregate reimbursement obligation of the Borrowers pursuant to Section 11.15 of the Loan Agreement, shall be limited to $25,000 per annum. Buyer agrees (on -48- 49 behalf of itself and its Affiliates, directors, officers, employees and representatives) to use reasonable precaution to keep confidential, in accordance with its customary procedures for handling confidential information and in accordance with safe and sound practices, and not to disclose to any third party, any non-public information supplied to it or otherwise obtained by it hereunder with respect to the Seller, the Guarantor. or any of their Affiliates; provided, however, that nothing herein shall prohibit the disclosure of any such information to the extent required by statute, rule, regulation or judicial process; provided, further that, unless specifically prohibited by applicable law or court order, Buyer shall, prior to disclosure thereof, notify the Seller of any request for disclosure of any such non-public information. Buyer further agrees not to use any such non-public information for any purpose unrelated to this Repurchase Agreement. 28. BUYER'S APPOINTMENT AS ATTORNEY-IN-FACT (a) The Seller hereby irrevocably constitutes and appoints the Buyer and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Seller and in the name of the Seller or in its own name, from time to time in the Buyer's discretion, for the purpose of carrying out the terms of this Repurchase Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Repurchase Agreement, and, without limiting the generality of the foregoing, the Seller hereby gives the Buyer the power and right, on behalf of the Seller, without assent by, but with notice to, the Seller, if an Event of Default shall have occurred and be continuing, to do the following: (i) in the name of the Seller, or in its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Buyer for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; (iii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Buyer or as the Buyer shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any -49- 50 proceeds thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Seller with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Buyer may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any Collateral as fully and completely as though the Buyer were the absolute owner thereof for all purposes, and to do, at the Buyer's option and the Seller's expense, at any time, and from time to time, all acts and things which the Buyer deems necessary to protect, preserve or realize upon the Collateral and the Buyer's Liens thereon and to effect the intent of this Repurchase Agreement, all as fully and effectively as such Seller might do; and (iv) to direct the actions of the Trustee with respect to the Collateral under the Pooling and Servicing Agreement. The Seller hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The Seller also authorizes the Buyer, if an Event of Default shall have occurred and be continuing, from time to time, to execute, in connection with any sale provided for in Section 13 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on the Buyer hereunder are solely to protect the Buyer's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Buyer shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Repurchase Agreement Parties for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. 29. MISCELLANEOUS (a) Time is of the essence under this agreement and all Transactions and all references to a time shall mean New York time in effect on the date of the action unless otherwise expressly stated in this Repurchase Agreement. (b) If there is any conflict between the terms of this Repurchase Agreement or any Transaction entered into hereunder and the Pooling and Servicing Agreement, this Repurchase Agreement shall prevail. (c) If there is any conflict between the terms of a Confirmation or a corrected Confirmation issued by the Buyer and this Repurchase Agreement, the Confirmation shall prevail. -50- 51 (d) This Repurchase Agreement may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. (e) The headings in this Repurchase Agreement are for convenience of reference only and shall not affect the interpretation or construction of this Repurchase Agreement. 30. CONFLICTS In the event of any conflict between the terms of this Repurchase Agreement and any other Repurchase Document, the terms of this Repurchase Agreement shall prevail. [THIS SPACE INTENTIONALLY LEFT BLANK] -51- 52 IN WITNESS WHEREOF, the parties have entered into this Repurchase Agreement as of the date set forth above. Buyer MORGAN STANLEY MORTGAGE CAPITAL INC. - ----- 1585 Broadway New York, New York 10036 By:/s/ ---------------------------- Name: Title: Seller: ADVANTA NATIONAL BANK - ------- One Righter Parkway Wilmington, Delaware 19803 By:/s/ ---------------------------- Name: Title: Pledgors: ADVANTA MORTGAGE HOLDING COMPANY - --------- Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: 53 ADVANTA MORTGAGE CORP. MIDATLANTIC Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC II Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDWEST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: ADVANTA MORTGAGE CORP. OF NEW JERSEY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ---------------------------- Name: Title: -2- 54 ADVANTA MORTGAGE CORP. NORTHEAST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By: /s/ -------------------------------- Name: Title: ADVANTA MORTGAGE CONDUIT SERVICES, INC. Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By: /s/ -------------------------------- Name: Title: ADVANTA FINANCE CORP. 16875 West Bernardo San Diego, California 92127 By: /s/ -------------------------------- Name: Title: -3- 55 EXHIBIT II REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS Part I. Eligible Mortgage Loans As to each residential Mortgage Loan purchased by Buyer on a Purchase Date (and the related Mortgage, Mortgage Note, Assignment of Mortgage and Mortgaged Property), the Seller shall be deemed to make the following representations and warranties to the Buyer as of such date and as of each date Collateral Value is determined (certain defined terms used herein and not otherwise defined in the Repurchase Agreement appearing in Part III to this Exhibit II). With respect to any representations and warranties made to the best of any Seller's knowledge, in the event that it is discovered that the circumstances with respect to the related Mortgage Loan are not accurately reflected in such representation and warranty notwithstanding the knowledge or lack of knowledge of such Seller, then, notwithstanding that such representation and warranty is made to the best of such Seller's knowledge, such Mortgage Loan shall be assigned a Collateral Value of zero: (a) Mortgage Loans as Described. The information set forth in the Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and correct in all material respects as of the date thereof. (b) Payments Current. With respect to each Mortgage Loan other than a Delinquent Mortgage Loan, no payment required under the Mortgage Loan is delinquent beyond the applicable grace period. With respect to each 59-Day Delinquent Mortgage Loan, no payment required under the Mortgage Loan is delinquent in excess of 59 days (without regard to any grace period) and with respect to each 89-Day Delinquent Loan, no payment required under the Mortgage Loan is delinquent in excess of 89 days (without regard to any grace period). (c) No Outstanding Charges. There are no material defaults in complying with the terms of the Mortgage securing the Mortgage Loan, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Neither the Seller nor the Qualified Originator from which the Seller acquired the Mortgage Loan has advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Mortgage Note or date of disbursement of the proceeds of the Mortgage Loan, whichever is earlier, to the day which precedes by one month the Due Date of the first installment of principal and interest thereunder. Schedule 1-1 56 (d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage have not been impaired, waived, altered or modified in any respect, from the date of origination (other than those which would not result in a Material Adverse Effect); except by a written instrument which has been recorded, if necessary to protect the interests of the Buyer, and which has been delivered to the Trustee or the Bailee, as applicable, and the terms of which are reflected in the Mortgage Loan Schedule. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor in respect of the Mortgage Loan has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by such policy, and which assumption agreement is part of the Mortgage File delivered to the Trustee and the terms of which are reflected in the Mortgage Loan Schedule. (e) Modification of Mortgage Loan. The Mortgage Loan has not been amended or modified in a manner that would materially and adversely effect the value of such Mortgage Loan. (f) No Defenses. The Mortgage Loan is not subject to any valid and enforceable right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto, and, to the Seller's knowledge, no Mortgagor in respect of the Mortgage Loan was a debtor in any state or Federal bankruptcy or insolvency proceeding at the time the Mortgage Loan was originated other than in cases in which the Mortgage Loan was originated in connection with a Mortgagor emerging from a bankruptcy and such Mortgage Loan was approved by the trustee in bankruptcy. The Seller has neither knowledge nor received any notice that any Mortgagor in respect of the Mortgage Loan is a debtor in any state or federal bankruptcy or insolvency proceeding. (g) Hazard Insurance. The improvements upon the Mortgaged Property is insured by a fire and extended perils insurance policy, issued by a Qualified Insurer, and such other hazards as are customary in the area where the Mortgaged Property is located, and to the extent required by the Seller or Qualified Originator as of the date of origination consistent with the Underwriting Guidelines in an amount not less than the lesser of (i) the outstanding principal balance of the related Mortgage Loan (together, in the case of a Second Lien Mortgage Loan, with the outstanding principal balance of the First Lien), (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis or, (iii) the full insurable value of the Mortgaged Property. If required by the Federal Emergency Management Agency, if any portion of the Mortgaged Property is in an area identified by any federal Governmental Authority as having special flood hazards, and flood insurance is available, a flood insurance policy meeting the current guidelines of the Federal Insurance Administration is in effect with a generally acceptable insurance carrier (unless the Underwriting Guidelines provide that such insurance is not necessary if the portion of the Mortgaged Property in the flood area is limited to the lot, and does not include the location of Schedule 1-2 57 any structures), in an amount representing coverage not less than the least of (1) the outstanding principal balance of the Mortgage Loan, (2) the full insurable value of the Mortgaged Property, and (3) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973, as amended. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Seller, its successors and assigns (including without limitation, subsequent owners of the Mortgage Loan), as mortgagee, and may not be reduced, terminated or canceled without 30 days' prior written notice to the mortgagee. No such notice has been received by the Seller. All premiums on such insurance policy have been paid. The related Mortgage obligates the Mortgagor to maintain all such insurance and, at such Mortgagor's failure to do so, authorizes the mortgagee to maintain such insurance at the Mortgagor's cost and expense and to seek reimbursement therefor from such Mortgagor. Where required by state law or regulation, the Mortgagor has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a "master" or "blanket" hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect. The Seller has not engaged in, and has no knowledge of the Mortgagor's having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by the Seller. (h) Compliance with Applicable Laws. Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan at the time it was originated have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations. (i) No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission. The Seller has not waived the performance by the Mortgagor of any action, if the Mortgagor's failure to perform such action would cause the Mortgage Loan to be in default, nor has any Seller waived any default resulting from any action or inaction by the Mortgagor. (j) Location and Type of Mortgaged Property. The Mortgaged Property is located in an Acceptable State as identified in the Mortgage Loan Schedule and consists of a single parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a low-rise condominium project, or an individual unit in a planned unit development or a de minimis planned unit development, provided, however, that no residence or dwelling is a mobile home. Other than Schedule 1-3 58 with respect to Mixed Use Mortgage Loans, no portion of the Mortgaged Property is used for commercial purposes. (k) Valid Lien. The Mortgage is a valid, subsisting, enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) and perfected (A) first lien and first priority security interest with respect to each Mortgage Loan which is indicated by the Seller to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien and second priority security interest with respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien (as reflected on the Mortgage Loan Tape), in either case, on the real property included in the Mortgaged Property, including all buildings on the Mortgaged Property located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to: (1) the lien of current real property taxes and assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other exceptions to title acceptable to mortgage lending institutions generally and specifically referred to in the Seller's title insurance policy delivered to the originator of the Mortgage Loan and (a) referred to or otherwise considered in the appraisal made for the originator of the Mortgage Loan or (b) which do not materially and adversely affect the Appraised Value of the Mortgaged Property set forth in such appraisal; (3) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property; and (4) with respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape) a First Lien on the Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) (A) first lien and first priority security interest with respect to each Mortgage Loan which is indicated by a Seller to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien and second priority security interest with respect to each Mortgage Loan which is indicated by a Seller to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), in either case, on the property described therein and such Seller has full right to pledge and assign the same to the Buyer. Schedule 1-4 59 (l) Validity of Mortgage Documents. The Mortgage Note and the Mortgage and any other agreement executed and delivered by a Mortgagor or guarantor, if applicable, in connection with a Mortgage Loan are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) in accordance with its terms. All parties to the Mortgage Note, the Mortgage and any other such related agreement had legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage and any other such related agreement have been duly and properly executed by such related parties. To the Seller' knowledge, no fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to a Mortgage Loan has taken place on the part of any Person, including, without limitation, the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan. The Seller have reviewed all of the documents constituting the Servicing File and has made such inquiries as they deem necessary to make and confirm the accuracy of the representations set forth herein. (m) Full Disbursement of Proceeds. The Mortgage Loan has been closed and the proceeds of the Mortgage Loan have been fully disbursed and there is no further requirement for future advances thereunder, and either (i) any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with or (ii) an escrow of funds for the completion of any on-site or off-site improvements has been established in an amount sufficient to make all repairs required by the Qualified Originator to the Mortgaged Property. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage. (n) Ownership. The Seller is the sole owner and holder of the Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the Seller has good, indefeasible and marketable title thereto, and has full right to transfer, pledge and assign the Mortgage Loan to the Buyer free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party (other than the interest of the Trustee pursuant to the Pooling and Servicing Agreement), to assign, transfer and pledge each Mortgage Loan pursuant to this Repurchase Agreement and following the pledge of each Mortgage Loan, the Buyer will hold such Mortgage Loan free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest except any such security interest created pursuant to the terms of this Repurchase Agreement. (o) Doing Business. All parties which have had any interest in the Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (ii) either (A) organized under the laws of such state, (B) qualified to do business Schedule 1-5 60 in such state, (C) a federal savings and loan association, a savings bank or a national bank having a principal office in such state, or (D) not doing business in such state. (p) LTV. No Mortgage Loan has an LTV greater than 100% or a CLTV greater than 125%. (q) Title Insurance. The Mortgage Loan is covered by either (i) an attorney's opinion of title and abstract of title, the form and substance of which is acceptable to mortgage lending institutions making mortgage loans in the area wherein the Mortgaged Property is located or (ii) an ALTA Buyer's title insurance policy or other generally acceptable form of policy or insurance and each such title insurance policy is issued by a title insurer qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring the Seller, their respective successors and assigns, as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan (or to the extent a Mortgage Note provides for negative amortization, the maximum amount of negative amortization in accordance with the Mortgage), subject only to the exceptions contained in clauses (1), (2), (3), and, with respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape) clause (4) of paragraph (j) of this Part I of Schedule 1. Where required by state law or regulation, the Mortgagor has been given the opportunity to choose the carrier of the required mortgage title insurance. Additionally, such Buyer's title insurance policy affirmatively insures ingress and egress and against encroachments by or upon the Mortgaged Property or any interest therein. The title policy does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading. The Seller, its respective successors and assigns, are the sole insureds of the lender's title insurance policy, and such lender's title insurance policy is valid and remains in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Repurchase Agreement. No claims have been made under such lender's title insurance policy, and, to the best of such Seller's knowledge, no prior holder or servicer of the related Mortgage, including the Seller, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy, including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by any Seller. (r) No Defaults. There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note (other than with respect to 59-Day Delinquent Mortgage Loans for which payments are delinquent for no more than fifty-nine (59) days and 89-Day Delinquent Mortgage Loans for which payments are delinquent for no more than eighty-nine (89) days) and no event has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither the Seller nor their respective predecessors have waived any default, breach, violation or event of acceleration. With respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien Mortgage Loan Schedule 1-6 61 (as reflected on the Mortgage Loan Schedule) (i) the prior mortgage is in full force and effect, (ii) there is no default, breach, violation or event of acceleration existing under such prior mortgage or the related mortgage note, (iii) no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration thereunder, and either (A) the prior mortgage contains a provision which allows or (B) applicable law requires, the mortgagee under the Second Lien Mortgage Loan to receive notice of, and affords such mortgagee an opportunity to cure any default by payment in full or otherwise under the prior mortgage. (s) No Mechanics' Liens. There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage. (t) Location of Improvements; No Encroachments. All improvements which were considered in determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning and building law, ordinance or regulation. (u) Origination; Payment Terms. The Mortgage Loan was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar banking institution which is supervised and examined by a federal or state authority. Principal payments on the Mortgage Loan commenced no more than 60 days after funds were disbursed in connection with the Mortgage Loan. The Mortgage Interest Rate is adjusted, with respect to adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal the Index plus the Gross Margin (rounded up or down to the nearest .125%), subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable in equal monthly installments of principal and interest, which installments of interest, with respect to adjustable rate Mortgage Loans, are subject to change due to the adjustments to the Mortgage Interest Rate on each Interest Rate Adjustment Date, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date, over an original term of not more than 30 years from commencement of amortization; provided, however, in the case of a Balloon Mortgage Loan, the Mortgage Loan matures prior to full amortization thereby requiring a balloon payment of the then outstanding principal balance prior to full amortization of the Mortgage Loan. The due date of the first payment under the Mortgage Note is no more than 60 days from the date of the Mortgage Note. (v) Customary Provisions. The Mortgage Note has a stated maturity. The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage Schedule 1-7 62 designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage Loan will be able to deliver good and merchantable title to the Mortgaged Property. There is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. (w) Conformance with Underwriting Guidelines and Agency Standards. The Mortgage Loan was underwritten substantially in accordance with the applicable Underwriting Guidelines. The Mortgage Note and Mortgage are on forms similar to those used by FHLMC or FNMA and the Seller has not made any representations to a Mortgagor that are inconsistent with the mortgage instruments used. (x) Occupancy of the Mortgaged Property. As of the Purchase Date the Mortgaged Property is lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. The Seller has not received notification from any governmental authority that the Mortgaged Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspection, licenses or certificates, as the case may be. The Seller has not received notice of any violation or failure to conform with any such law, ordinance, regulation, standard, license or certificate. (y) No Additional Collateral. The Mortgage Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in clause (j) above other than collateral which is not included in any calculation of the LTV of such Mortgage Loan. (z) Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Trustee or the Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor. (aa) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage, the Assignment of Mortgage and any other documents required to be delivered under the Pooling and Servicing Agreement for each Mortgage Loan have been delivered to the Trustee. The Seller or their respective agents are in possession of a complete, true and accurate Mortgage File in compliance with the Pooling and Servicing Agreement, except for such documents the originals of which have been delivered to the Trustee. Schedule 1-8 63 (bb) Transfer of Mortgage Loans. The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located. (cc) Due-On-Sale. The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder. (dd) Consolidation of Future Advances. Any future advances made to the Mortgagor prior to the Cut-off Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having (A) first lien priority with respect to each Mortgage Loan which is indicated by the Seller to be a First Lien (as reflected on the Mortgage Loan Tape) or (B) second lien priority with respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien Mortgage Loan (as reflected on the Mortgage Loan Tape), in either case, by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to FNMA and FHLMC. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan. (ee) Mortgaged Property Undamaged. To the best of the Seller's knowledge, the Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended and each Mortgaged Property is in good repair. There have not been any condemnation proceedings with respect to the Mortgaged Property and the Seller has no knowledge of any such proceedings. (ff) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The origination and collection practices used by the originator, each servicer of the Mortgage Loan and the Seller with respect to the Mortgage Loan have been in all respects in compliance with applicable laws and regulations and in all material respects in compliance with Accepted Servicing Practices, and have been in all respects legal. With respect to escrow deposits and Escrow Payments (other than with respect to each Mortgage Loan which is indicated by the Seller to be a Second Lien Mortgage Loan and for which the mortgagee under the First Lien is collecting Escrow Payments (as reflected on the Mortgage Loan Tape), all such payments are in the possession of, or under the control of, the Seller and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in full compliance with state and federal law. An escrow of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under the Mortgage or the Mortgage Note. All Mortgage Interest Schedule 1-9 64 Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state, federal and local law has been properly paid and credited. (gg) Other Insurance Policies. No action, inaction or event has occurred and no state of facts exists or has existed that has resulted or will result in the exclusion from, denial of, or defense to coverage under any applicable special hazard insurance policy, PMI Policy or bankruptcy bond, irrespective of the cause of such failure of coverage. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by the Seller or by any officer, director, or employee of the Seller or any designee of the Seller or any corporation in which the Seller or any officer, director, or employee had a financial interest at the time of placement of such insurance. (hh) Soldiers' and Sailors' Civil Relief Act. The Mortgagor has not notified the Seller, and the Seller has no knowledge, of any relief requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940. (ii) Appraisal. The Mortgage File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the Seller, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan. (jj) Disclosure Materials. The Mortgagor has executed a statement to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect to the making of adjustable rate mortgage loans, and the Seller maintain such statement in the Mortgage File. (kk) Construction or Rehabilitation of Mortgaged Property. No Mortgage Loan was made in connection with the construction or rehabilitation of a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged Property. (ll) No Defense to Insurance Coverage. No action has been taken or failed to be taken, no event has occurred and no state of facts exists or has existed on or prior to the Purchase Date (whether or not known to the Seller on or prior to such date) which has resulted or will result in an exclusion from, denial of, or defense to coverage under any private mortgage insurance (including, without limitation, any exclusions, denials or defenses which would limit or reduce the availability of the timely payment of the full amount of the loss otherwise due thereunder to the insured) whether arising out of actions, representations, errors, omissions, negligence, or fraud of the Seller, the related Mortgagor or any party involved in the application for such coverage, including the appraisal, plans and specifications and other exhibits or documents submitted therewith to the insurer under such insurance policy, or for any other reason under such coverage, but not including the failure of such insurer to pay by reason of such insurer's breach of such insurance policy or such insurer's financial inability to pay. Schedule 1-10 65 (mm) Capitalization of Interest. The Mortgage Note does not by its terms provide for the capitalization or forbearance of interest. (nn) No Equity Participation. No document relating to the Mortgage Loan provides for any contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage Note is not convertible to an ownership interest in the Mortgaged Property or the Mortgagor and the Seller has not financed and does not own directly or indirectly, any equity of any form in the Mortgaged Property or the Mortgagor. (oo) Withdrawn Mortgage Loans. If the Mortgage Loan has been released to the Seller pursuant to a Request for Release as permitted under Section 5 of the Pooling and Servicing Agreement, then the promissory note relating to the Mortgage Loan was returned to the Trustee within 14 days (or if such fourteenth day was not a Business Day, the next succeeding Business Day). (pp) No Exception. Neither the Trustee nor the Bailee has noted any material exceptions on an Exception Report (as defined in the Pooling and Servicing Agreement or the Bailee Agreement) with respect to the Mortgage Loan which would materially adversely affect the Mortgage Loan or the Buyer's ownership or security interest, granted by the Seller, in the Mortgage Loan. (qq) Qualified Originator. The Mortgage Loan has been originated by, and, if applicable, purchased by the Seller from, a Qualified Originator. (rr) Mortgage Submitted for Recordation. The Mortgage either has been or will promptly be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (ss) Securitization. Each Mortgage Loan conforms to the Seller's Underwriting Guidelines and otherwise conforms to the current standards of institutional securitization applicable to loans similar in nature to the Mortgage Loans. All Mortgage Loans, individually and in the aggregate, substantially comply with each related representation or warranty customarily required under the current standards of investment grade institutional securitization applicable to mortgage loans similar in nature to the Mortgage Loans. (tt) Delinquent Loan Sublimit The inclusion of any Mortgage Loan included in the Borrowing Base shall not cause the aggregate Collateral Value of Eligible Mortgage Loans (i) which are 59-Day Delinquent Mortgage Loans to exceed 3% of the aggregate principal amount outstanding under the Loans, or (ii) which are 89-Day Delinquent Mortgage Loans to exceed 1% of the aggregate Purchase Price of all Transactions outstanding under the Repurchase Documents. Schedule 1-11 66 Part II. Pledged Certificates As to each Mortgage Loan which is related to a Pledged Certificate, and as to the related Pooling and Servicing Agreement, the following eligibility criteria shall be met as of the applicable Purchase Date and as of each date Collateral Value is determined: (a) Validity of Pooling and Servicing Agreement. The Pooling and Servicing Agreement and any other agreement executed and delivered by the Trustee in connection with the Pledged Certificates are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. The Trustee, Sponsor and Master Servicer (as the last two such terms are defined in the Pooling and Servicing Agreement) had legal capacity to execute and deliver the Pooling and Servicing Agreement and any such other related agreement to which such Trustee, Sponsor or Master Servicer are parties have been duly and properly executed by such Trustee, Sponsor or Master Servicer, as applicable. The Pooling and Servicing Agreement is in full force and effect, and the enforceability of the Pooling and Servicing Agreement has not been contested by Trustee. (b) Original Terms Unmodified. The terms of the Pooling and Servicing Agreement have not been impaired, altered or modified in any respect. (c) No Defenses. The Pledged Certificates are not subject to any right of rescission, set-off, counterclaim or defense nor will the operation of any of the terms of the Pooling and Servicing Agreement, or the exercise of any right thereunder, render the Pooling Servicing Agreement unenforceable in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. (d) No Waiver. The Seller have not waived the performance by the Trustee or Master Servicer of any action, if the Trustee's failure to perform such action would cause any Mortgage Loan or Pledged Certificate to be in default, nor has the Seller waived any default resulting from any action or inaction by the Trustee or Master Servicer. (e) No Defaults. There is no material default, breach, violation or event of acceleration existing under the Pooling and Servicing Agreement and no event has occurred which, with the passage of time or giving of notice or both and the expiration of any grace or cure period, would constitute a material default, breach, violation or event of acceleration under the Pooling and Servicing Agreement, and neither the Seller nor its predecessors in interest have waived any such default, breach, violation or event of acceleration. Schedule 1-12 67 (f) Delivery of Pooling and Servicing Agreement. A copy of the Pooling and Servicing Agreement has been delivered to the Buyer. (g) Pooling and Servicing Agreement Assignable. The Pooling and Servicing Agreement is assignable to the Buyer. The Pooling and Servicing Agreement permits the holder of the Pledged Certificate to sell, assign, pledge, transfer or rehypothecate the Pledged Certificates issued pursuant to the Pooling and Servicing Agreement. Schedule 1-13 68 Part III Defined Terms In addition to terms defined elsewhere in the Repurchase Agreement, the following terms shall have the following meanings when used in this Exhibit II: "Acceptable State" shall mean any state unless the Seller is otherwise notified by the Buyer. "Accepted Servicing Practices" shall mean, with respect to any Mortgage Loan, those mortgage servicing practices of mortgage lending institutions which service mortgage loans of the same type as such Mortgage Loans in the jurisdiction where the related Mortgaged Property is located. "ALTA" means the American Land Title Association. "Appraised Value" shall mean the value set forth in an appraisal made in connection with the origination of the related Mortgage Loan as the value of the Mortgaged Property. "Assignment of Mortgage" shall mean, with respect to any Mortgage, an assignment of the mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related mortgaged property is located to reflect the assignment and pledge of the mortgage. "Best's" means Best's Key Rating Guide, as the same shall be amended from time to time. "Cut-off Date" means the first day of the month in which the related Purchase Date occurs. "Due Date" means the day of the month on which the Monthly Payment is due on a Mortgage Loan, exclusive of any days of grace. "Escrow Payments" means with respect to any Mortgage Loan, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condominium charges, and any other payments required to be escrowed by the Mortgagor with the mortgagee pursuant to the Mortgage or any other document. "FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor thereto. "FNMA" means the Federal National Mortgage Association, or any successor thereto. 69 "Gross Margin" means with respect to each adjustable rate Mortgage Loan, the fixed percentage amount set forth in the related Mortgage Note. "Index" means with respect to each adjustable rate Mortgage Loan, the index set forth in the related Mortgage Note for the purpose of calculating the interest rate thereon. "Insurance Proceeds" means with respect to each Mortgage Loan, proceeds of insurance policies insuring the Mortgage Loan or the related Mortgaged Property. "Interest Rate Adjustment Date" means with respect to each adjustable rate Mortgage Loan, the date, specified in the related Mortgage Note and the Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted. "Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage Loan, the ratio of the original outstanding principal amount of the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at origination or (b) if the Mortgaged Property was purchased within 12 months of the origination of the Mortgage Loan, the purchase price of the Mortgaged Property. "Monthly Payment" means the scheduled monthly payment of principal and interest on a Mortgage Loan as adjusted in accordance with changes in the Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an adjustable rate Mortgage Loan. "Mortgage Interest Rate" means the annual rate of interest borne on a Mortgage Note, which shall be adjusted from time to time with respect to adjustable rate Mortgage Loans. "Mortgage Interest Rate Cap" means with respect to an adjustable rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth in the related Mortgage Note. "Mortgagee" means the Seller or any subsequent holder of a Mortgage Loan. "Origination Date" shall mean, with respect to each Mortgage Loan, the date of the Mortgage Note relating to such Mortgage Loan, unless such information is not provided by the Seller with respect to such Mortgage Loan, in which case the Origination Date shall be deemed to be the date that is 40 days prior to the date of the first payment under the Mortgage Note relating to such Mortgage Loan. "PMI Policy" or "Primary Insurance Policy" means a policy of primary mortgage guaranty insurance issued by a Qualified Insurer. "Qualified Insurer" means an insurance company duly qualified as such under the laws of the states in which the Mortgaged Property is located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, and approved as an insurer pursuant to the applicable Underwriting Guidelines. Schedule 1-2 70 "Qualified Originator" means an originator of Mortgage Loans reasonably acceptable to the Buyer. "Servicing File" means with respect to each Mortgage Loan, the file retained by the Seller consisting of originals of all documents in the Mortgage File which are not delivered to a Trustee and copies of the Mortgage Loan Documents set forth in Section 2 of the Pooling and Servicing Agreement. Schedule 1-3 71 AMENDMENT NO. 1 TO MASTER REPURCHASE AGREEMENT Amendment No. 1 dated as of September 25, 1998 ("Amendment No. 1"), among ADVANTA NATIONAL BANK, as Seller, ADVANTA MORTGAGE HOLDING COMPANY, a Delaware corporation, as a Pledgor; ADVANTA MORTGAGE CORP. USA, a Delaware corporation, as a Pledgor; ADVANTA MORTGAGE CORP. MIDATLANTIC, a Pennsylvania corporation, as a Pledgor; ADVANTA MORTGAGE CORP. MIDATLANTIC II, a Pennsylvania corporation, as a Pledgor; ADVANTA MORTGAGE CORP. MIDWEST, a Pennsylvania corporation, as a Pledgor; ADVANTA MORTGAGE CORP. OF NEW JERSEY, a New Jersey corporation, as a Pledgor; ADVANTA MORTGAGE CORP. NORTHEAST, a New York corporation, as a Pledgor; ADVANTA MORTGAGE CONDUIT SERVICES, INC., a Delaware corporation, as a Pledgor; ADVANTA FINANCE CORP., a Nevada corporation, as a Pledgor (each a "Pledgor", collectively the "Pledgors") and MORGAN STANLEY MORTGAGE CAPITAL INC., a New York corporation (the "Buyer"). RECITALS The Seller and the Pledgors entered into that certain Master Repurchase Agreement, dated August 21, 1998 with the Buyer (the "Existing Repurchase Agreement" as amended by this Amendment No. 1, the "Repurchase Agreement") for the sale of certain mortgage loans by the Seller on the terms and conditions as set forth in the Existing Repurchase Agreement. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Repurchase Agreement or the Sale and Servicing Agreement (as defined below), each as applicable. The Pledgors are also party to that certain Amended and Restated Master Loan and Security Agreement dated as of August 21, 1998, as amended by Amendment No. 1 to Amended and Restated Master Loan and Security Agreement dated as of September 25, 1998, among the Pledgors (as Borrowers thereunder) and the Lender. The Seller, the Pledgors and the Buyer wish to amend the Existing Repurchase Agreement to provide for the existence of the Indenture Notes (as defined below). Accordingly, the parties hereby agree, in consideration of the mutual premises and mutual obligations set forth herein, to the terms and conditions of the Existing Repurchase Agreement as amended by this Amendment No. 1. SECTION 1.________Definitions. Section 1.01 of the Existing Loan Agreement is hereby amended by: (a) adding the following definitions in proper alphabetical order therein. "Indenture" means the Indenture dated as of September 25, 1998 between Advanta Home Equity Loan Owner Trust 1998-MS1 and Bankers Trust Company of California, N.A. "Indenture Note" means any note authorized by and authenticated and delivered under the Indenture. "Indenture Note Principal Balance" means the principal balance of each Indenture Note as calculated in the Sale and Servicing Agreement. -3- 72 "Sale and Servicing Agreement" means the Sale and Servicing Agreement dated as of September 25, 1998, among Advanta Home Equity Loan Owner Trust 1998-MS1, as Issuer, Advanta Loan Warehouse Corporation, as Depositor, Advanta Mortgage Corp. USA ("AMCUSA"), as Servicer, Advanta National Bank, Advanta Bank Corp. and AMCUSA, as Loan Originators, Bankers Trust Company of California, N.A., as Indenture Trustee on behalf of the Noteholders, and Advanta Corp. together with AMCUSA, as Transfer Obligors. (b) deleting the definitions of "Available Committed Purchase Amount" and "Available Purchase Amount" in their entirety and replacing them with the following: "Available Committed Purchase Amount" means the Maximum Committed Amount, minus the sum of (i) the aggregate amount of Transactions outstanding hereunder, (ii) aggregate amount of Loans outstanding under the Loan Agreement, and (iii) the aggregate Indenture Note Principal Balance of the Indenture Notes. "Available Purchase Amount" means the Maximum Purchase Amount minus the sum of (i) the aggregate amount of Transactions outstanding hereunder, (ii) the aggregate amount of Loans outstanding under the Loan Agreement, and (iii) the aggregate Indenture Note Principal Balance of the Indenture Notes. (c) (1) deleting in Section 3(l) of the Existing Repurchase Agreement the word "Maximum" and inserting the word "Available" in lieu thereof; and (2) deleting in Section 3(l) of the Existing Repurchase Agreement the phrase "minus the aggregate principal amount of outstanding Loans under the Loan Agreement". SECTION 2. Conditions Precedent to Amendment Effective Date. This Amendment No. 1 shall become effective on the date (the "Amendment Effective Date") on which the following conditions precedent shall have been satisfied: 2.1 Delivered Documents. On the Amendment Effective Date, the Buyer shall have received the following documents, each of which shall be satisfactory to the Buyer in form and substance: (a) this Amendment No. 1, executed and delivered by a duly authorized officer of each of the Seller and the Pledgors; (b) such other documents as the Buyer or counsel to the Buyer may reasonably request. 2.2 No Default. On the Amendment Effective Date, the Seller and the Pledgors (i) shall be in compliance with all the terms and provisions set forth in the Repurchase Agreement on their part to be observed or performed, (ii) the representations and warranties made by the Seller pursuant to Section 3 of this Amendment No. 1 shall be true and complete on and as of such date in all material respects with the same force and effect as if made on and as of such date (or, if such representation or warranty is expressly stated to have been made as of a specific date, as of such date), and (iii) no Default shall have occurred and be continuing on such date. -4- 73 SECTION 3. Representations and Warranties. The Seller hereby represents and warrants to the Buyer that it is in compliance with all the terms and provisions set forth in the Repurchase Agreement (as amended hereby, if applicable) on their part to be observed or performed, and that no Default has occurred or is continuing, and hereby confirm and reaffirm the representations and warranties contained in Section 10 of the Repurchase Agreement. SECTION 4. Limited Effect. Except as expressly set forth in this Amendment No. 1, the Existing Repurchase Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. SECTION 5. Counterparts. This Amendment No. 1 may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. SECTION 6. GOVERNING LAW. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE CHOICE OF LAW PROVISIONS THEREOF. [SIGNATURE PAGE FOLLOWS] -5- 74 Execution Copy IN WITNESS WHEREOF, the parties have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. Seller MORGAN STANLEY MORTGAGE CAPITAL INC. - ------ 1585 Broadway New York, New York 10036 By: /s/ ----------------------------------- Name: Title: Buyer: ADVANTA NATIONAL BANK - ----- One Righter Parkway, Wilmington, Delaware 19803 By: /s/ ----------------------------------- Name: Title: Pledgors: - --------- ADVANTA MORTGAGE HOLDING COMPANY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By: /s/ ----------------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By: /s/ ----------------------------------- Name: Title: 75 ADVANTA MORTGAGE CORP. MIDATLANTIC Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDATLANTIC II Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: ADVANTA MORTGAGE CORP. MIDWEST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: ADVANTA MORTGAGE CORP. OF NEW JERSEY Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: -2- 76 ADVANTA MORTGAGE CORP. NORTHEAST Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: ADVANTA MORTGAGE CONDUIT SERVICES, INC. Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477 By:/s/ ----------------------------------- Name: Title: ADVANTA FINANCE CORP. 16875 West Bernardo San Diego, California 92127 By:/s/ ----------------------------------- Name: Title: -3- EX-10.X 9 SALES AND SERVICING AGREEMENT 1 Exhibit 10-X ================================================================================ SALE AND SERVICING AGREEMENT Dated as of September 25, 1998 among ADVANTA HOME EQUITY LOAN OWNER TRUST 1998-MS1 (Issuer) ADVANTA LOAN WAREHOUSE CORPORATION (Depositor) ADVANTA MORTGAGE CORP. USA (Servicer) ADVANTA BANK CORP., ADVANTA NATIONAL BANK, and ADVANTA MORTGAGE CORP. USA (Loan Originators) ADVANTA CORP., and ADVANTA MORTGAGE CORP. USA (Transfer Obligors) and BANKERS TRUST COMPANY OF CALIFORNIA, N.A. (Indenture Trustee) ADVANTA HOME EQUITY LOAN OWNER TRUST 1998-MS1 HOME EQUITY LOAN ASSET-BACKED NOTES ISSUABLE IN SERIES ================================================================================ 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS Section 1.01 Definitions.........................................................................................1 Section 1.02 Other Definitional Provisions......................................................................30 ARTICLE II CONVEYANCE OF THE TRUST ESTATE; ADDITIONAL NOTE PRINCIPAL BALANCES Section 2.01 Conveyance of the Trust Estate; Additional Note Principal Balances.................................31 Section 2.02 Ownership and Possession of Loan Files.............................................................33 Section 2.03 Books and Records; Intention of the Parties........................................................33 Section 2.04 Delivery of Loan Documents.........................................................................34 Section 2.05 Acceptance by the Indenture Trustee of the Loans; Certain Substitutions and Repurchases; Certification by the Custodian...................................................................36 Section 2.06 Conditions Precedent to Transfer Dates and Collateral Value Excess Dates...........................38 Section 2.07 Termination of Revolving Period....................................................................40 ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor....................................................40 Section 3.02 Representations and Warranties of the Loan Originators.............................................43 Section 3.03 Representations, Warranties and Covenants of the Servicer..........................................46 Section 3.04 Representations and Warranties of the Transfer Obligors............................................48 Section 3.05 Representations and Warranties Regarding Loans.....................................................50 Section 3.06 Purchase and Substitution..........................................................................62 Section 3.07 Dispositions.......................................................................................65 Section 3.08 Loan Originator Put; Servicer Call.................................................................68 Section 3.09 Modification of Underwriting Guidelines............................................................68
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ARTICLE IV ADMINISTRATION AND SERVICING OF THE LOANS Section 4.01 Duties of the Servicer.............................................................................69 Section 4.02 Collection of Certain Loan Payments................................................................71 Section 4.03 Subservicing Agreements Between Servicer and Subservicers..........................................71 Section 4.04 Successor Subservicers.............................................................................71 Section 4.05 Liability of Servicer..............................................................................72 Section 4.06 No Contractual Relationship Between Subservicer and Indenture Trustee or the Securityholders.......72 Section 4.07 Assumption or Termination of Subservicing Agreement by Successor Servicer..........................72 Section 4.08 Servicing Advances.................................................................................72 Section 4.09 Periodic Advances..................................................................................73 Section 4.10 Maintenance of Insurance...........................................................................73 Section 4.11 Due-on-Sale Clauses; Assumption and Substitution Agreements........................................74 Section 4.12 Realization Upon Defaulted Loans...................................................................75 Section 4.13 Release of Files...................................................................................76 Section 4.14 Access to Information..............................................................................77 Section 4.15 Release of Loan Files..............................................................................77 Section 4.16 Servicing Compensation.............................................................................78 Section 4.17 Statement as to Compliance and Financial Statements................................................78 Section 4.18 Independent Public Accountants' Servicing Report...................................................79 Section 4.19 ARMs...............................................................................................80 Section 4.20 Year 2000 Compliance...............................................................................80 Section 4.21 Inspections by the Majority Noteholders and the Indenture Trustee..................................80 Section 4.22 Errors and Omissions Insurance.....................................................................81 ARTICLE V ESTABLISHMENT OF TRUST ACCOUNTS; TRANSFER OBLIGATION Section 5.01 Collection Account and Distribution Account; Reserve Account.......................................81 Section 5.02 Payments to Securityholders........................................................................85 Section 5.03 Trust Accounts; Trust Account Property.............................................................86 Section 5.04 Advance Account....................................................................................89 Section 5.05 Transfer Obligation Account........................................................................89 Section 5.06 Transfer Obligation................................................................................90
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ARTICLE VI STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Statements.........................................................................................91 Section 6.02 Specification of Certain Tax Matters...............................................................94 Section 6.03 Valuation of Loans, Hedge Value and Retained Securities Value; Market Value Agent..................95 ARTICLE VII HEDGING Section 7.01 Hedging Instruments................................................................................96 ARTICLE VIII THE SERVICER Section 8.01 Indemnification; Third Party Claims................................................................97 Section 8.02 Merger or Consolidation of the Servicer............................................................99 Section 8.03 Limitation on Liability of the Servicer and Others.................................................99 Section 8.04 Servicer Not to Resign; Assignment................................................................100 Section 8.05 Relationship of Servicer to Issuer, Owner Trustee and the Indenture Trustee.......................100 Section 8.06 Servicer May Own Securities.......................................................................100 Section 8.07 Indemnification of the Indenture Trustee and Initial Noteholder...................................101 ARTICLE IX SERVICER EVENTS OF DEFAULT Section 9.01 Servicer Events of Default........................................................................101 Section 9.02 Appointment of Successor..........................................................................103 Section 9.03 Waiver of Defaults................................................................................104 Section 9.04 Accounting Upon Termination of Servicer...........................................................104 ARTICLE X TERMINATION, PUT OPTION Section 10.01 Termination.......................................................................................105 Section 10.02 Optional Termination..............................................................................105 Section 10.03 Notice of Termination.............................................................................106
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Section 10.04 Put Option.........................................................................................106 ARTICLE XI MISCELLANEOUS PROVISIONS Section 11.01 Acts of Securityholders.............................................................................106 Section 11.02 Amendment...........................................................................................106 Section 11.03 Recordation of Agreement............................................................................107 Section 11.04 Duration of Agreement...............................................................................107 Section 11.05 Governing Law.......................................................................................107 Section 11.06 Notices.............................................................................................108 Section 11.07 Severability of Provisions..........................................................................109 Section 11.08 No Partnership......................................................................................109 Section 11.09 Counterparts........................................................................................109 Section 11.10 Successors and Assigns..............................................................................109 Section 11.11 Headings............................................................................................109 Section 11.12 Actions of Securityholders..........................................................................109 Section 11.13 Non-Petition Agreement..............................................................................110 Section 11.14 Holders of the Certificates.........................................................................110 Section 11.15 Due Diligence Fees, Due Diligence ..................................................................110 Section 11.16 Holders of the Certificates.........................................................................111 EXHIBIT A Form of Notice of Additional Note Principal Balance EXHIBIT B Form of Servicer's Remittance Report to Trustee EXHIBIT C Form of S&SA Assignment EXHIBIT D Form of Reserve Account Release Instructions from Initial Noteholder
-iv- 6 This Sale and Servicing Agreement is entered into effective as of September 25, 1998, among ADVANTA HOME EQUITY LOAN OWNER TRUST 1998-MS1, a Delaware business trust (the "Issuer"), ADVANTA LOAN WAREHOUSE CORPORATION, a Delaware corporation ("ALWC"), as Depositor (in such capacity, the "Depositor"), ADVANTA MORTGAGE CORP. USA, a Delaware corporation ("AMCUSA"), as Servicer (in such capacity, the "Servicer"), AMC, ADVANTA NATIONAL BANK, a national banking association ("ANB"), and ADVANTA BANK CORP., a Utah industrial loan corporation ("ABC"), as Loan Originators (in such capacity, each a "Loan Originator", or collectively the "Loan Originators"), BANKERS TRUST COMPANY OF CALIFORNIA, N.A., a national banking association, as Indenture Trustee on behalf of the Noteholders (in such capacity, the "Indenture Trustee") and ADVANTA CORP., a Delaware corporation and collectively with AMCUSA, as Transfer Obligors (in such capacity, the "Transfer Obligors"). W I T N E S S E T H: In consideration of the mutual agreements herein contained, the Issuer, the Depositor, the Servicer, the Indenture Trustee, the Loan Originators and the Transfer Obligors hereby agree as follows for the benefit of each of them and for the benefit of the holders of Securities: ARTICLE I DEFINITIONS Section 1.01 Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Article. Unless otherwise specified, all calculations of interest described herein shall be made on the basis of a 360-day year and the actual number of days elapsed in each Accrual Period. ABC: Advanta Bank Corp. and any successor thereto. Accepted Servicing Practices: The Servicer's normal servicing practices in servicing and administering the loans for its own account, which in general will conform to the mortgage servicing practices of prudent mortgage lending institutions which service for their own account mortgage loans of the same type as the Loans in the jurisdictions in which the related Mortgaged Properties are located and will give due consideration to the Noteholders' reliance on the Servicer. Accrual Period: With respect to the Notes, the period commencing on and including the preceding Payment Date (or, in the case of the first Payment Date, the period commencing on and including the first Transfer Date) and ending on the day preceding the related Payment Date. -1- 7 Act or Securities Act: The Securities Act of 1933, as amended. Additional Note Principal Balance: (a) With respect to each Transfer Date, the aggregate Sales Prices of all Loans conveyed on such date. (b) With respect to each Collateral Value Excess Date, an amount equal to the Additional Note Principal Balance that the Issuer sells to the Initial Noteholder pursuant to the Note Purchase Agreement on such Collateral Value Excess Date. Adequately Capitalized: Shall mean the maintenance of capital ratios at or above the required minimum levels for such capital category under regulations promulgated pursuant to Section 1831(o) of Title 12 of the United States Code, as amended from time to time. Administration Agreement: The Administration Agreement, dated as of September 25, 1998, among the Issuer and Advanta Mortgage Corp. USA, as Administrator. Administrator: Advanta Mortgage Corp. USA or any successor in interest thereto, in its capacity as Administrator under the Administration Agreement. Advance Account: The account established and maintained pursuant to Section 5.04. Affiliate: With respect to any specified Person, any "affiliate" of such Person as such term is defined in the United States Bankruptcy Code in effect from time to time, and the terms "controlling" and "controlled" have corresponding meanings. Agreement: This Agreement, as the same may be amended and supplemented from time to time. Allocation Percentage: With respect to a Loan Originator or the Depositor and as of any date of determination, the fraction (expressed as a percentage) for which the numerator shall equal the aggregate Transfer Cutoff Date Principal Balance of all Loans conveyed by such party minus the aggregate Transfer Cutoff Date Principal Balance of all such Loans subsequently resold pursuant to a Disposition or repurchased or substituted, and for which the denominator shall equal the aggregate Transfer Cutoff Date Principal Balance of all Loans minus the aggregate Transfer Cutoff Date Principal Balance of all Loans subsequently resold pursuant to a Disposition or repurchased or substituted. ALTA: The American Land Title Association and its successors in interest. AMCUSA: Advanta Mortgage Corp. USA, and any successor thereto. ANB: Advanta National Bank, and any successor thereto. -2- 8 Appraised Value: The value of the Mortgaged Property as set forth in an appraisal in accordance with the Underwriting Guidelines, made in connection with the origination of the related Loan. ARM: Any Loan, the Loan Interest Rate with respect to which is subject to adjustment. Assignment: A LPA Assignment or S&SA Assignment. Assignment of Mortgage: With respect to any Loan, an assignment of the related Mortgage to Bankers Trust Company of California, N.A., as custodian or trustee under the applicable custodial agreement or trust agreement, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the assignment and pledge of such Mortgage. Balloon Loan: Any Loan for which the related monthly payments, other than the monthly payment due on the maturity date thereof, are computed on the basis of a period to full amortization ending on a date that is later than such maturity date. Basic Documents: This Agreement, the Administration Agreement, the Custodial Agreement, the Indenture, the Loan Purchase Agreement, the Note Purchase Agreement, the Trust Agreement, each Hedging Instrument and, as and when required to be executed and delivered, the Assignments. Borrower: The obligor or obligors on a Promissory Note. Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in New York City, California or in the city in which the corporate trust office of the Indenture Trustee is located or the city in which the Servicer's servicing operations are located are authorized or obligated by law or executive order to be closed. Certificateholder: A holder of a Trust Certificate. Change Date: The date on which the Loan Interest Rate of each ARM is subject to adjustment. Clean-up Call Date: The first Payment Date occurring on or after the end of the Revolving Period on which the Note Principal Balance declines to 10% or less of the aggregate Note Principal Balance as of the end of the Revolving Period. Closing Date: September 25, 1998, or with respect to a Series of Notes subsequent to the Series issued on such date, as set forth in the related Indenture Supplement. Code: The Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated by the United States Treasury thereunder. -3- 9 Collateral Percentage: With respect to each Loan and any Business Day, a percentage determined as follows: (a) with respect to all Loans other than Loans that are 30 or more days Delinquent and High LTV Loans, 96%; (b) with respect to all High LTV Loans, 94%; and (c) with respect to all Loans that are 30 or more days Delinquent, 90%. Collateral Value: With respect to each Loan and each Business Day, an amount equal to (a) the lesser of (1) the Collateral Percentage of the Market Value of such Loan, and (2) 100% of the Principal Balance of such Loan as of the most recent Determination Date, less (b) the aggregate unreimbursed Servicing Advances and Periodic Advances attributable to such Loan as of the most recent Determination Date; provided, however, that the Collateral Value shall be zero with respect to each Loan (1) that a Loan Originator is required to repurchase pursuant to Section 2.05 or Section 3.06 hereof or (2) which is a Loan of the type specified in subparagraphs (i)-(vii) hereof and which is in excess of the limits permitted under subparagraphs (i)-(vii) hereof, or (3) which remains pledged to the Indenture Trustee later than 180 days after its related Transfer Date, or (4) which has been released from the possession of the Custodian to the Servicer or any Loan Originator for a period in excess of 14 days, or (5) which is a Loan which is 30 or more days Delinquent and remains pledged to the Indenture Trustee hereunder upon removal of some or all of the Loans pledged to the Indenture Trustee after a Disposition; provided further however: (i) the aggregate Collateral Value of Loans which are Second Lien Loans may not exceed 20% of the aggregate Note Principal Balance; (ii) the aggregate Collateral Value of Loans which are Mixed Use Loans may not exceed 1% of the Maximum Note Principal Balance; (iii) the aggregate Collateral Value of Loans which are Balloon Loans may not exceed 25% of the Maximum Note Principal Balance; (iv) the aggregate Collateral Value of first lien Loans that are High LTV Loans may not exceed 10% of the Maximum Note Principal Balance; (v) the aggregate Collateral Value of Loans which are 30 to 59 days Delinquent as of the related Determination Date may not exceed 3% of the aggregate Note Principal Balance, provided, however that if the aggregate Collateral Value of all Loans that are 30 to 59 days Delinquent as of such date exceeds 3% of the aggregate Note Principal Balance as of such day, each Loan or portion thereof included in the portion of such aggregate Collateral Value in excess of such limit shall be deemed to be 60 to 89 days Delinquent; -4- 10 (vi) the aggregate Collateral Value of Loans which are 60 to 89 days Delinquent as of the related Determination Date may not exceed 1% of the aggregate Note Principal Balance, provided, however that if the aggregate Collateral Value of all Loans that are 60 to 89 days Delinquent as of such date exceed 1% of the aggregate Note Principal Balance as of such day, each Loan or portion thereof included in the portion of such aggregate Collateral Value in excess of such limit shall be deemed to be 90 or more days Delinquent; (vii) the aggregate Collateral Value of Loans which are 90 or more days Delinquent as of the most recent Determination Date (inclusive of all Loans that are deemed to be 90 or more days Delinquent pursuant to clause (vi) above and each Loan which is a Foreclosed Loan or which is an REO Property), may not exceed 0%; and (viii) the aggregate Collateral Value of Loans which are secured by a Manufactured Dwelling may not exceed 5% of the Maximum Note Principal Balance. Collateral Value Excess: With respect to any Business Day, an amount equal to the positive difference, if any, between (a) (i) the aggregate Collateral Value of all Loans in the Loan Pool on such Business Day, or (ii) in the event that a Performance Trigger shall have occurred and not been Deemed Cured, the aggregate Collateral Value of all Loans in the Loan Pool on such Business Day multiplied by 0.98 and (b) the Note Principal Balance on such Business Day. Collateral Value Excess Date: Any Business Day on which a Collateral Value Excess exists and on which the Initial Noteholder purchases Additional Note Principal Balance in respect thereof pursuant to Section 2.01 hereof. Collection Account: The account designated as such, established and maintained by the Servicer in accordance with Section 5.01(a)(1) hereof. Combined LTV or CLTV: With respect to any Loan, the ratio of (a) the outstanding principal balance on the related date of origination of (i) such Loan plus (ii) the loan constituting the first lien (if any) to (b) the Appraised Value of the Mortgaged Property, expressed as a percentage. Commission: The Securities and Exchange Commission. Custodial Agreement: The custodial agreement dated as of September 25, 1998, among the Issuer, the Servicer, the Indenture Trustee and the Custodian, providing for the retention of the Custodial Loan Files by the Custodian on behalf of the Indenture Trustee. Custodial Loan File: As defined in Section 2.04. -5- 11 Custodian: Any custodian pursuant to the Custodial Agreement, which custodian shall not be affiliated with the Servicer, the Loan Originators, the Depositor or any Subservicer. Bankers Trust Company of California, N.A., a national banking association, shall be the initial Custodian pursuant to the terms of the Custodial Agreement. Custodian Fee: If applicable, the quarterly fee payable to the Custodian, calculated and payable on every third Payment Date pursuant to Section 5.01(c)(3)(i) hereof. To the extent such fee is not paid pursuant to the Sale and Servicing Agreement, the Servicer shall pay such fee pursuant to Section 6 of the Custodial Agreement. Daily Interest Accrual Amount: With respect to each day, interest accrued at the Note Interest Rate with respect to such day on the Note Principal Balance as of the preceding Business Day after giving effect to all changes to the Note Principal Balance on or prior to such preceding Business Day. Deemed Cured: A Performance Trigger or Rapid Amortization Trigger shall be Deemed Cured when the condition that originally gave rise to such event has not continued for 20 consecutive days. Default: Any occurrence that is, or with notice or the lapse of time or both would become, an Event of Default. Defaulted Loan: With respect to any Determination Date, any Loan, including, without limitation, any Liquidated Loan with respect to which any of the following has occurred as of the end of the preceding Remittance Period: (a) foreclosure or similar proceedings have been commenced; or (b) the Servicer or any Subservicer has determined in good faith and in accordance with the servicing standard set forth in Section 4.01 that such Loan is in default or imminent default. Defective Loan: As defined in Section 3.06(a) hereof. Deleted Loan: A Loan replaced or to be replaced by one or more Qualified Substitute Loans. Delinquent: A Loan is "Delinquent" if any Monthly Payment due thereon is not made by the close of business on the day such Monthly Payment is required to be paid. A Loan is "30 days Delinquent" if any Monthly Payment due thereon has not been received by the close of business on the corresponding day of the month immediately succeeding the month in which such Monthly Payment was required to be paid or, if there is no such corresponding day (e.g., as when a 30-day month follows a 31-day month in which a payment was required to be paid on the 31st day of such month), then on the last day of such immediately succeeding month. The determination of whether a Loan is "60 days Delinquent," "90 days Delinquent", etc., shall be made in like manner. Delivery: When used with respect to Trust Account Property means: -6- 12 (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute "instruments" within the meaning of Section 9-105(1)(i) of the UCC and are susceptible of physical delivery (except with respect to Trust Account Property consisting of certificated securities (as defined in Section 8-102(a)(4) of the UCC)), physical delivery to the Indenture Trustee or its custodian endorsed to the Indenture Trustee or its custodian or endorsed in blank; (b) with respect to a certificated security (i) delivery of such certificated security endorsed to, or registered in the name of, the Indenture Trustee or endorsed in blank to a securities intermediary (as defined in Section 8-102(a)(14) of the UCC) and the making by such securities intermediary of appropriate entries in its records identifying such certificated securities as credited to the securities account (as defined in Section 8-501(a) of the UCC) of the Indenture Trustee, or (ii) by delivery thereof to a "clearing corporation" (as defined in Section 8-102(5) of the UCC) and the making by such clearing corporation of appropriate entries in its records crediting the securities account of a securities intermediary by the amount of such certificated security and the making by such securities intermediary of appropriate entries in its records identifying such certificated securities as credited to the securities account of the Indenture Trustee (all of the Trust Account Property described in Subsections (a) and (b), "Physical Property"); and, in any event, any such Physical Property in registered form shall be in the name of the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect the complete transfer of ownership of any such Trust Account Property (as defined herein) to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; (c) with respect to any security issued by the U.S. Treasury, FNMA or FHLMC that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations, the following procedures, all in accordance with applicable law, including applicable federal regulations and Articles 8 and 9 of the UCC: the making by a Federal Reserve Bank of an appropriate entry crediting such Trust Account property to an account of a securities intermediary that is also a "participant" pursuant to applicable federal regulations; the making by such securities intermediary of appropriate entries in its records crediting such book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations and Articles 8 and 9 of the UCC to the securities account of the Indenture Trustee; and such additional or alternative procedures as may hereafter become appropriate to effect complete transfer of ownership of any such Trust Account Property to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; and (d) with respect to any item of Trust Account Property that is an uncertificated security (as defined in Section 8-102(a)(18) of the UCC) and that is not -7- 13 governed by clause (c) above, registration in the records of the Issuer thereof in the name of the securities intermediary, and the making by such securities intermediary of appropriate entries in its records crediting such uncertificated certificates to the Indenture Trustee. Denomination: With respect to a Note, the portion of the Note Principal Balance represented by such Note as specified therein. Depositor: Advanta Loan Warehouse Corporation, a Delaware corporation, and any successors thereto. Determination Date: With respect to any Payment Date occurring on the 25th day of a month, the third Business Day immediately preceding such Payment Date, and with respect to any other Payment Date, as mutually agreed by the Servicer and the Noteholders. Disposition: A Securitization, Whole Loan Sale transaction, or other disposition of Loans, in each case by the Issuer. Disposition Agent: Morgan Stanley & Co. Incorporated and its successors and assigns acting at the direction of the Majority Noteholders or such other Person designated by the Issuer with the consent of the Majority Noteholders; provided that with respect to any Disposition in connection with an Event of Default, or during a Termination Period, the Disposition Agent shall be Morgan Stanley & Co. Incorporated. Disposition Participant: With respect to a Disposition, any "depositor" with respect to such Disposition, the Disposition Agent, the Majority Noteholders, the Issuer, the Servicer, the related trustee and the related custodian, any nationally recognized credit rating agency, the related underwriters, the related placement agent, the related credit enhancer, the related whole-loan purchaser, the related purchaser of securities and/or any other party necessary or, in the good faith belief of any of the foregoing, desirable to effect a Disposition. Disposition Proceeds: With respect to a Disposition, (x) the proceeds of the Disposition remitted to the Trust in respect of the Loans transferred on the date of and with respect to such Disposition, including without limitation, any cash and Retained Securities created in any related Securitization less all costs, fees and expenses incurred in connection with such Disposition, including, without limitation, all amounts deposited into any reserve funds upon the closing thereof plus or minus (y) the net positive or net negative value of all Hedging Instruments terminated in connection with such Disposition minus (z) all other amounts agreed upon in writing by the Initial Noteholder, the Trust and the Servicer. Distribution Account: The account established and maintained pursuant to Section 5.01(a)(2) hereof. Due Date: The day of the month on which the Monthly Payment is due from the Borrower with respect to a Loan. -8- 14 Due Diligence Fees: Shall have the meaning provided in Section 11.15 hereof. Eligible Account: At any time, an account which is: (i) maintained with a depository institution or trust company (A) the long-term debt obligations of which are at such time rated by each Rating Agency in one of their three highest long-term rating categories or (B) the short-term debt obligations of which are then rated by each Rating Agency in their highest short-term rating category; (ii) fully insured by either the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC; (iii) a trust account (which shall be a "segregated trust account") maintained with the corporate trust department of a federal or state chartered depository institution or trust company with trust powers and acting in its fiduciary capacity for the benefit of the Indenture Trustee and the Issuer, which depository institution or trust company shall have capital and surplus of not less than $50,000,000; or (iv) with the prior written consent of the Majority Noteholders, any other account. Eligible Servicer: (x) AMCUSA or (y) any other Person that (a) (i) has been designated as an approved seller-servicer by FNMA or FHLMC for first and second mortgage loans and (ii) has equity of not less than $15,000,000, as determined in accordance with GAAP or (b) any other Person to which the Majority Noteholders may consent in writing. Escrow Payments: With respect to any Loan, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, fire, hazard, liability and other insurance premiums, condominium charges, and any other payments required to be escrowed by the related Borrower with the lender pursuant to the Mortgage or any other document. Event of Default: Either a Servicer Event of Default or an Event of Default under the Indenture. Exchange Act: The Securities Exchange Act of 1934, as amended. FDIC: The Federal Deposit Insurance Corporation and any successor thereto. FHLMC: The Federal Home Loan Mortgage Corporation and any successor thereto. Fidelity Bond: As described in Section 4.22 hereof. Final Put Date: As defined in Section 10.05 of the Indenture. First Lien Loan: A Loan secured by the lien on the related Mortgaged Property, subject to no prior liens on such Mortgaged Property. FNMA: The Federal National Mortgage Association and any successor thereto. Foreclosed Loan: As of any Determination Date, any Loan that as of the end of the preceding Remittance Period has been discharged as a result of (i) the completion of foreclosure or comparable proceedings by the Servicer, on behalf of the Issuer; (ii) the -9- 15 acceptance of the deed or other evidence of title to the related Mortgaged Property in lieu of foreclosure or other comparable proceeding; or (iii) the acquisition of title to the related Mortgaged Property by operation of law. Foreclosure Property: Any real property securing a Foreclosed Loan that has been acquired by the Servicer on behalf of the Issuer through foreclosure, deed in lieu of foreclosure or similar proceedings in respect of the related Loan. GAAP: Generally accepted accounting principles as in effect in the United States. Gross Margin: With respect to each ARM, the fixed percentage amount set forth in the related Promissory Note. Hedge Funding Requirement: With respect to any day, all amounts required to be paid or delivered by the Issuer under any Hedging Instrument, whether in respect of payments thereunder or in order to meet margin, collateral or other requirements thereof. Such amounts shall be calculated by the Market Value Agent and noticed to the Indenture Trustee. Hedge Value: With respect to any Business Day and a specific Hedging Instrument, the positive amount, if any, that is equal to the amount that would be paid to the Issuer in consideration of an agreement between the Issuer and an unaffiliated third party, that would have the effect of preserving for the Issuer the net economic equivalent, as of such Business Day, of all payment and delivery requirements payable to and by the Issuer under such Hedging Instrument until the termination thereof, as determined by the Market Value Agent in accordance with Section 6.03 hereof. Hedging Counterparty: A Person (i) (A) the long-term and commercial paper or short-term deposit ratings of which are acceptable to the Majority Noteholders and (B) which shall agree in writing that, in the event that any of its long-term or commercial paper or short-term deposit ratings cease to be at or above the levels deemed acceptable by the Majority Noteholders, it shall secure its obligations in accordance with the reasonable request of the Majority Noteholders, (ii) that has entered into a Hedging Instrument and (iii) that is acceptable to the Majority Noteholders. Hedging Instrument: Any interest rate cap agreement, interest rate floor agreement, interest rate swap agreement or other interest rate hedging agreement entered into by the Issuer with a Hedging Counterparty, and which requires the Hedging Counterparty to deposit all amounts payable thereby directly to the Collection Account. Each Hedging Instrument shall meet the requirements set forth in Article VII hereof with respect thereto. High LTV Loans: First and second lien Loans with an LTV greater than 90% and less than or equal to 100%. -10- 16 Indenture: The Indenture dated as of September 25, 1998, together with the Indenture Supplement, between the Issuer and the Indenture Trustee. Indenture Supplement: With respect to a Series of Notes, the Indenture Supplement pursuant to which such Series of Notes was issued. Indenture Trustee: Bankers Trust Company of California, N.A., a national banking association, as Indenture Trustee under the Indenture, or any successor indenture trustee under the Indenture. Indenture Trustee Fee: As to any Payment Date, the amount payable to the Indenture Trustee pursuant to Section 5.01(c)(3)(i) equal to an amount as separately agreed in writing by the Indenture Trustee and the Servicer and with the approval of the Majority Noteholders, which approval shall not be unreasonably withheld. Independent: When used with respect to any specified Person, such Person (i) is in fact independent of the Loan Originators, the Transfer Obligors, the Servicer, the Depositor or any of their respective Affiliates, (ii) does not have any direct financial interest in, or any material indirect financial interest in, any of the Loan Originators, the Transfer Obligors, the Servicer, the Depositor or any of their respective Affiliates and (iii) is not connected with any of the Loan Originators, the Transfer Obligors, the Depositor, the Servicer or any of their respective Affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions; provided, however, that a Person shall not fail to be Independent of the Loan Originators, the Transfer Obligors, the Depositor, the Servicer or any of their respective Affiliates merely because such Person is the beneficial owner of 1% or less of any class of securities issued by the Loan Originators, the Transfer Obligors, the Depositor, the Servicer or any of their respective Affiliates, as the case may be. Independent Accountants: A firm of nationally recognized certified public accountants which is Independent. Index: With respect to each ARM, the index set forth in the related Promissory Note for the purpose of calculating the Loan Interest Rate thereon. Initial Noteholder: MSSFI. Insurance Policies: With respect to any Mortgaged Property or Loan, the insurance policies required pursuant to Section 4.10. Insurance Proceeds: With respect to any Mortgaged Property, all amounts collected in respect of Insurance Policies and not required either pursuant to applicable law or the related Loan Documents to be applied to the restoration of the related Mortgaged Property or paid to the related Borrower. Interest Carry-Forward Amount: With respect to any Payment Date, the excess, if any, of (A) the Interest Payment Amount for such Payment Date plus the Interest -11- 17 Carry-Forward Amount for the prior Payment Date over (B) the amount in respect of interest that is actually paid from the Distribution Account on such Payment Date in respect of the interest for such Payment Date. Interest Payment Amount: With respect to any Payment Date, the sum of the Daily Interest Accrual Amounts for all days in the related Accrual Period. LIBOR: With respect to each day, the rate for United States dollar deposits for one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m., London time, on the related LIBOR Determination Date. If such rate does not appear on such page (or such other page as may replace that page on that service, or if such service is no longer offered, such other service for displaying LIBOR or comparable rates as may be reasonably selected by the Initial Noteholder with the consent of the Issuer, such consent not to be unreasonably withheld), LIBOR for the applicable day will be the Reference Bank Rate. If no such rates can be obtained by the Initial Noteholder and no Reference Bank Rate is available, LIBOR will be LIBOR applicable to the first preceding day on which LIBOR has been determined in accordance with this definition. LIBOR Business Day: Any day on which banks are open for dealing in foreign currency and exchange in London and New York City. LIBOR Determination Date: With respect to each day that is a LIBOR Business Day, such LIBOR Business Day, and with respect to any day that is not a LIBOR Business Day, the LIBOR Business Day preceding such day, as determined by the Initial Noteholder. LIBOR Margin: With respect to each day, the percentage corresponding to the Unfunded Transfer Obligation Percentage as of such day, as set forth in the following table:
Unfunded Transfer Obligation Percentage: LIBOR Margin: >= 8.00% 0.60% >= 5.00%, but < 8.00% 1.10% < 5.00% 2.10%
provided that the LIBOR Margin shall be equal to 2.10% upon the occurrence of an Event of Default or for the period commencing on the Clean-up Call Date. Lien: With respect to any asset, (a) any mortgage, lien, pledge, charge, security interest, hypothecation, option or encumbrance of any kind in respect of such asset or (b) the interest of a vendor or lessor under any conditional sale agreement, financing lease or other title retention agreement relating to such asset. Lifetime Cap: The provision in the Promissory Note for each ARM which limits the maximum Loan Interest Rate over the life of such ARM. -12- 18 Liquidated Loan: As defined in Section 4.12(b). Liquidated Loan Losses: With respect to any Determination Date, the difference between (i) the aggregate Principal Balances as of such date of all Loans that became Liquidated Loans and (ii) all Liquidation Proceeds allocable to principal received prior to such date. Liquidation Proceeds: With respect to a Liquidated Loan, any cash amounts received in connection with the liquidation of such Liquidated Loan, whether through trustee's sale, foreclosure sale or other disposition, any cash amounts received in connection with the management of the Mortgaged Property from Defaulted Loans and any other amounts required to be deposited in the Collection Account pursuant to Section 5.01(b)(1) hereof, in each case other than Insurance Proceeds and Released Mortgaged Property Proceeds. Loan: Any loan sold to the Trust hereunder and pledged to the Indenture Trustee, which loan includes, without limitation, (i) a Promissory Note and related Mortgage and (ii) all right, title and interest of the related Loan Originator in and to the Mortgaged Property covered by such Mortgage. The term Loan shall be deemed to include the related Promissory Note, related Mortgage and related Foreclosure Property, if any. Loan Documents: With respect to a Loan, the documents comprising the Custodial Loan File for such Loan. Loan File: With respect to each Loan, the Custodial Loan File and the Servicer's Loan File. Loan Interest Rate: With respect to each Loan, the annual rate of interest borne by the related Promissory Note, as shown on the Loan Schedule, and, in the case of an ARM, as the same may be periodically adjusted in accordance with the terms of such Loan. Loan Originator: Each of Advanta National Bank, a national banking association, Advanta Mortgage Corp. USA, a Delaware corporation and Advanta Bank Corp., a Utah industrial loan corporation. "Loan Originators" shall mean all such entities, collectively, and any successors thereto. Loan Originator Put: The mandatory repurchase by a Loan Originator, at the option of the Majority Noteholders, of a Loan pursuant to Section 3.08(a) hereof. Loan Pool: As of any date of determination, the pool of all Loans conveyed to the Issuer pursuant to this Agreement on all Transfer Dates up to and including such date of determination, which Loans have not been released from the Lien of the Indenture pursuant to the terms of the Basic Documents, together with the rights and obligations of a holder thereof, and the payments thereon and proceeds therefrom received after the applicable Transfer Cutoff Date (other than interest thereon accrued prior to such Transfer Cutoff Date), as identified from time to time on the Loan Schedule. -13- 19 Loan Purchase Agreement: The Loan Purchase Agreement, among the Loan Originators (other than ANB and ABC), as sellers and the Depositor, as purchaser, dated as of September 25, 1998, and all supplements thereto. Loan Schedule: The schedule of Loans conveyed to the Issuer and delivered to the Initial Noteholder and the Indenture Trustee in the form of a computer-readable transmission specifying the following information (a) with respect to each non-Wet Funded Loan conveyed on such date: (i) the Loan identifying number, (ii) the Borrower's name, (iii) the street address, city, state and zip code of the related Mortgaged Property, (iv) the original Principal Balance (v) the Transfer Cutoff Date Principal Balance, (vi) the Loan Interest Rate as of the Transfer Cutoff Date, (vii) whether such Loan has a fixed Loan Interest Rate, or, if such Loan is an ARM, the Index thereof, the Gross Margin thereof, the Lifetime Cap, and the adjustment date of the Loan; (viii) the maturity date, (ix) whether such Loan is a First Lien Loan, a Second Lien Loan or a Loan that is more than 30 days Delinquent, (x) the date of the last Monthly Payment and the Due Date of such payment, (xi) whether such Loan is a Balloon Loan, (xii) whether such Loan is a Mixed Use Loan, (xiii) whether or not the loan has been assumed pursuant to an assumption agreement, (xiv) the related Loan Originator, (xv) the terms of any written instrument that modifies the Promissory Note or Mortgage (xvi) such other information as may be reasonably requested by the Majority Noteholders and the Indenture Trustee, and (xvii) that such Loan is not a Wet Funded Loan, (xviii) a code indicating whether such Loan was previously a Wet Funded Loan, (xix) the temporary Wet Funded Loan number, if applicable, (xx) the Wet Custodial File Delivery Date; and (b) with respect to each Wet Funded Loan conveyed on such date: (i) the temporary Loan identifying number or the Borrower's name, (ii) the original Principal Balance, and (iii) a code indicating that such Loan is a Wet Funded Loan, and the Wet Custodial File Delivery Date. Loan Schedule and Exceptions Report: The meaning set forth in the Custodial Agreement. Loan-to-Value Ratio or LTV: With respect to any Loan, the ratio of the original outstanding principal amount of the Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at origination or (b) if the Mortgaged Property was purchased within 12 months of the origination of the Loan, the purchase price of the Mortgaged Property. LPA Assignment: The Assignment of Loans from the Loan Originators (other than ABC and ANB) to the Depositor under the Loan Purchase Agreement. Majority Certificateholders: Has the meaning set forth in the Trust Agreement. Majority Noteholders: The holder or holders of in excess of 50% of the Note Principal Balance. In the event of the release of the Lien of the Indenture in accordance with the terms thereof, the Majority Noteholders shall mean the Majority Certificateholders. Manufactured Dwelling: Shall mean a fully attached manufactured home which is considered and treated as "real estate" under applicable state law. -14- 20 Market Value: The market value of such Loan as of any Business Day as determined by the Market Value Agent in accordance with Section 6.03 hereof. Market Value Agent: Morgan Stanley & Co. Incorporated and its successors in interest. Maturity Date: With respect to the Notes of a given Series, as set forth in the related Indenture Supplement or such later date as may be agreed in writing by the Majority Noteholders, provided that if the Majority Noteholders shall exercise the Put Option or the Disposition Agent shall effect a Disposition, the Maturity Date for the Notes of such Series shall be the earlier of the Put Date and the date of a Disposition. Maximum Note Principal Balance: For any Series of Notes, as set forth in the related Indenture Supplement, less the aggregate principal balance of the loans outstanding under the Warehouse Lines. Mixed Use Loan: A Loan secured by a Mortgaged Property that is used primarily for residential purposes, but which is also used for non-residential purposes. Monthly Payment: The scheduled monthly payment of principal and/or interest required to be made by a Borrower on the related Loan, as set forth in the related Promissory Note. Monthly Remittance Amount: With respect to each Remittance Period, the sum, without duplication, of (i) the aggregate interest portions of the payments (whether or not collected) becoming due on the Loans during the immediately preceding Remittance Period, (ii) the aggregate principal payments on the Loans collected by the Servicer during the immediately preceding Remittance Period, (iii) the aggregate of amounts deposited into the Collection Account pursuant to Section 5.01(b)(1)(ii) through 5.01(b)(1)(vi) and Section 5.01(b)(1)(xi) during the immediately preceding Remittance Period and (iv) any Termination Price, Periodic Advances, cash Disposition Proceeds and payments by Hedging Counterparties received on or prior to the related Determination Date. Moody's: Moody's Investors Service, Inc., or any successor thereto. Mortgage: With respect to any Loan, the mortgage, deed of trust or other instrument securing the related Promissory Note, which creates a first or second lien on the fee in real property and/or a first or second lien on the leasehold estate in real property securing the Promissory Note and the assignment of rents and leases related thereto. Mortgaged Property: With respect to a Loan, the related Borrower's fee and/or leasehold interest in the real property (and/or all improvements, buildings, fixtures, building equipment and personal property thereon (to the extent applicable) and all additions, alterations and replacements made at any time with respect to the foregoing) and all other collateral securing repayment of the debt evidenced by the related Promissory Note. -15- 21 MSSFI: Morgan Stanley Securitization Funding Inc. Net Liquidation Proceeds: With respect to any Payment Date, Liquidation Proceeds received during the prior Remittance Period, net of any reimbursements to the Servicer made from such amounts for any unreimbursed Servicing Compensation, Servicing Advances and Periodic Advances (including Nonrecoverable Servicing Advances and Nonrecoverable Periodic Advances) made and any other fees and expenses paid in connection with the foreclosure, conservation and liquidation of the related Liquidated Loans or Foreclosure Properties pursuant to Section 4.12 hereof. Net Loan Interest Rate: With respect to each Loan, the related Loan Interest Rate, less the rate at which the Servicing Fee is calculated. Net Loan Losses: With respect to any Defaulted Loan that is subject to a modification pursuant to Section 4.02 hereof, an amount equal to the portion of the Principal Balance, if any, released in connection with such modification. Nonrecoverable Periodic Advance: Any portion of a Periodic Advance previously made or proposed to be made in respect of a Loan which has not been previously reimbursed to the Servicer and which, in the good faith judgment of the Servicer, will not, or in the case of a proposed Periodic Advance would not, be ultimately recoverable from Liquidation Proceeds or other recoveries in respect of the related Loan. The determination by the Servicer that (i) it has made a Nonrecoverable Periodic Advance or (ii) that any proposed advance, if made, would constitute a Nonrecoverable Periodic Advance, shall be evidenced by a certificate of a Servicing Officer promptly delivered to the Initial Noteholder detailing the reasons for such determination. Nonrecoverable Servicing Advance: With respect to any Loan, any Foreclosure Property, (a) any Servicing Advance previously made and not reimbursed from late collections, Liquidation Proceeds, Insurance Proceeds or the Released Mortgaged Property Proceeds or (b) a Servicing Advance proposed to be made in respect of a Loan or Foreclosure Property either of which, in the good faith business judgment of the Servicer, as evidenced by certificate of a Servicing Officer delivered to the Initial Noteholder, would not be ultimately recoverable. Note: The meaning assigned thereto in the Indenture. Noteholder: The meaning assigned thereto in the Indenture. Note Interest Rate: Interest will accrue on the Notes on each day at a per annum interest rate equal to LIBOR for the related LIBOR Determination Date plus the LIBOR Margin for such day. Note Principal Balance: With respect to the Notes, as of any date of determination (a) the sum of the Additional Note Principal Balances of all Notes purchased on -16- 22 or prior to such date pursuant to the Note Purchase Agreement less (b) all amounts previously distributed in respect of principal of the Notes prior to such day. Note Purchase Agreement: The Note Purchase Agreement among MSSFI, the Issuer and the Depositor, dated as of September 25, 1998. Note Redemption Amount: As of any Determination Date, an amount without duplication equal to the sum of (i) then outstanding Note Principal Balance plus all accrued and unpaid interest thereon as of the related Payment Date, (ii) any Trust Fees and Expenses due and unpaid on the related Payment Date, (iii) any Servicing Advance Reimbursement Amount as of such Determination Date, (iv) any Nonrecoverable Periodic Advances as of such Determination Date, and (v) all amounts due to Hedging Counterparties in respect of the termination of all related Hedging Instruments. Officer's Certificate: A certificate signed by a Responsible Officer of the Depositor, ANB, ABC, the Servicer or the Issuer, in each case, as required by this Agreement. Opinion of Counsel: A written opinion of counsel who may be employed by the Servicer, the Depositor, ANB, ABC or any of their respective Affiliates. Overcollateralization Shortfall: With respect to any Payment Date, an amount equal to the positive difference, if any, between (a) the Note Principal Balance on such Payment Date and (b) (i) the aggregate Collateral Value of all Loans in the Loan Pool as of the last day of the related Remittance Period, or (ii) in the event that a Performance Trigger shall have occurred and not been Deemed Cured, the aggregate Collateral Value of all Loans in the Loan Pool as of the last day of the related Remittance Period multiplied by 0.98; provided, however, that, in either case, on (A) the Maturity Date, (B) the occurrence of a Rapid Amortization Trigger, (C) the Payment Date on which the Trust is to be terminated pursuant to Section 10.02 hereof, the Overcollateralization Shortfall shall be equal to the Note Principal Balance. Notwithstanding anything to the contrary herein, in no event shall the Overcollateralization Shortfall, with respect to any Payment Date, exceed the Note Principal Balance as of such date. With the written consent of the Majority Noteholders in their sole discretion, if as of such Payment Date, no Rapid Amortization Trigger or Default under this Agreement or the Indenture shall be in effect, the Overcollateralization Shortfall shall be reduced (but in no event to an amount below zero) by all or any portion of the aggregate Hedge Value as of such Payment Date as the Majority Noteholders may, in their sole discretion, designate in writing. Owner Trustee: means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as Owner Trustee under this Agreement, and any successor owner trustee under the Trust Agreement. Owner Trustee Fee: The annual fee of $2,500.00 payable in equal monthly installments to the Servicer pursuant to Section 5.01(c)(3)(i) which shall in turn pay, in one -17- 23 lump sum, such $2,500.00 to the Owner Trustee on the Scheduled Payment Date occurring in September each year during the term of this Agreement, commencing in September, 1999. Payment Date: The 25th day of each calendar month commencing on the first such 25th day to occur after the first Transfer Date, or if any such day is not a Business Day, the first Business Day immediately following such day, and any day a Loan is sold pursuant to the terms hereof. From time to time, the Majority Noteholders and the Issuer may agree, upon written notice to the Owner Trustee and the Indenture Trustee, to additional Payment Dates in accordance with Section 5.01(c)(4). Payment Period: With respect to each ARM, the period commencing on the first day of each calendar year and ending on the last day of such calendar year. Payment Closing Date: With respect to each ARM, the first day of the calendar year or, if such day is not a Business Day, the next succeeding Business Day. Payment Statement: As defined in Section 6.01(b) hereof. Percentage Interest: As defined in the Trust Agreement. Performance Trigger: With respect to any Determination Date, a Performance Trigger shall mean the existence of one or more of the following conditions as of such Determination Date: (i) the aggregate Principal Balance of all Loans that are 30 to 59 days Delinquent as of such Determination Date divided by the Pool Principal Balance as of such Determination Date is greater than 5% provided, however, that a Performance Trigger shall not occur if such percentage is reduced to less than 3% within 15 Business Days of such Determination Date as the result of the exercise of a Servicer Call; (ii) the aggregate Principal Balance of all Loans that are 60 to 89 days Delinquent as of such Determination Date divided by the Pool Principal Balance as of such Determination Date is greater than 2%; provided, however, that a Performance Trigger shall not occur if such percentage is reduced to less than 1% within 15 Business Days of such Determination Date as the result of the exercise of a Servicer Call; (iii) the aggregate Liquidated Loan Losses for the three calendar month period preceding such Business Day divided by (y) the average Pool Principal Balance of the Loans during such three calendar month period is greater than 0.10%; and A Performance Trigger shall continue to exist until Deemed Cured. -18- 24 Periodic Advance: The aggregate of the advances made by the Servicer on any Payment Date pursuant to Section 4.09, the amount of any such advances being equal to the total of the interest portion of all Monthly Payments (net of the related Servicing Fee) on the Loans, that (x) were Delinquent as of the related Remittance Date and (y) have not been determined by the Servicer to be Nonrecoverable Periodic Advances; provided, that the aggregate amount payable by the Servicer on any Payment Date as a Periodic Advance shall not exceed the positive difference, if any, between (x) the funds on deposit in the Distribution Account and (y) the total amount distributable by the Indenture Trustee on such Payment Date pursuant to Section 5.01(c)(3)(i)-(iii). Permitted Investments: Each of the following: (1) obligations of, or guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof if backed by the full faith and credit of the United States; (2) direct U.S. government obligations or obligations of a federal agency that are backed by the full faith and credit of the U.S. government or by FNMA or FHLMC which are subject to a repurchase agreement that satisfies the following criteria: (A) it must be between the Indenture Trustee and either (x) primary dealers on the Federal Reserve reporting dealer list which are rated in one of the three highest categories for long-term unsecured debt obligations by each Rating Agency or (y) banks rated in one of the three highest categories for long-term unsecured debt obligations by each Rating Agency; and (B) it must be in writing and include the following terms: (a) a term no greater than 60 days for any repurchase transaction; (b) the collateral must be delivered to the Indenture Trustee or a third party custodian acting as agent for the Indenture Trustee by appropriate book entries and confirmation statements, and must have been delivered before or simultaneously with payment (i.e., perfection by possession of certificated securities); and (c) the securities sold thereunder must be valued weekly, marked-to-market at current market price plus accrued interest and the value of the collateral must be equal to at least 104% of the amount of cash transferred by or on behalf of the Indenture Trustee under the repurchase agreement and, if the value of the securities held as collateral declines to an amount below 104% of the cash transferred by or on behalf of the Indenture Trustee plus accrued interest (i.e., a margin call), then additional cash and/or acceptable securities must be transferred to the Indenture Trustee to satisfy such margin call; provided, however, that if the securities used as collateral are obligations of FNMA or FHLMC, then the value of the securities held as collateral must equal at least 105% of the cash transferred by or on behalf of the Indenture Trustee under such repurchase agreement; (3) certificates of deposit, time deposits and bankers acceptances of any United States depository institution or trust company incorporated under the laws of the United States or any state thereof, including the Indenture Trustee; provided, however, that the debt obligations of such depository institution or trust company at the date of -19- 25 the acquisition thereof have been rated by each Rating Agency in one of its three highest long-term rating categories; (4) deposits, including deposits with the Indenture Trustee, that are fully insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC; (5) commercial paper of any corporation incorporated under the laws of the United States or any state thereof, including corporate Affiliates of the Indenture Trustee, which at the time the investment is made is rated by each Rating Agency in its highest short-term rating category and which has an original maturity of not more than 365 days; (6) debt obligations rated by each Rating Agency at the time the investment is made in one of its three highest long-term rating categories (or those investments specified in paragraph (3) above with depository institutions which have debt obligations rated by each Rating Agency in one of its three highest long-term rating categories); (7) money market funds that are rated by each Rating Agency at the time the investment is made in one of its three highest long-term rating categories; provided, that money market funds that allow for withdrawals on demand shall be deemed to satisfy any maturity requirements for Permitted Investments set forth in this Agreement; (8) debt obligations of the Initial Purchaser or its Affiliates; and (9) any other investments that the Majority Noteholders may consent to in writing prior to the time at which such investment is made; provided, however, that no instrument described in foregoing subparagraphs (1) through (8) shall evidence either the right to receive (a) only interest with respect to the obligations underlying such instrument or (b) both principal and interest payments derived from obligations underlying such instrument where the interest and principal payments with respect to such instrument provide a yield to maturity at par greater than 120% of the yield to maturity at par of the underlying obligations; and provided, further, that no instrument described in the foregoing subparagraphs may be purchased at a price greater than par if such instrument may be prepaid or called at a price less than its purchase price prior to its stated maturity. Each reference in this definition of "Permitted Investments" to the Rating Agency shall be construed, in the case of each subparagraph above referring to each Rating Agency, as a reference to each of S&P and Moody's. Person: Any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, national banking association, unincorporated organization or government or any agency or political subdivision thereof. -20- 26 Physical Property: As defined in clause (b) of the definition of "Delivery" above. PMI Policy or Primary Insurance Policy: A policy of primary mortgage guaranty insurance issued by a Qualified Insurer. Pool Principal Balance: With respect to any Determination Date, the aggregate Principal Balances of the Loans as of the end of the preceding Remittance Period; provided, however, that the Pool Principal Balance on any Payment Date on which the Termination Price is to be paid to Noteholders will be deemed to have been equal to zero as of such date. Prepaid Installment: With respect to any Loan, any installment of principal thereof and interest thereon received prior to the scheduled due date for such installment, intended by the Borrower as an early payment thereof and not as a Prepayment with respect to such Loan. Prepayment: Any payment of principal of a Loan which is received by the Servicer in advance of the scheduled due date for the payment of such principal (other than the principal portion of any Prepaid Installment), and the proceeds of any Insurance Policy which are to be applied as a payment of principal on the related Loan shall be deemed to be Prepayments for all purposes of this Agreement. Preservation Expenses: Expenditures made by the Servicer in connection with a foreclosed Loan prior to the liquidation thereof, including, without limitation, expenditures for real estate property taxes, hazard insurance premiums, property restoration or preservation. Primary Parcel: With respect to any Mortgaged Property with multiple parcels, the parcel having the greatest Appraised Value. Principal Balance: With respect to any Loan or related Foreclosure Property, (i) at the Transfer Cutoff Date, the Transfer Cutoff Date Principal Balance and (ii) with respect to any other Determination Date, the outstanding unpaid principal balance of the Loan as of the end of the preceding Remittance Period (after giving effect to all payments received thereon and the allocation of any Net Loan Losses with respect thereto for a Defaulted Loan prior to such day); provided, however, that any Liquidated Loan shall be deemed to have a Principal Balance of zero. Principal Carry-Forward Amount: With respect to any Payment Date, the excess, if any, of (A) the Overcollateralization Shortfall for such Payment Date plus the Principal Carry-Forward Amount for the prior Payment Date over (B) the amount in respect of principal that is actually distributed from the Distribution Account on such Payment Date. Proceeding: Means any suit in equity, action at law or other judicial or administrative proceeding. -21- 27 Promissory Note: With respect to a Loan, the original executed promissory note or other evidence of the indebtedness of the related Borrower or Borrowers. Purchase Price: With respect to a Loan, the Principal Balance thereof as of the date of purchase or repurchase, plus all accrued and unpaid interest on such Loan to and including the date of purchase or repurchase computed at the applicable Loan Interest Rate, plus the amount of any unreimbursed Servicing Advances and any unreimbursed Periodic Advances made by the Servicer with respect to such Loan (after deducting therefrom any amounts received in respect of such purchased or repurchased Loan and being held in the Collection Account for future distribution to the extent such amounts represent recoveries of principal not yet applied to reduce the related Principal Balance or interest (net of the Servicing Fee) for the period from and after the date of repurchase). The Purchase Price shall be (i) increased by the net negative value or (ii) decreased by the net positive value of all Hedging Instruments terminated with respect to the purchase of such Loan. To the extent the Servicer does not reimburse itself for amounts, if any, in respect of the Servicing Advance Reimbursement Amount or Nonrecoverable Periodic Advances pursuant to Section 5.01(c)(1) hereof, with respect to such Loan, the Purchase Price shall be reduced by such amounts. Put/Call Loan: Any (i) Loan that has become 30 or more days Delinquent, (ii) Defaulted Loan, (iii) Loan that has been in default for a period of 30 days or more (other than a Loan referred to in clause (i) hereof), (iv) Loan that does not meet criteria established by independent rating agencies or surety agency conditions for Dispositions which criteria have been established at the related Transfer Date and may be modified only to match changed criteria of independent rating agencies or surety agents, or (v) Loan that is inconsistent with the intended tax status of the Securitization. Put Date: The date on which the Notes are to be purchased by the Issuer as a result of the exercise of the Put Option. Put Option: The right of the Majority Noteholders to require the Issuer to repurchase the Notes in accordance with Section 10.04 of the Indenture. Qualified Insurer: An insurance company duly qualified as such under the laws of the states in which the Mortgaged Property is located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, and approved as an insurer pursuant to the applicable Underwriting Guidelines. Qualified Substitute Loan: A Loan or Loans substituted for a Deleted Loan pursuant to Section 3.06 hereof, which (i) has or have been approved in writing by the Majority Noteholders and (ii) complies or comply as of the date of substitution with each representation and warranty set forth in Section 3.05 hereof and is or are not 30 or more days Delinquent as of the date of substitution for such Deleted Loan or Loans. Rapid Amortization Trigger: With respect to any Determination Date, a Rapid Amortization Trigger shall mean the existence of one or more of the following conditions as of such Determination Date: -22- 28 (i) the aggregate Principal Balance of all Loans that are 30 to 59 days Delinquent as of such Determination Date divided by the Pool Principal Balance as of such Determination Date is greater than 6%; provided, however, that a Rapid Amortization Trigger shall not occur if such percentage is reduced to less than 3% within 15 Business Days of such Determination Date as the result of the exercise of a Servicer Call; (ii) the aggregate Principal Balance of all Loans that are 60 to 89 days Delinquent as of such Determination Date divided by the Pool Principal Balance as of such Determination Date is greater than 3%; provided, however, that a Rapid Amortization Trigger shall not occur if such percentage is reduced to less than 1% within 15 Business Days of such Determination Date as the result of the exercise of a Servicer Call; (iii) (x) the aggregate Liquidated Loan Losses for the three calendar month period preceding such Determination Date divided by (y) the average Pool Principal Balance of the Loans during such three calendar month period is greater than 0.25%; A Rapid Amortization Trigger shall continue to exist until it is Deemed Cured. Rating Agencies: S&P and Moody's or such other nationally recognized credit rating agencies as may from time to time be designated in writing by the Majority Noteholders in their sole discretion, with the approval of the Issuer, which approval shall not be unreasonably withheld. Record Date: With respect to each Payment Date, the close of business of the preceding Remittance Period. Reference Bank Rate: With respect to any day, the arithmetic mean (rounded upwards, if necessary, to the nearest one sixteenth of a percent) of the offered rates for United States dollar deposits for one month that are offered by the Reference Banks not affiliated with Morgan Stanley & Co. Incorporated as of 11:00 a.m., New York City time, on the related LIBOR Determination Date to prime banks in the London interbank market for a period of one month in amounts approximately equal to the Note Principal Balance, provided that at least two such Reference Banks provide such rate. If fewer than two offered rates appear, the Reference Bank Rate will be arithmetic mean of the rates quoted by one or more major banks in New York City, selected by the Majority Noteholders, as of 11:00 a.m., New York City time, on such day for loans in U.S. Dollars to leading European Banks for a period of one month in amounts approximately equal to the outstanding Note Principal Balance. If no such quotation can be obtained, the Reference Bank Rate will be the Reference Bank Rate applicable to the preceding day. Reference Banks: Three money center banks selected by the Initial Noteholder with the approval of the Issuer, which approval shall not be unreasonably withheld. -23- 29 Released Mortgaged Property Proceeds: With respect to any Loan, proceeds received by the Servicer in connection with (i) a taking of an entire Mortgaged Property by exercise of the power of eminent domain or condemnation or (ii) any release of part of the Mortgaged Property from the lien of the related Mortgage, whether by partial condemnation, sale or otherwise; which proceeds in either case are not released to the Borrower in accordance with applicable law, the servicing standard set forth in Section 4.01 or this Agreement. Remittance Date: The 18th calendar day of each month, if such date is not a Business Day, the first Business Day immediately following such day. Remittance Period: With respect to any Determination Date or Payment Date, the calendar month immediately preceding such Determination Date or Payment Date, as the case may be. REO Property: Real property (including all improvements and fixtures on the Mortgaged Property) acquired through foreclosure sale or by deed in lieu of foreclosure or otherwise. Reserve Account: The account established and maintained pursuant to Section 5.01(a)(3) hereof. Reserve Account Right: The rights of the Depositor, ANB and ABC, respectively, to receive releases from the Reserve Account in accordance with the terms hereof. Responsible Officer: When used with respect to the Indenture Trustee or Custodian, any officer within the corporate trust office of such Person, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of such Person customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to the Issuer, Depositor or any officer of the Owner Trustee who is authorized to act for the Owner Trustee in matters relating to the Issuer or Depositor and who is identified on the list of Authorized Officers delivered by the Administrator to the Owner Trustee on the date hereof (as such list may be modified or supplemented from time to time thereafter) and, so long as the Administration Agreement is in effect, any Vice President or more senior officer of the Administrator who is authorized to act for the Administrator in matters relating to the Issuer or Depositor and to be acted upon by the Administrator pursuant to the Administration Agreement and who is identified on the list of Responsible Officers delivered by the Administrator to the Owner Trustee on the date hereof (as such list may be modified or supplemented from time to time thereafter). When used with respect to the Depositor, the Loan Originators, the Transfer Obligors or the Servicer, the President, any Vice President, or the Treasurer. -24- 30 Retained Securities: With respect to a Securitization, any subordinated securities issued or expected to be issued, or excess collateral value retained or expected to be retained, in connection therewith to the extent the Depositor, ANB or ABC or an Affiliate thereof decides in its sole discretion to retain, instead of sell, such securities. Retained Securities Value: With respect to any Business Day and a Retained Security, the market value thereof as determined by the Market Value Agent in accordance with Section 6.03(d) hereof. Revolving Period: With respect to a Note of a given Series, the period commencing on the Closing Date and ending on the earlier of (i) the date on which the Revolving Period is terminated pursuant to Section 2.07 and (ii) the date set forth in the related Indenture Supplement. Sales Price: The sum of the Collateral Values with respect to each Loan conveyed on such Transfer Date, subtracting any Overcollateralization Shortfall as of such date, after giving effect to all payments received in respect of principal thereon prior to the Transfer Cutoff Date as determined by the Servicer. SAS 70: Relevant Statement on Auditing Standards issued by the Auditing Standards Board providing guidance on the factors an Independent Accountant should consider when auditing the financial reports of an entity that uses a service organization to process certain transactions. S&SA Assignment: An Assignment, in the form of Exhibit C hereto, of Loans and other property from the Depositor, ANB and ABC, respectively, to the Issuer pursuant to this Agreement. Second Lien Loan: A Loan secured by the lien on the Mortgaged Property, subject to one Superior Lien on such Mortgaged Property. Securities: The Notes or Trust Certificates. Securitization: A sale or transfer of loans, including Loans, to an Affiliate of the Depositor (other than the Loan Originators, the Depositor, Advanta Mortgage Holding Company, a Delaware corporation, Advanta Mortgage Corp. Midatlantic, a Pennsylvania corporation, Advanta Mortgage Corp. Midatlantic II, a Pennsylvania corporation, Advanta Mortgage Corp. Midwest, a Pennsylvania corporation, Advanta Mortgage Corp. of New Jersey, a New Jersey corporation, Advanta Mortgage Corp. Northeast, a New York corporation, Advanta Mortgage Conduit Services, Inc., a Delaware corporation and Advanta Finance Corp., a Nevada corporation) in order to effect one or a series of structured-finance securitization transactions, including but not limited to transactions involving the issuance of securities which may be treated for federal income tax purposes as indebtedness of Advanta Corp. or one or more of its wholly-owned subsidiaries. Securityholder: Any Noteholder or Certificateholder. -25- 31 Series: With respect to a Note, the related series of which such Note is a part, as specified in the Indenture Supplement. There shall be only one Series of Notes at any given time. Servicer: Advanta Mortgage Corp. USA, in its capacity as the master servicer hereunder, or any successor appointed as herein provided. Servicer Call: The optional repurchase by the Servicer of a Loan pursuant to Section 3.08(b) hereof. Servicer Event of Default: As described in Section 9.01 hereof. Servicer's Fiscal Year: January 1st through December 31st of each year. Servicer's Loan File: With respect to each Loan, the file held by the Servicer, consisting of all documents (or electronic images thereof) relating to such Loan, including, without limitation, copies of all of the Loan Documents included in the related Custodial Loan File. Servicer's Remittance Report: A report prepared and computed by the Servicer in substantially the form of Exhibit B attached hereto. Servicing Advance Reimbursement Amount: With respect to any Determination Date, the amount of any Servicing Advances that have not been reimbursed as of such date, including Nonrecoverable Servicing Advances. Servicing Advances: As defined in Section 4.08 hereof. Servicing Compensation: The Servicing Fee and other amounts to which the Servicer is entitled pursuant to Section 4.16 hereof. Servicing Fee: As to each Loan (including any Loan that has been foreclosed and has become a Foreclosure Property, but excluding any Liquidated Loan), the fee payable monthly to the Servicer on each Payment Date, which shall be the product of 0.50% (50 basis points) and the Principal Balance of such Loan as of the beginning of the immediately preceding Remittance Period, divided by 12. The Servicing Fee includes any servicing fees owed or payable to any Subservicer, which fees shall be paid from the Servicing Fee. Servicing Officer: Any officer of the Servicer or Subservicer involved in, or responsible for, the administration and servicing of the Loans whose name and specimen signature appears on a list of servicing officers annexed to an Officer's Certificate furnished by the Servicer or the Subservicer, respectively, on the date hereof to the Issuer and the Indenture Trustee, on behalf of the Noteholders, as such list may from time to time be amended. S&P: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. -26- 32 State: Means any one of the States of the United States of America or the District of Columbia. Subservicer: Any Person with which the Servicer has entered into a Subservicing Agreement and which is an Eligible Servicer and satisfies any requirements set forth in Section 4.03 hereof in respect of the qualifications of a Subservicer. Subservicing Account: An account established by a Subservicer pursuant to a Subservicing Agreement, which account must be an Eligible Account. Subservicing Agreement: Any agreement between the Servicer and any Subservicer relating to subservicing and/or administration of any or all Loans as provided in Section 4.03 hereof, copies of which shall be made available, along with any modifications thereto, to the Initial Noteholder. Substitution Adjustment: As to any date on which a substitution occurs pursuant to Section 2.05 or Section 3.06 hereof, the amount, if any, by which (a) the sum of the aggregate principal balance (after application of principal payments received on or before the date of substitution) of any Qualified Substitute Loans as of the date of substitution, plus any accrued and unpaid interest thereon to the date of substitution, is less than (b) the sum of the aggregate of the Principal Balances, together with accrued and unpaid interest thereon to the date of substitution, of the related Deleted Loans. Superior Lien: With respect to any Second Lien Loan, the mortgage loan(s) having a superior priority lien on the related Mortgaged Property. Termination Event: Shall have the meaning set forth in Section 5.17 of the Indenture. Termination Period: Shall be the 30 day period commencing with the occurrence of a Termination Event or such other longer period as the Majority Noteholders may approve. Termination Price: As of any Determination Date, an amount without duplication equal to the greater of (A) the Note Redemption Amount and (B) the sum of (i) the Principal Balance of each Loan included in the Trust as of the end of the preceding Remittance Period; (ii) all unpaid interest accrued on the Principal Balance of each such Loan at the related Net Loan Interest Rate to the end of the preceding Remittance Period; and (iii) the aggregate fair market value of each Foreclosure Property included in the Trust as of the end of the preceding Remittance Period, as determined by an Independent appraiser acceptable to the Majority Noteholders as of a date not more than 30 days prior to such Payment Date. Transfer Cutoff Date: With respect to each Loan, the first day of the month in which the Transfer Date with respect to such Loan occurs. -27- 33 Transfer Cutoff Date Principal Balance: As to each Loan, its Principal Balance as of the opening of business on the Transfer Cutoff Date (after giving effect to any payments received on the Loan before the Transfer Cutoff Date). Transfer Date: With respect to each Loan, the day such Loan is sold to the Depositor by the Loan Originators (other than ANB and ABC) pursuant to the Loan Purchase Agreement and to the Issuer by the Depositor and ANB and ABC, as applicable, pursuant to Section 2.01 hereof. Transfer Obligation: The obligation of the Transfer Obligors under Section 5.06 hereof to make certain payments in connection with Dispositions and other related matters. Transfer Obligation Account: The account designated as such, established and maintained pursuant to Section 5.05 hereof. Transfer Obligation Target Amount: With respect to any Payment Date or Collateral Value Excess Date, as applicable, the cumulative total of all withdrawals pursuant to Section 5.05(e), 5.05(f), 5.05(g), and 5.05(h) hereof from the Transfer Obligation Account to but not including such Payment Date minus any amount withdrawn from the Transfer Obligation Account to return to the Transfer Obligors pursuant to Section 5.05(i)(i). Transfer Obligors: Advanta Corp., a Delaware corporation, and Advanta Mortgage Corp. USA, a Delaware Corporation, jointly and severally. Treasury Regulations: The regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. Trust: Advanta Home Equity Loan Owner Trust 1998-MS1, the Delaware business trust created pursuant to the Trust Agreement. Trust Agreement: The Trust Agreement dated as of September 25, 1998 among the Depositor and the Owner Trustee. Trust Account Property: The Trust Accounts, all amounts and investments held from time to time in the Trust Accounts and all proceeds of the foregoing. Trust Accounts: The Distribution Account, the Collection Account, the Transfer Obligation Account and the Reserve Account. Trust Certificate: The meaning assigned thereto in the Trust Agreement. Trust Estate: Shall mean the assets subject to this Agreement, the Trust Agreement and the Indenture and assigned to the Trust, which assets consist of: (i) such Loans as from time to time are subject to this Agreement as listed in the Loan Schedule, as the -28- 34 same may be amended or supplemented on each Transfer Date, by the removal of Deleted Loans and by the addition of Qualified Substitute Loans, together with the Servicer's Loan Files and the Custodial Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and security interests in Mortgaged Property, (iii) all payments in respect of interest due with respect to each Loan on or after the related Transfer Cutoff Date and all payments in respect of principal received on or after such Transfer Cutoff Date, (iv) such assets as from time to time are identified as Foreclosure Property, (v) such assets and funds as are from time to time deposited in the Distribution Account, Collection Account, the Transfer Obligation Account and the Reserve Account, including, without limitation, amounts on deposit in such accounts that are invested in Permitted Investments, (vi) lenders' rights under all Insurance Policies and to any Insurance Proceeds, (vii) Net Liquidation Proceeds and Released Mortgaged Property Proceeds, (viii) all right, title and interest of the Trust (but none of the obligations) in and to the obligations of Hedging Counterparties under Hedging Instruments and (ix) all right, title and interest of each of the Depositor and ANB and ABC and the Trust in and under the Basic Documents including, without limitation, the obligations of the Loan Originators (other than ANB and ABC) under the Loan Purchase Agreement pursuant to which the Depositor acquired the Loans from the Loan Originators (other than ANB and ABC), and all proceeds of any of the foregoing. Trust Fees and Expenses: As of each Payment Date, an amount equal to the Servicing Compensation, the Owner Trustee Fee, the Indenture Trustee Fee and the Custodian Fee, if any. UCC: The Uniform Commercial Code as in effect in the State of New York. UCC Assignment: A form "UCC-2" or "UCC-3" statement meeting the requirements of the Uniform Commercial Code of the relevant jurisdiction to reflect an assignment of a secured party's interest in collateral. UCC-1 Financing Statement: A financing statement meeting the requirements of the Uniform Commercial Code of the relevant jurisdiction. Underwriting Guidelines: The underwriting guidelines (including the loan origination guidelines) provided to the Initial Noteholder on or prior to the date hereof by the Loan Originators or Affiliates thereof. Unfunded Transfer Obligation: With respect to any date of determination, an amount equal to (x) the sum of (A) 10% of the aggregate Collateral Value (as of the related Transfer Date) of all Loans sold hereunder, plus (B) any amounts withdrawn from the Transfer Obligation Account for return to the Transfer Obligors pursuant to Section 5.05(i)(i) hereof prior to such Payment Date, less (y) the sum of (i) the aggregate amount of payments actually made by the Transfer Obligors in respect of the Transfer Obligation pursuant to Section 5.06 and (ii) the aggregate amount of the Purchase Prices paid by the Loan Originators in respect of any Loan Originator Puts. -29- 35 Unfunded Transfer Obligation Percentage: As of any date of determination, an amount equal to (x) the Unfunded Transfer Obligation as of such date, divided by (y) 100% of the aggregate Collateral Value as of the related Transfer Date of all Loans sold hereunder. Warehouse Lines: The Amended and Restated Master Loan and Security Agreement, dated as of August 21, 1998, between Advanta Mortgage Corp. USA, et al. and Morgan Stanley Mortgage Capital Inc., together with the Master Repurchase Agreement, dated as of August 21, 1998, between Morgan Stanley Mortgage Capital Inc. and Advanta National Bank. Wet Custodial File Delivery Date: With respect to a Wet Funded Loan, the twenty-first day after the related Transfer Date, provided that if a Default or Event of Default shall have occurred, the Wet Custodial File Delivery Date shall be the fifth day after the occurrence of such event. Wet Funded Loan: A Loan which as of the related Transfer Date, the related Custodial Loan File shall not have been delivered to the Custodian. Whole Loan Sale: A Disposition of Loans pursuant to a whole-loan sale. Section 1.02 Other Definitional Provisions. (a) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under GAAP. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under GAAP, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this -30- 36 Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. ARTICLE II CONVEYANCE OF THE TRUST ESTATE; ADDITIONAL NOTE PRINCIPAL BALANCES Section 2.01 Conveyance of the Trust Estate; Additional Note Principal Balances. (a)(i) On the terms and conditions of this Agreement, on each Transfer Date, each of the Depositor, ANB and ABC, as applicable, agree to offer for sale and to sell Loans and deliver related Loan Documents to or at the direction of the Issuer. To the extent the Issuer has or is able to obtain sufficient funds for the purchase thereof, the Issuer agrees to purchase such Loans offered for sale by the Depositor, ANB and ABC, as applicable. (ii) In consideration of the payment of the Additional Note Principal Balance pursuant to Section 2.06 hereof, the Depositor, ANB and ABC, as applicable, as of the initial Closing Date and concurrently with the execution and delivery hereof, hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse, but subject to the other terms and provisions of this Agreement, all of the right, title and interest of the Depositor, ANB and ABC, as applicable, in and to the Trust Estate. (iii) During the Revolving Period, on each Transfer Date, subject to the conditions precedent set forth in Section 2.06(a) and in accordance with the procedures set forth in Section 2.01(c), the Depositor, ANB and ABC, as applicable, pursuant to an S&SA Assignment, will assign to the Issuer without recourse all the right, title and interest of the Depositor, ANB and ABC, as applicable, in and to the Loans and all proceeds thereof listed on the Loan Schedule attached to such S&SA Assignment, including all interest accrued and principal received by the Loan Originators, the Depositor or the Servicer on or with respect to the Loans on or after the related Transfer Cutoff Date (and including Monthly Payments due on or after the related Transfer Cutoff Date but received by the Loan Originators on or before the related Transfer Cutoff Date and held for application on the related scheduled Due Dates, but not including interest accrued on the Loans before the related Transfer Cutoff Date), together with all right, title and interest in and to the proceeds of any related Insurance Policies and all of the Depositor's rights, title and interest in and to (but none of its obligations under) the Loan Purchase Agreement and all proceeds of the foregoing. (iv) The foregoing sales, transfers, assignments, set overs and conveyances do not, and are not intended to, result in a creation or an assumption by the Issuer of any of the obligations of the Depositor, the Loan Originators or any other Person in connection with -31- 37 the Trust Estate or under any agreement or instrument relating thereto except as specifically set forth herein. (b) As of the Closing Date and as of each Transfer Date, the Issuer acknowledges (or will acknowledge pursuant to the S&SA Assignment) the conveyance to it of the Trust Estate, including all rights, title and interest of the Depositor, ANB and ABC, as applicable, in and to the Trust Estate, receipt of which is hereby acknowledged by the Issuer. Concurrently with such delivery, as of the initial Closing Date and as of each Transfer Date, pursuant to the Indenture the Issuer pledges the Trust Estate to the Indenture Trustee. In addition, concurrently with such delivery and in exchange therefor, the Owner Trustee, pursuant to the instructions of the Depositor, has executed (not in its individual capacity, but solely as Owner Trustee on behalf of the Issuer) and caused the Trust Certificates to be authenticated and delivered to or at the direction of the Depositor, ANB and ABC, respectively. (c)(i) Pursuant to and subject to the Note Purchase Agreement, the Trust may, at its sole option, from time to time request that the Initial Noteholder advance on any Transfer Date and on any Collateral Value Excess Date, Additional Note Principal Balances and the Initial Noteholder shall remit on such Transfer Date or Collateral Value Excess Date, as the case may be, to the Advance Account an amount equal to the Additional Note Principal Balance. (ii) Notwithstanding anything to the contrary herein, in no event shall the Initial Noteholder be required to advance Additional Note Principal Balances on a Transfer Date if the conditions precedent to a transfer of the Loans under Section 2.06(a) and the conditions precedent to the purchase of Additional Note Principal Balances set forth in Section 3.01 of the Note Purchase Agreement have not been fulfilled. (iii) Notwithstanding anything to the contrary herein, in no event shall the Initial Noteholder be required to advance Additional Note Principal Balance on a Collateral Value Excess Date if the conditions precedent thereto set forth in Section 2.06(b) and the conditions precedent to the purchase of Additional Note Principal Balances set forth in Section 3.01 of the Note Purchase Agreement have not been fulfilled. (iv) The Servicer shall appropriately note such Additional Note Principal Balance (and the increased Note Principal Balance) in the next succeeding Payment Statement; provided, however, that failure to make any such notation in such Payment Statement or any error in such notation shall not adversely affect any Noteholder's rights with respect to its Note Principal Balance and its right to receive interest and principal payments in respect of the Note Principal Balance held by such Noteholder. The Initial Noteholder shall record on the schedule attached to such Noteholder's Note, the date and amount of any Additional Note Principal Balance advanced by it; provided, that failure to make such recordation on such schedule or any error in such schedule shall not adversely affect any Noteholder's rights with respect to its Note Principal Balance and its right to receive interest payments in respect of the Note Principal Balance held by such Noteholder. -32- 38 (v) Absent manifest error, the Note Principal Balance of each Note as set forth in the Initial Noteholder's records shall be binding upon the Noteholders and the Trust, notwithstanding any notation made by the Servicer in its Payment Statement pursuant to the preceding paragraph. Section 2.02 Ownership and Possession of Loan Files. With respect to each Loan, as of the related Transfer Date the ownership of the related Promissory Note, the related Mortgage and the contents of the related Servicer's Loan File and Custodial Loan File shall be vested in the Trust for the benefit of the Securityholders, although possession of the Servicer's Loan File (other than items required to be maintained in the Custodial Loan Files) on behalf of and for the benefit of the Securityholders shall remain with the Servicer, and the Custodian shall take possession of the Custodial Loan Files as contemplated in Section 2.05 hereof. Section 2.03 Books and Records; Intention of the Parties. (a) As of each Transfer Date, the sale of each of the Loans conveyed on such Transfer Date shall be reflected on the balance sheets and other financial statements of the Depositor and the Loan Originators, as the case may be, as a sale of assets by the Depositor and the Loan Originators, as the case may be, under GAAP. Each of the Servicer and the Custodian shall be responsible for maintaining, and shall maintain, a complete set of books and records for each Loan which shall be clearly marked to reflect the ownership of each Loan, as of the related Transfer Date, by the Issuer and for the benefit of the Securityholders. (b) It is the intention of the parties hereto that, other than for federal, state and local income or franchise tax purposes, the transfers and assignments of the Trust Estate on the initial Closing Date, on each Transfer Date and as otherwise contemplated by the Basic Documents and the Assignments shall constitute a sale of the Trust Estate including, without limitation, the Loans and all other property comprising the Trust Estate specified in Section 2.01(a) hereof, from the Depositor, ANB, ABC, as applicable, to the Issuer and such property shall not be property of the Depositor, ANB or ABC. The parties hereto shall treat the Notes as indebtedness for federal, state and local income and franchise tax purposes. (c) If any of the assignments and transfers of the Loans and the other property of the Trust Estate specified in Section 2.01(a) hereof to the Issuer pursuant to this Agreement or the conveyance of the Loans or any of such other property of the Trust Estate to the Issuer, other than for federal, state and local income or franchise tax purposes, is held or deemed not to be a sale or is held or deemed to be a pledge of security for a loan, the Depositor, ANB and ABC intend that the rights and obligations of the parties shall be established pursuant to the terms of this Agreement and that, in such event, with respect to such property, (i) consisting of Loans and related property, the Depositor, ANB and ABC, as applicable, shall be deemed to have granted, as of the related Transfer Date, to the Issuer a first priority security interest in the entire right, title and interest of the Depositor, ANB and ABC, as applicable, in and to such Loans and proceeds and all other property conveyed to the -33- 39 Issuer as of such Transfer Date, (ii) consisting of any other property specified in Section 2.01(a), the Depositor, ANB and ABC, as applicable, shall be deemed to have granted, as of the initial Closing Date, to the Issuer a first priority security interest in the entire right, title and interest of the Depositor, ANB and ABC, as applicable, in and to such property and the proceeds thereof. In such event, with respect to such property, this Agreement shall constitute a security agreement under applicable law. (d) Within ten (10) days of the initial Closing Date, the Depositor, ANB and ABC shall, at each party's sole expense, cause to be filed UCC-1 Financing Statements naming the Issuer as "secured party" and describing the Trust Estate being sold by the Depositor, ANB and ABC, respectively, to the Issuer with the office of the Secretary of State of the state in which the Depositor, ANB and ABC are located. Section 2.04 Delivery of Loan Documents. (a) The related Loan Originator shall, no less than four (4) Business Days prior to the related Transfer Date, or such other time as mutually agreed upon between the related Loan Originator and the Custodian (or in the case of a Wet Funded Loan, on or before the related Wet Custodial File Delivery Date), deliver or cause to be delivered to the Custodian, as the designated agent of the Indenture Trustee, a Loan Schedule and each of the following documents (collectively, the "Custodial Loan File"): (i) The original Promissory Note bearing all intervening endorsements, endorsed either (i) "Pay to the order of Bankers Trust Company of California, N.A., as custodian or trustee under the applicable custody or trust agreement, without recourse" or (ii) "Pay to the order of Bankers Trust Company of California, N.A., as custodian or trustee under the applicable custody or trust agreement, without recourse, Advanta as Servicer," or (iii) "Pay to the order of Bankers Trust Company of California, N.A., as custodian or trustee" by [Loan Originator, signature, name, title] and signed in the name of the previous owner by an authorized offer (in the event that the Loan was acquired by the previous owner in a merger the signature must be in the following form: "[the previous owner], successor by merger to [name of predecessor]", in the event that the Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the previous owner], formerly known as [previous name]". The original Promissory Note should be accompanied by any riders made in connection with the origination of the related Loan; (ii) The original of the guarantee executed in connection with the Promissory Note (if any). -34- 40 (iii) The original Mortgage with evidence of recording thereon, or a copy thereof together with an Officer's Certificate of the Servicer certifying that such represents a true and correct copy of the original and that such original has been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (iv) The originals of all assumption, modification, consolidation or extension agreements (if any) with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the Servicer certifying that such represent true and correct copies of the originals and that such originals have each been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (v) The original, or a certified copy of, the Assignment of Mortgage of each Loan to "Bankers Trust Company of California, N.A., as custodian or trustee" (provided, however, that such Assignment of Mortgage shall not be required in those cases in which Bankers Trust Company of California, N.A., as custodian or trustee is the mortgagee of record). In the event that the Loan was acquired by the previous owner in a merger, the Assignment of Mortgage must be in the "(previous owner), successor by merger to (names of predecessor)"; and in the event that the Loan was acquired or originated by the previous owner while doing business under another name, the Assignment of Mortgage must be by the "(previous owner), formerly known as (previous name)". (vi) The originals of, or a certified copy of, all intervening assignments of mortgage (if any) with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the Servicer certifying that such represent true and correct copies of the originals and that such originals have each been submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (vii) The original of any security agreement, chattel mortgage or equivalent document executed in connection with the Loan. In addition, if in connection with a Disposition the Loan Originator or any Affiliate is notified by any Disposition Participant that the Loan Originator will be required to deliver the following items to the Custodian with respect to the Loan Originator's mortgage loan securitization program, then the following item will also be required: -35- 41 (viii) The original attorney's opinion of title and abstract of title or the original mortgagee title insurance policy, or if the original mortgagee title insurance policy has not been issued, the original irrevocable commitment to issue the same. (b) The Loan Originator shall, on the related Transfer Date (or in the case of a Wet Funded Loan, on or before the related Wet Custodial File Delivery Date), deliver or cause to be delivered to the Servicer for the benefit of the Indenture Trustee, as secured party on behalf of the Noteholders, the related Servicer's Loan File. (c) The Indenture Trustee shall cause the Custodian to take and maintain continuous physical possession of the Custodial Loan Files in the State of California and, in connection therewith, shall act solely as agent for the Noteholders in accordance with the terms hereof and not as agent for the Loan Originators, the Servicer or any other party. Section 2.05 Acceptance by the Indenture Trustee of the Loans; Certain Substitutions and Repurchases; Certification by the Custodian. (a) The Indenture Trustee declares that it will cause the Custodian to hold the Custodial Loan Files and any additions, amendments, replacements or supplements to the documents contained therein, as well as any other assets included in the Trust Estate and delivered to the Custodian, in trust, upon and subject to the conditions set forth herein. The Indenture Trustee further agrees to cause the Custodian to execute and deliver such certifications as are required under the Custodial Agreement and to otherwise direct the Custodian to perform all of its obligations with respect to the Custodial Loan Files in strict accordance with the terms of the Custodial Agreement. (b)(i) With respect to any Loans which are set forth as exceptions in the Loan Schedule and Exceptions Report (after giving effect to the proviso in Section 2.04(a)), the related Loan Originator shall cure such exception by delivering such missing documents to the Custodian or otherwise curing the defect no later than (A) other than Loan Documents specified in clause (B) below, in the case of (x) a non-Wet Funded Loan, 5 Business Days, or (y) in the case of a Wet Funded Loan one Business Day, in each case, following the receipt of the first Loan Schedule and Exceptions Report listing such exception with respect to such Loan or (B) in the case of Loan Documents referenced in Section 2.04(a) (iii), (iv) (vi) and (viii) 30 days after the related Transfer Date or with respect to Wet Funded Loans, from the related Wet Custodial File Delivery Date. (ii) In the event that, with respect to any Loan, the related Loan Originator does not comply with the document delivery requirements of this Section 2.05, the related Loan Originator shall purchase such Loan within one Business Day of notice thereof from the Indenture Trustee at the Purchase Price with respect to such Loan by depositing such Purchase Price in the Collection Account. In lieu of such a repurchase, the Depositor and related Loan Originator may comply with the substitution provisions of Section 3.06 hereof. The related Loan Originator shall provide the Servicer, the Indenture Trustee, the Issuer and the Initial Noteholder with a certification of a Responsible Officer prior to such repurchase or -36- 42 substitution indicating that the related Loan Originator intends to repurchase or substitute such Loan. (iii) It is understood and agreed that the obligation of the related Loan Originator to repurchase or substitute any such Loan pursuant to this Section 2.05(b) shall constitute the sole remedy against it with respect to such failure to comply with the foregoing delivery requirements. (c) In performing its reviews of the Custodial Loan Files pursuant to the Custodial Agreement, the Custodian shall have no responsibility to determine the genuineness of any document contained therein and any signature thereon. The Custodian shall not have any responsibility for determining whether any document is valid and binding, whether the text of any assignment or endorsement is in proper or recordable form, whether any document has been recorded in accordance with the requirements of any applicable jurisdiction or whether a blanket assignment is permitted in any applicable jurisdiction. (d) The Servicer's Loan File shall be held in the custody of the Servicer (i) for the benefit of, and as agent for, the Noteholders and (ii) for the benefit of the Indenture Trustee, on behalf of the Noteholders, for so long as the Notes are outstanding; after the Notes are not outstanding, the Servicer's Loan File shall be held in the custody of the Servicer for the benefit of, and as agent for, the Certificateholders. It is intended that, by the Servicer's agreement pursuant to this Section 2.05(d), the Indenture Trustee shall be deemed to have possession of the Servicer's Loan Files for purposes of Section 9-305 of the UCC of the state in which such documents or instruments are located. The Servicer shall promptly report to the Indenture Trustee any failure by it to hold the Servicer's Loan File as herein provided and shall promptly take appropriate action to remedy any such failure. In acting as custodian of such documents and instruments, the Servicer agrees not to assert any legal or beneficial ownership interest in the Loans or such documents or instruments. Subject to Section 8.01(d), the Servicer agrees to indemnify the Securityholders and the Indenture Trustee, its officers, directors, employees, agents and "control persons" as such term is used under the Act and under the Securities Exchange Act of 1934, as amended for any and all liabilities, obligations, losses, damages, payments, costs or expenses of any kind whatsoever which may be imposed on, incurred by or asserted against the Securityholders or the Indenture Trustee as the result of the negligence or willful misfeasance by the Servicer relating to the maintenance and custody of such documents or instruments which have been delivered to the Servicer provided, however, that the Servicer will not be liable for any portion of any such amount resulting from the negligence or willful misconduct of any Securityholders or the Indenture Trustee; and provided, further, that the Servicer will not be liable for any portion of any such amount resulting from the Servicer's compliance with any instructions or directions consistent with this Agreement issued to the Servicer by the Indenture Trustee or the Majority Noteholders. The Indenture Trustee shall have no duty to monitor or otherwise oversee the Servicer's performance as custodian hereunder. -37- 43 Section 2.06 Conditions Precedent to Transfer Dates and Collateral Value Excess Dates. (a) On each Transfer Date, the Depositor, ANB and ABC, as applicable, shall convey to the Issuer, the Loans and the other property and rights related thereto described in the related S&SA Assignment, and the Issuer, only upon the satisfaction of each of the conditions set forth below on or prior to such Transfer Date, shall deposit or cause to be deposited cash in the amount of the Additional Note Principal Balance in the Advance Account (or in the case of Wet Funded Loans, in the Reserve Account to the extent of the Sales Prices therefor) in respect thereof, and the Servicer shall, promptly after such deposit, withdraw the amount deposited in respect of applicable Additional Note Principal Balance from the Advance Account, and distribute such amount to or at the direction of the Depositor, ANB and ABC, respectively. (i) the Depositor, ANB and ABC, as applicable, shall have delivered to the Issuer and the Initial Noteholder duly executed Assignments, which shall have attached thereto a Loan Schedule setting forth the appropriate information with respect to all Loans conveyed on such Transfer Date and shall have delivered to the Initial Noteholder a computer readable transmission of such Loan Schedule; (ii) the Depositor, ANB and ABC, as applicable, shall have deposited in the Collection Account all collections received with respect to each of the Loans on and after the applicable Transfer Cutoff Date; (iii) as of such Transfer Date, neither the Loan Originators, nor the Depositor shall (A) be insolvent, (B) be made insolvent by its respective sale of Loans or (C) have reason to believe that its insolvency is imminent; (iv) the Revolving Period shall not have terminated; (v) as of such Transfer Date, there shall be no Overcollateralization Shortfall; (vi) in the case of non-Wet Funded Loans, the Issuer shall have delivered the Custodial Loan File to the Custodian in accordance with the Custodial Agreement and the Initial Noteholder shall have received a copy of the Loan Schedule and Exceptions Report reflecting such delivery; (vii) each of the representations and warranties made by the Loan Originators pursuant to Section 3.05 with respect to the Loans shall be true and correct in all material respects as of the related -38- 44 Transfer Date with the same effect as if then made, and the Depositor, ANB and ABC shall have performed all obligations to be performed by it under the Basic Documents on or prior to such Transfer Date; (viii) the Depositor, ANB and ABC shall each, at its own expense, within one Business Day following the Transfer Date, indicate in its computer files that the Loans identified in the LPA Assignment (with respect to Loans sold by the Depositor) and S&SA Assignment have been sold to the Issuer pursuant to this Agreement and the S&SA Assignment; (ix) the Depositor, ANB and ABC shall have taken any action requested by the Indenture Trustee, the Issuer or the Noteholders required to maintain the ownership interest of the Issuer in the Trust Estate; (x) no selection procedures believed by the Depositor, ANB or ABC to be adverse to the interests of the Noteholders shall have been utilized in selecting the Loans to be conveyed on such Transfer Date; (xi) the Depositor, ANB or ABC, as applicable, shall have provided the Issuer, the Indenture Trustee and the Initial Noteholder no later than one Business Day prior to such date a Notice of Additional Note Principal Balance in the form of Exhibit A hereto; (xii) after giving effect to the Additional Note Principal Balance associated therewith, the Note Principal Balance will not exceed the Maximum Note Principal Balance; (xiii) all conditions precedent to the Depositor's purchase of Loans pursuant to the Loan Purchase Agreement shall have been fulfilled as of such Transfer Date; and (xiv) all conditions precedent to the Noteholders' purchase of Additional Note Principal Balance pursuant to the Note Purchase Agreement shall have been fulfilled as of such date. (b) On each Collateral Value Excess Date, upon the satisfaction of conditions set forth in subclauses (iii), (iv), (ix), (xi), (xii), (xiii) and (xiv) of Section 2.06(a) on such Collateral Value Excess Date, the Issuer shall deposit or cause to be deposited into (i) the Transfer Obligation Account, cash in the amount equal to the lesser of (A) the Additional Note Principal Balance and (B) the Transfer Obligation Target Amount and (ii) the Advance Account the excess (if any) of the Additional Note Principal Balance over the amount -39- 45 deposited into the Transfer Obligation Account pursuant to clause (i) above; provided that, in the case of Wet Funded Loans, the Additional Note Principal Balance shall be deposited in the Reserve Account to the extent of the Sales Prices therefor. The Servicer shall withdraw the amount deposited in respect of Additional Note Principal Balance from the Advance Account in respect of such deposit and distribute such amount to or at the direction of the Depositor, ANB and ABC in accordance with the Allocation Percentage. Section 2.07 Termination of Revolving Period. Upon the occurrence of (i) an Event of Default or Default or (ii) a Rapid Amortization Trigger, the Initial Noteholder (if still a Noteholder) may, in its sole discretion, terminate the Revolving Period. Section 2.08 Correction of Errors. The parties hereto shall cooperate to reconcile any errors in calculating the Sales Price from and after the Closing Date. In the event that an error in the Sales Price is discovered by either party, including without limitation, any error due to miscalculations of Market Value where insufficient information has been provided with respect to a Loan to make an accurate determination of Market Value as of any applicable Transfer Date, any miscalculations of Principal Balance, accrued interest, Overcollateralization Shortfall or aggregate unreimbursed Servicing Advances and Periodic Advances attributable to the applicable Loan, or any prepayments not properly credited, such party shall give prompt notice to the other parties hereto, and the party that shall have benefitted from such error shall promptly remit to the other, by wire transfer of immediately available funds, the amount of such error with no interest thereon. ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor. The Depositor hereby represents, warrants and covenants to the other parties hereto and the Securityholders that as of each Closing Date, as of each Transfer Date and as of each Collateral Value Excess Date: (a) The Depositor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has, and had at all relevant times, full power to own its property, to carry on its business as currently conducted, to enter into and perform its obligations under each Basic Document to which it is a party; -40- 46 (b) The execution and delivery by the Depositor of each Basic Document to which the Depositor is a party and its performance of and compliance with all of the terms thereof will not violate the Depositor's organizational documents or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the breach or acceleration of, any material contract, agreement or other instrument to which the Depositor is a party or which are applicable to the Depositor or any of its assets; (c) The Depositor has the full power and authority to enter into and consummate the transactions contemplated by each Basic Document to which the Depositor is a party, has duly authorized the execution, delivery and performance of each Basic Document to which it is a party and has duly executed and delivered each Basic Document to which it is a party. Each Basic Document to which it is a party, assuming due authorization, execution and delivery by the other party or parties thereto, constitutes a valid, legal and binding obligation of the Depositor, enforceable against it in accordance with the terms thereof, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditors generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law); (d) The Depositor is not in violation of, and the execution and delivery by the Depositor of each Basic Document to which the Depositor is a party and its performance and compliance with the terms of each Basic Document to which the Depositor is a party will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction, which violation would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or any of its properties or materially and adversely affect the performance of any of its duties hereunder; (e) There are no actions or proceedings against, or investigations of, the Depositor currently pending with regard to which the Depositor has received service of process and no action or proceeding against, or investigation of, the Depositor is, to the knowledge of the Depositor, threatened or otherwise pending before any court, administrative agency or other tribunal that (A) if determined adversely to the Depositor, would prohibit its entering into any of the Basic Documents to which it is a party or render the Securities invalid, (B) seek to prevent the issuance of the Securities or the consummation of any of the transactions contemplated by any of the Basic Documents to which it is a party or (C) if determined adversely to the Depositor, would prohibit or materially and adversely affect the performance by the Depositor of its obligations under, or the validity or enforceability of, any of the Basic Documents to which it is a party or the Securities; (f) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance -41- 47 by the Depositor of, or compliance by the Depositor with, any of the Basic Documents to which the Depositor is a party or the Securities, or for the consummation of the transactions contemplated by any of the Basic Documents to which the Depositor is a party, except for such consents, approvals, authorizations and orders, if any, that have been obtained prior to such date; (g) The Depositor is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business and its obligations hereunder; it will not be rendered insolvent by the execution and delivery of any of the Basic Documents to which it is a party or the assumption of any of its obligations thereunder; no petition of bankruptcy (or similar insolvency proceeding) has been filed by or against the Depositor; (h) As of the Transfer Date related thereto, Depositor did not sell the Loans sold thereon to the Trust with any intent to hinder, delay or defraud any of its creditors; nor will the Depositor be rendered insolvent as a result of such sale; (i) As of the Transfer Date related thereto, the Depositor had good title to, and was the sole owner of, each Loan sold thereon free and clear of any lien other than any such lien released simultaneously with the sale contemplated herein, and, immediately upon each transfer and assignment herein contemplated, the Depositor will have delivered to the Trust good title to, and the Trust will be the sole owner of, each Loan transferred thereon free and clear of any lien; (j) As of the Transfer Date related thereto, the Depositor acquired title to each of the Loans sold thereon in good faith, without notice of any adverse claim; (k) None of the Basic Documents to which the Depositor is a party, nor any Officer's Certificate, statement, report or other document prepared by the Depositor and furnished or to be furnished by it pursuant to any of the Basic Documents to which it is a party or in connection with the transactions contemplated thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (l) The Depositor is not required to be registered as an "investment company" under the Investment Company Act of 1940, as amended; and (m) As of the Transfer Date related thereto, the transfer, assignment and conveyance of the Loans by the Depositor thereon pursuant to this Agreement is not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (n) (i) The Depositor's principal place of business and chief executive offices are located at One Righter Parkway, Wilmington, Delaware 19803; and -42- 48 (o) The Depositor covenants that during the continuance of this Agreement it will comply in all respects with the provisions of its organizational documents in effect from time to time. Section 3.02 Representations and Warranties of the Loan Originators. Each Loan Originator hereby represents and warrants to the other parties hereto and the Securityholders that as of each Closing Date, as of each Transfer Date and as of each Collateral Value Excess Date: (a) The Loan Originator is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and (i) is duly qualified, in good standing and licensed to carry on its business in each state where any Mortgaged Property is located and (ii) is in compliance with the laws of any such jurisdiction, in both cases, to the extent necessary to ensure the enforceability of the Loans in accordance with the terms thereof and had at all relevant times, full corporate power to originate the Loans, to own its property, to carry on its business as currently conducted and to enter into and perform its obligations under each Basic Document to which it is a party; (b) The execution and delivery by the Loan Originator of each Basic Document to which it is a party and its performance of and compliance with the terms thereof will not violate the Loan Originator's articles of organization or by-laws or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the breach or acceleration of, any contract, agreement or other instrument to which the Loan Originator is a party or which may be applicable to the Loan Originator or any of its assets; (c) The Loan Originator has the full power and authority to enter into and consummate all transactions contemplated by the Basic Documents to be consummated by it, has duly authorized the execution, delivery and performance of each Basic Document to which it is a party and has duly executed and delivered each Basic Document to which it is a party. Each Basic Document to which it is a party, assuming due authorization, execution and delivery by each of the other parties thereto, constitutes a valid, legal and binding obligation of the Loan Originator, enforceable against it in accordance with the terms hereof, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditors generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law); (d) The Loan Originator is not in violation of, and the execution and delivery of each Basic Document to which it is a party by the Loan Originator and its performance and compliance with the terms of each Basic Document to which it is a party will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having -43- 49 jurisdiction, which violation would materially and adversely affect the condition (financial or otherwise) or operations of the Loan Originator or its properties or materially and adversely affect the performance of its duties under any Basic Document to which it is a party; (e) There are no actions or proceedings against, or investigations of, the Loan Originator currently pending with regard to which the Loan Originator has received service of process and no action or proceeding against, or investigation of, the Loan Originator is, to the knowledge of the Loan Originator, threatened or otherwise pending before any court, administrative agency or other tribunal that (A) if determined adversely to the Loan Originator, would prohibit its entering into any Basic Document to which it is a party or render the Securities invalid, (B) seek to prevent the issuance of the Securities or the consummation of any of the transactions contemplated by any Basic Document to which it is a party or (C) if determined adversely to the Loan Originator, would prohibit or materially and adversely affect the sale of the Loans to the Depositor, the performance by the Loan Originator of its obligations under, or the validity or enforceability of, any Basic Document to which it is a party or the Securities; (f) No consent, approval, authorization or order of any court or governmental agency or body is required for: (1) the execution, delivery and performance by the Loan Originator of, or compliance by the Loan Originator with, any Basic Document to which it is a party, (2) the issuance of the Securities, (3) the sale of the Loans under the Loan Purchase Agreement (to the extent such Loan Originator is a party thereto), (4) the sale by ANB and ABC, respectively, of the Loans under this Agreement, or (5) the consummation of the transactions required of it by any Basic Document to which it is a party, except such as shall have been obtained before such date; (g) Immediately prior to the Transfer Date related thereto, the Loan Originator had good title to the Loans sold on such Transfer Date without notice of any adverse claim; (h) The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Loan Originator to the Initial Noteholder in connection with the negotiation, preparation or delivery of the Basic Documents to which it is a party or delivered pursuant thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Loan Originator to the Initial Noteholder in connection with the Basic Documents to which it is a party and the transactions contemplated thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. -44- 50 (i) The Loan Originator is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business and its obligations under each Basic Document to which it is a party; it will not be rendered insolvent by the execution and delivery of this Agreement or by the performance of its obligations under each Basic Document to which it is a party; no petition of bankruptcy (or similar insolvency proceeding) has been filed by or against the Loan Originator prior to the date hereof; (j) As of the Transfer Date related thereto, the Loan Originator has transferred the Loans transferred on or prior to such Transfer Date without any intent to hinder, delay or defraud any of its creditors; (k) As of the Transfer Date related thereto, the Loan Originator has received fair consideration and reasonably equivalent value in exchange for the Loans sold on such Transfer Date to the Depositor; (l) (i) Advanta National Bank's principal place of business and chief executive offices are located at One Righter Parkway, Wilmington, Delaware 19803; (ii) Advanta Mortgage Corp. USA's principal place of business and chief executive offices are located at Welsh & McKean Roads, P.O. Box 844, Spring House, Pennsylvania 19477; and (iii) Advanta Bank Corp.'s principal place of business and chief executive offices are located at 11850 South Election Drive, Draper, Utah, 84020; (m) with respect to ANB and ABC only, such party is an "insured depository institution" (within the meaning of Section 1813(c)(2) of Title 12 of the United States Code) and accordingly, makes the following additional representations and warranties: (1) the Basic Documents do not violate any statutory or regulatory requirements applicable to such party; (2) the Basic Documents have been (i) executed contemporaneously with the definitive agreement reached by such party and the parties to the Basic Documents, (ii) approved by a specific resolution by such party's board of directors, which approval shall be reflected in the minutes of said board, and (iii) entered into the official records of such party, a copy of which approvals, certified by a Secretary, Assistant Secretary, vice president or higher officer of such party, has been provided to the Depositor; (3) the aggregate amount of the Sales Price of all Loans conveyed on each Transfer Date by such party to the Depositor does not exceed any restrictions or limitations imposed by the board of directors of such party; (4) such party is at least Adequately Capitalized. -45- 51 It is understood and agreed that the representations and warranties set forth in this Section 3.02 shall survive delivery of the respective Custodial Loan Files to the Custodian (as the agent of the Indenture Trustee) and shall inure to the benefit of the Securityholders, the Depositor, the Servicer, the Indenture Trustee, the Owner Trustee and the Issuer. Upon discovery by any Loan Originator, the Depositor, the Servicer, the Indenture Trustee or the Trust of a breach of any of the foregoing representations and warranties that materially and adversely affects the value of any Loan or the interests of the Securityholders therein, the party discovering such breach shall give prompt written notice (but in no event later than two Business Days following such discovery) to the other parties. The obligations of the Loan Originator set forth in Sections 2.05 and 3.06 hereof to cure any breach or to substitute for or repurchase an affected Loan shall constitute the sole remedies available hereunder to the Securityholders, the Depositor, the Servicer, the Indenture Trustee or the Trust respecting a breach of the representations and warranties contained in this Section 3.02. The fact that the Initial Noteholder has conducted or has failed to conduct any partial or complete due diligence investigation of the Loan Files shall not affect the Securityholders' rights to demand repurchase or substitution as provided under this Agreement. Section 3.03 Representations, Warranties and Covenants of the Servicer. The Servicer hereby represents and warrants to and covenants with the other parties hereto and the Securityholders that as of each Closing Date, as of each Transfer Date and as of each Collateral Value Excess Date: (a) The Servicer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and (i) is duly qualified, in good standing and licensed to carry on its business in each state where any Mortgaged Property is located, and (ii) is in compliance with the laws of any such state, in both cases, to the extent necessary to ensure the enforceability of the Loans in accordance with the terms thereof and to perform its duties under each Basic Document to which it is a party and had at all relevant times, full corporate power to own its property, to carry on its business as currently conducted, to service the Loans and to enter into and perform its obligations under each Basic Document to which it is a party; (b) The execution and delivery by the Servicer of each Basic Document to which it is a party and its performance of and compliance with the terms thereof will not violate the Servicer's articles of incorporation or by-laws or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the breach or acceleration of, any material contract, agreement or other instrument to which the Servicer is a party or which are applicable to the Servicer or any of its assets; (c) The Servicer has the full power and authority to enter into and consummate all transactions contemplated by each Basic Document to which it is a party, has duly authorized the execution, delivery and performance of each Basic Document to which it is a party and has duly executed and delivered each Basic -46- 52 Document to which it is a party. Each Basic Document to which it is a party, assuming due authorization, execution and delivery by each of the other parties thereto, constitutes a valid, legal and binding obligation of the Servicer, enforceable against it in accordance with the terms hereof, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditors generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law); (d) The Servicer is not in violation of, and the execution and delivery of each Basic Document to which it is a party by the Servicer and its performance and compliance with the terms of each Basic Document to which it is a party will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction, which violation would materially and adversely affect the condition (financial or otherwise) or operations of the Servicer or materially and adversely affect the performance of its duties under any Basic Document to which it is a party; (e) There are no actions or proceedings against, or investigations of, the Servicer currently pending with regard to which the Servicer has received service of process and no action or proceeding against, or investigation of, the Servicer is, to the knowledge of the Servicer, threatened or otherwise pending before any court, administrative agency or other tribunal that (A) if determined adversely to the Servicer, would prohibit its entering into any Basic Document to which it is a party, (B) seek to prevent the consummation of any of the transactions contemplated by any Basic Document to which it is a party or (C) if determined adversely to the Servicer, would prohibit or materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, any Basic Document to which it is a party or the Securities; (f) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Servicer of, or compliance by the Servicer with, any Basic Document to which it is a party or the Securities, or for the consummation of the transactions contemplated by any Basic Document to which it is a party, except for such consents, approvals, authorizations and orders, if any, that have been obtained prior to such date; (g) The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Servicer to the Initial Noteholder in connection with the negotiation, preparation or delivery of the Basic Documents to which it is a party or delivered pursuant thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Servicer to the Initial Noteholder in connection with the Basic Documents to -47- 53 which it is a party and the transactions contemplated thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. (h) The Servicer is solvent and will not be rendered insolvent as a result of the performance of its obligations pursuant to under the Basic Documents to which it is a party; (i) The Servicer acknowledges and agrees that the Servicing Fee represents reasonable compensation for the performance of its services hereunder and that the entire Servicing Fee shall be treated by the Servicer, for accounting purposes, as compensation for the servicing and administration of the Loans pursuant to this Agreement; and (j) The Servicer is an Eligible Servicer and covenants to remain an Eligible Servicer or, if not an Eligible Servicer, each Subservicer is an Eligible Servicer and the Servicer covenants to cause each Subservicer to be an Eligible Servicer. It is understood and agreed that the representations, warranties and covenants set forth in this Section 3.03 shall survive delivery of the respective Custodial Loan Files to the Indenture Trustee or the Custodian on its behalf and shall inure to the benefit of the Depositor, the Securityholders, the Indenture Trustee and the Issuer. Upon discovery by any of the Loan Originators, the Depositor, the Servicer, the Indenture Trustee, the Owner Trustee or the Issuer of a breach of any of the foregoing representations, warranties and covenants that materially and adversely affects the value of any Loans or the interests of the Securityholders therein, the party discovering such breach shall give prompt written notice (but in no event later than two Business Days following such discovery) to the other parties. The fact that the Initial Noteholder has conducted or has failed to conduct any partial or complete due diligence investigation shall not affect the Securityholders' rights to exercise their remedies as provided under this Agreement. Section 3.04 Representations and Warranties of the Transfer Obligors. Each Transfer Obligor hereby represents, warrants and covenants to the other parties hereto and the Securityholders that as of each Closing Date, as of each Transfer Date and as of each Collateral Value Excess Date: (a) The Transfer Obligor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has, and had at all relevant times, full power to own its property, to carry on its business as currently conducted, to enter into and perform its obligations under each Basic Document to which it is a party; (b) The execution and delivery of each Basic Document to which it is a party by the Transfer Obligor and its performance of and compliance with all of the terms thereof will not violate the Transfer Obligor's articles of incorporation or by- -48- 54 laws or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the breach or acceleration of, any material contract, agreement or other instrument to which the Transfer Obligor is a party or which is applicable to the Transfer Obligor or any of its material assets; (c) The Transfer Obligor has the full power and authority to enter into and consummate the transactions contemplated by each Basic Document to which it is a party, has duly authorized the execution, delivery and performance of each Basic Document to which it is a party and has duly executed and delivered each Basic Document to which it is a party. Each Basic Document to which it is a party, assuming due authorization, execution and delivery by the other party or parties thereto, constitutes a valid, legal and binding obligation of the Transfer Obligor, enforceable against it in accordance with the terms thereof, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditors generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law); (d) The Transfer Obligor is not in violation of, and the execution and delivery of each Basic Document to which it is a party by the Transfer Obligor and its performance and compliance with the terms of each Basic Document to which it is a party will not constitute a violation with respect to, any order or decree of any court or any order or regulation of any federal, state, municipal or governmental agency having jurisdiction, which violation would materially and adversely affect the condition (financial or otherwise) or operations of the Transfer Obligor or its properties or materially and adversely affect the performance of its duties hereunder; (e) There are no actions or proceedings against, or investigations of, the Transfer Obligor currently pending with regard to which the Transfer Obligor has received service of process and no action or proceeding against, or investigation of, the Transfer Obligor is, to the knowledge of the Transfer Obligor, threatened or otherwise pending before any court, administrative agency or other tribunal that (A) if determined adversely to the Transfer Obligor, would prohibit its entering into any of the Basic Documents to which it is a party or render the Securities invalid, (B) seek to prevent the issuance of the Securities or the consummation of any of the transactions contemplated by any of the Basic Documents to which it is a party or (C) if determined adversely to the Transfer Obligor, would prohibit or materially and adversely affect the performance by the Transfer Obligor of its obligations under, or the validity or enforceability of, any of the Basic Documents to which it is a party or the Securities; (f) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Transfer Obligor of, or compliance by the Transfer Obligor with, any of the Basic Documents to which it is a party or the Securities, or for the consummation of the transactions contemplated by any of the Basic Documents to which it is a party, -49- 55 except for such consents, approvals, authorizations and orders, if any, that have been obtained prior to the such date; (g) The Transfer Obligor is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business and its obligations hereunder; it will not be rendered insolvent by the execution and delivery of any of the Basic Documents to which it is a party or the assumption of any of its obligations thereunder; no petition of bankruptcy (or similar insolvency proceeding) has been filed by or against the Transfer Obligor; and (h) None of the Basic Documents to which it is a party, nor any Officer's Certificate, statement, report or other document prepared by the Transfer Obligor and furnished or to be furnished by it pursuant to any of the Basic Documents to which it is a party or in connection with the transactions contemplated thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. Section 3.05 Representations and Warranties Regarding Loans. The Loan Originator which sold the related Loan hereby represents and warrants to the other parties hereto and the Securityholders, with respect to each such Loan as of the related Transfer Date (except as otherwise expressly agreed in writing by the Majority Noteholders): (1) Loans as Described. The information set forth in the Loan Schedule with respect to the Loan is complete, true and correct in all material respects as of the related Transfer Cutoff Date. (2) Payments Current. With respect to each Loan other than a delinquent Loan, no payment required under the Loan is delinquent beyond the applicable grace period. With respect to each Loan that is 30 to 59 days Delinquent, no payment required under the Loan is delinquent in excess of 59 days (without regard to any grace period) and with respect to each Loan that is 60 to 89 days Delinquent, no payment required under the Loan is delinquent in excess of 89 days (without regard to any grace period). (3) No Outstanding Charges. There are no material defaults in complying with the terms of the Mortgage securing the Loan, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. The Loan Originator has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other -50- 56 than the Borrower, directly or indirectly, for the payment of any amount required under the Loan, except for interest accruing from the date of the Promissory Note or date of disbursement of the proceeds of the Loan, whichever is earlier, to the day which precedes by one month the Due Date of the first installment of principal and interest thereunder. (4) Original Terms Unmodified. The terms of the Promissory Note and Mortgage have not been impaired, waived, altered or modified in any respect, from the date of origination (other than those which would not result in a material adverse effect on the validity or enforceability thereof); except by a written instrument which has been recorded, if necessary to protect the interests of the Indenture Trustee, and which has been delivered to the Indenture Trustee, and the terms of which are reflected in the Loan Schedule. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required, and its terms are reflected on the Loan Schedule. No Borrower in respect of the Loan has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by such policy, and which assumption agreement is part of the Custodial Loan File delivered to the Indenture Trustee and the terms of which are reflected in the Loan Schedule. (5) Modification of Loan. The Loan has not been amended or modified in a manner that would materially and adversely effect the value of such Loan. (6) No Defenses. The Loan is not subject to any valid and enforceable right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Promissory Note or the Mortgage, or the exercise of any right thereunder, render either the Promissory Note or the Mortgage unenforceable, in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto, and no, to the Loan Originator's knowledge, Borrower in respect of the Loan was a debtor in any state or federal bankruptcy or insolvency proceeding at the time the Loan was originated other than in cases in which the Loan was originated in connection with a Borrower emerging from a bankruptcy and such Loan was approved by the trustee in bankruptcy. No Loan Originator has knowledge nor has any Loan Originator received any notice that any Borrower in respect of the Loan is a debtor in any state or federal bankruptcy or insolvency proceeding. (7) Hazard Insurance. The improvements upon the Mortgaged Property is insured by a fire and extended perils insurance policy, issued by a Qualified Insurer, and such other hazards as are customary in the area -51- 57 where the Mortgaged Property is located, and to the extent required by the Loan Originator as of the date of origination consistent with the Underwriting Guidelines in an amount not less than the lesser of (i) the outstanding principal balance of the related Loan (together, in the case of a Second Lien Loan, with the outstanding principal balance of the first lien), (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis or, (iii) the full insurable value of the Mortgaged Property. If required by the Federal Emergency Management Agency, if any portion of the Mortgaged Property is in an area identified by any federal governmental authority as having special flood hazards, and flood insurance is available, a flood insurance policy meeting the current guidelines of the Federal Insurance Administration is in effect with a generally acceptable insurance carrier (unless the Underwriting Guidelines provide that such insurance is not necessary if the portion of the Mortgaged Property in the flood area is limited to the lot, and does not include the location of any structures), in an amount representing coverage not less than the least of (1) the outstanding principal balance of the Loan, (2) the full insurable value of the Mortgaged Property, and (3) the maximum amount of insurance available under the Flood Disaster Protection Act of 1973, as amended. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Loan Originator, its successors and assigns (including without limitation, subsequent owners of the Loan), as mortgagee, and may not be reduced, terminated or canceled without 30 days' prior written notice to the mortgagee. No such notice has been received by the Loan Originator. All premiums on such insurance policy have been paid. The related Mortgage obligates the Borrower to maintain all such insurance and, at such Borrower's failure to do so, authorizes the mortgagee to maintain such insurance at the Borrower's cost and expense and to seek reimbursement therefor from such Borrower. Where required by state law or regulation, the Borrower has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a "master" or "blanket" hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect. The Loan Originator has not engaged in, and has no knowledge of the Borrower's having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by the Loan Originator. -52- 58 (8) Compliance with Applicable Laws. Any and all requirements of any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Loan at the time it was originated have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations. (9) No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission. No Loan Originator has waived the performance by the Borrower of any action, if the Borrower's failure to perform such action would cause the Loan to be in default, nor has any Loan Originator waived any default resulting from any action or inaction by the Borrower. (10) Location and Type of Mortgaged Property. The Mortgaged Property is located in the United States at the location identified in the Loan Schedule and consists of a single parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a low-rise condominium project, or an individual unit in a planned unit development or a de minimis planned unit development, provided, however, that no residence or dwelling is a mobile home. Other than with respect to Mixed Use Loans, no portion of the Mortgaged Property is used for commercial purposes. (11) Valid Lien. The Mortgage is a valid, subsisting, enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) and perfected (A) first lien and first priority security interest with respect to each Loan which is indicated by the Loan Originator to be a first lien (as reflected on the Loan Schedule) or (B) second lien and second priority security interest with respect to each Loan which is indicated by such Loan Originator to be a second lien (as reflected on the Loan Schedule), in either case, on the real property included in the Mortgaged Property, including all buildings on the Mortgaged Property located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to: (1) the lien of current real property taxes and assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and -53- 59 other exceptions to title acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Loan and (a) referred to or otherwise considered in the appraisal made for the originator of the Loan or (b) which do not materially and adversely affect the Appraised Value of the Mortgaged Property set forth in such appraisal; (3) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property; and (4) with respect to each Loan which is indicated by the Loan Originators to be a Second Lien Loan (as reflected on the Loan Schedule) a first lien on the Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Loan establishes and creates a valid, subsisting and enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) (A) first lien and first priority security interest with respect to each Loan which is indicated by a Loan Originator to be a First Lien Loan (as reflected on the Loan Schedule) or (B) second lien and second priority security interest with respect to each Loan which is indicated by a Loan Originator to be a Second Lien Loan (as reflected on the Loan Schedule), in either case, on the property described therein and such Loan Originator has full right to pledge and assign the same to the Indenture Trustee. (12) Validity of Mortgage Documents. The Promissory Note and the Mortgage and any other agreement executed and delivered by a Borrower or guarantor, if applicable, in connection with a Loan are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws effecting creditors' rights generally and by general principles of equity) in accordance with its terms. All parties to the Promissory Note, the Mortgage and any other such related agreement had legal capacity to enter into the Loan and to execute and deliver the Promissory Note, the Mortgage and any such agreement, and the Promissory Note, the Mortgage and any other such related agreement have been duly and properly executed by such related parties. To the Loan Originator's knowledge, no fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to a Loan has taken place on the part of any Person, including, without limitation, the Borrower, any appraiser, any builder or developer, or any other party involved in the origination of the Loan. The Loan Originators have reviewed all of the documents constituting -54- 60 the Servicing File and has made such inquiries as they deem necessary to make and confirm the accuracy of the representations set forth herein. (13) Full Disbursement of Proceeds. The Loan has been closed and the proceeds of the Loan have been fully disbursed and there is no further requirement for future advances thereunder, and either (i) any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with or (ii) an escrow of funds for the completion of any on-site or off-site improvements has been established in an amount sufficient to make all repairs required by the Loan Originator to the Mortgaged Property. All costs, fees and expenses incurred in making or closing the Loan and the recording of the Mortgage were paid, and the Borrower is not entitled to any refund of any amounts paid or due under the Promissory Note or Mortgage. (14) Ownership. The Loan Originator is the sole owner and holder of the Loan. The Loan is not assigned or pledged, and the Loan Originator has good, indefeasible and marketable title thereto, and has full right to transfer, pledge and assign the Loan to the Indenture Trustee free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party to assign, transfer and pledge each Loan pursuant to this Agreement and following the pledge of each Loan, the Indenture Trustee will hold such Loan free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest except any such security interest created pursuant to the terms of this Agreement. (15) Doing Business. All parties which have had any interest in the Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (ii) either (A) organized under the laws of such state, (B) qualified to do business in such state, (C) a federal savings and loan association, a savings bank or a national bank having a principal office in such state, or (D) not doing business in such state. (16) Loan-to-Value Ratio. No Loan has a Loan-to-Value Ratio greater than 100% or a Combined Loan-to-Value Ratio greater than 125%. (17) Title Insurance. The Loan is covered by either (i) an attorney's opinion of title and abstract of title, the form and substance of which is acceptable to mortgage lending institutions making mortgage loans in the -55- 61 area wherein the Mortgaged Property is located or (ii) an ALTA lender's title insurance policy or other generally acceptable form of policy or insurance and each such title insurance policy is issued by a title insurer qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring the Loan Originators, their respective successors and assigns, as to the first priority lien of the Mortgage in the original principal amount of the Loan (or to the extent a Promissory Note provides for negative amortization, the maximum amount of negative amortization in accordance with the Mortgage), subject only to the exceptions contained in clauses (1), (2), (3), of paragraph (11) of this Section 3.05 and, with respect to each Loan which is indicated by the Loan Originators to be a Second Lien Loan (as reflected on the Loan Schedule). Where required by state law or regulation, the Borrower has been given the opportunity to choose the carrier of the required mortgage title insurance. Additionally, such lender's title insurance policy affirmatively insures ingress and egress and against encroachments by or upon the Mortgaged Property or any interest therein. The title policy does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading. Each Loan Originator, its respective successors and assigns, are the sole insureds of such lender's title insurance policy, and such lender's title insurance policy is valid and remains in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender's title insurance policy, and, to the best of such Loan Originator's knowledge, no prior holder or servicer of the related Mortgage, including any Loan Originator, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy, including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by any Loan Originator. (18) No Defaults. There is no default, breach, violation or event of acceleration existing under the Mortgage or the Promissory Note (other than with respect to Loans that are 30 to 59 days Delinquent and Loans that are 60 to 89 days Delinquent; and no event has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither the Loan Originators nor their respective predecessors have waived any default, breach, violation or event of acceleration. With respect to each Loan which is indicated by a Loan Originator to be a Second Lien Loan (as reflected on the Loan Schedule) -56- 62 (i) the prior mortgage is in full force and effect, (ii) there is no default, breach, violation or event of acceleration existing under such prior mortgage or the related mortgage note, (iii) no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration thereunder, and either (A) the prior mortgage contains a provision which allows or (B) applicable law requires, the mortgagee under the Second Lien Loan to receive notice of, and affords such mortgagee an opportunity to cure any default by payment in full or otherwise under the prior mortgage. (19) No Mechanics' Liens. There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage. (20) Location of Improvements; No Encroachments. All improvements which were considered in determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning and building law, ordinance or regulation. (21) Origination; Payment Terms. The Loan was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar banking institution which is supervised and examined by a federal or state authority. Principal payments on the Loan commenced no more than 60 days after funds were disbursed in connection with the Loan. The Loan Interest Rate is adjusted, with respect to ARMs, on each Change Date to equal the Index plus the Gross Margin (rounded up or down to the nearest .125%), subject to the Lifetime Cap. The Promissory Note is payable in equal monthly installments of principal and interest, which installments of interest, with respect to ARMs, are subject to change due to the adjustments to the Loan Interest Rate on each Change Date, with interest calculated and payable in arrears, sufficient to amortize the Loan fully by the stated maturity date, over an original term of not more than 30 years from commencement of amortization; provided, however, in the case of a Balloon Loan, the Loan matures prior to full amortization thereby requiring a balloon payment of the then outstanding principal -57- 63 balance prior to full amortization of the Loan. The due date of the first payment under the Promissory Note is no more than 60 days from the date of the Promissory Note. (22) Customary Provisions. The Promissory Note has a stated maturity. The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a Borrower on a Loan and foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Loan will be able to deliver good and merchantable title to the Mortgaged Property. There is no homestead or other exemption available to a Borrower which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. (23) Conformance with Underwriting Guidelines and Agency Standards. The Loan was underwritten substantially in accordance with the applicable Underwriting Guidelines. The Promissory Note and Mortgage are on forms similar to those used by FHLMC or FNMA and the Loan Originators have not made any representations to a Borrower that are inconsistent with the mortgage instruments used. (24) Occupancy of the Mortgaged Property. As of the Transfer Date the Mortgaged Property is lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. The Loan Originators have not received notification from any governmental authority that the Mortgaged Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspection, licenses or certificates, as the case may be. The Loan Originators have not received notice of any violation or failure to conform with any such law, ordinance, regulation, standard, license or certificate. (25) No Additional Collateral. The Promissory Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in clause (10) above other than collateral which is not included in any calculation of the LTV of such Loan. -58- 64 (26) Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Indenture Trustee or the Initial Noteholder to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Borrower. (27) Delivery of Mortgage Documents. The Promissory Note, the Mortgage, the Assignment of Mortgage and any other documents required to be delivered under the Custodial Agreement for each Loan have been delivered or will be delivered in accordance with Section 2.04 to the Custodian. The Loan Originators or their respective agents are in possession of a complete, true and accurate Loan File in compliance with the Custodial Agreement, except for such documents the originals of which have been delivered to the Custodian. (28) Transfer of Loans. The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located. (29) Due-On-Sale. The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder. (30) Consolidation of Future Advances. Any future advances made to the Borrower prior to the Transfer Cutoff Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having (A) first lien priority with respect to each Loan which is indicated by the Loan Originators to be a First Lien Loan (as reflected on the Loan Schedule) or (B) second lien priority with respect to each Loan which is indicated by the Loan Originators to be a Second Lien Loan (as reflected on the Loan Schedule), in either case, by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to FNMA and FHLMC. The consolidated principal amount does not exceed the original principal amount of the Loan. (31) Mortgaged Property Undamaged. To the best of the Loan Originator's knowledge, the Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, flood, tornado or other casualty so as to -59- 65 affect adversely the value of the Mortgaged Property as security for the Loan or the use for which the premises were intended and each Mortgaged Property is in good repair. There have not been any condemnation proceedings with respect to the Mortgaged Property and no Loan Originator has knowledge of any such proceedings. (32) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The origination and collection practices used by the originator, each servicer of the Loan and any Loan Originator with respect to the Loan have been in all respects in compliance with applicable laws and regulations and in all material respects in compliance with Accepted Servicing Practices, and have been in all respects legal. With respect to escrow deposits and Escrow Payments (other than with respect to each Loan which is indicated by the Loan Originators to be a Second Lien Loan and for which the mortgagee under the First Lien Loan is collecting Escrow Payments (as reflected on the Loan Schedule), all such payments are in the possession of, or under the control of, the Loan Originators and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in full compliance with state and federal law. An escrow of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due the Loan Originators have been capitalized under the Mortgage or the Promissory Note. All Loan Interest Rate adjustments have been made in strict compliance with state and federal law and the terms of the related Promissory Note. Any interest required to be paid pursuant to state, federal and local law has been properly paid and credited. (33) Other Insurance Policies. No action, inaction or event has occurred and no state of facts exists or has existed that has resulted or will result in the exclusion from, denial of, or defense to coverage under any applicable special hazard insurance policy, PMI Policy or bankruptcy bond, irrespective of the cause of such failure of coverage. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by the Loan Originators or by any officer, director, or employee of the Loan Originators or any designee of the Loan Originators or any corporation in which the Loan Originators or any officer, director, or employee had a financial interest at the time of placement of such insurance. (34) Soldiers' and Sailors' Civil Relief Act. The Borrower has not notified any Loan Originator, and no Loan Originator has knowledge, of any -60- 66 relief requested or allowed to the Borrower under the Soldiers' and Sailors' Civil Relief Act of 1940. (35) Appraisal. The Loan File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Loan application by a qualified appraiser, duly appointed by the Loan Originators, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Loan. (36) Disclosure Materials. The Borrower has executed a statement to the effect that the Borrower has received all disclosure materials required by applicable law with respect to the making of ARMs, and the Borrowers maintain such statement in the Loan File. (37) Construction or Rehabilitation of Mortgaged Property. No Loan was made in connection with the construction or rehabilitation of a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged Property. (38) No Defense to Insurance Coverage. No action has been taken or failed to be taken, no event has occurred and no state of facts exists or has existed on or prior to the Transfer Date (whether or not known to any Loan Originator on or prior to such date) which has resulted or will result in an exclusion from, denial of, or defense to coverage under any private mortgage insurance (including, without limitation, any exclusions, denials or defenses which would limit or reduce the availability of the timely payment of the full amount of the loss otherwise due thereunder to the insured) whether arising out of actions, representations, errors, omissions, negligence, or fraud of the Loan Originators, the related Borrower or any party involved in the application for such coverage, including the appraisal, plans and specifications and other exhibits or documents submitted therewith to the insurer under such insurance policy, or for any other reason under such coverage, but not including the failure of such insurer to pay by reason of such insurer's breach of such insurance policy or such insurer's financial inability to pay. (39) Capitalization of Interest. The Promissory Note does not by its terms provide for the capitalization or forbearance of interest. (40) No Equity Participation. No document relating to the Loan provides for any contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Promissory Note is not convertible to an ownership interest in the -61- 67 Mortgaged Property or the Borrower and the Loan Originators have not financed nor do they own directly or indirectly, any equity of any form in the Mortgaged Property or the Borrower. (41) Withdrawn Loans. If the Loan has been released to any Loan Originator pursuant to a Request for Release as permitted under the Custodial Agreement, then the promissory note relating to the Loan was returned to the Custodian within 14 days (or if such fourteenth day was not a Business day, the next succeeding Business Day). (42) No Exception. The Custodian has not noted any material exceptions on a Loan Schedule and Exceptions Report (as defined in the Custodial Agreement) with respect to the Loan which would materially adversely affect the Loan or the Indenture Trustee's security interest, granted by the Loan Originator, in the Loan. (43) Mortgage Submitted for Recordation. The Mortgage either has been or will promptly be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (44) Securitization. Each Loan conforms to the parties' Underwriting Guidelines and otherwise conforms to the current standards of institutional securitization applicable to loans similar in nature to the Loans. All Loans, individually and in the aggregate, substantially comply with each related representation or warranty customarily required under the current standards of investment grade institutional securitization applicable to mortgage loans similar in nature to the Loans. (45) Representation regarding compliance with aggregate pool characteristics. The Loans in the Loan Pool, in the aggregate, comply with the percentage limitations set forth in clauses (i) through (viii) of the definition of "Collateral Value". Section 3.06 Purchase and Substitution. (a) It is understood and agreed that the representations and warranties set forth in Section 3.05 hereof shall survive the conveyance of the Loans to the Indenture Trustee on behalf of the Issuer, and the delivery of the Securities to the Securityholders. Upon discovery by the Depositor, the Servicer, the Loan Originators, the Custodian, the Issuer, the Indenture Trustee or any Securityholder of a breach of any of such representations and warranties or the representations and warranties of the Loan Originators set forth in Section 3.02 which materially and adversely affects the value of the Loans or the interests of the Securityholders in the related Loan (notwithstanding that such representation and warranty was made to the related Loan Originator's best knowledge) or which, as a result of the attributes of -62- 68 the aggregate Loan Pool, constitutes a breach of the representations and warranties set forth in Section 3.05 (45), the party discovering such breach shall give prompt written notice to the others. The related Loan Originator shall within 5 Business Days of any breach of a representation or warranty, promptly cure such breach in all material respects. If within 5 Business Days after the earlier of the related Loan Originator's discovery of such breach or the related Loan Originator's receiving notice thereof such breach has not been remedied by the related Loan Originator and such breach materially and adversely affects the interests of the Securityholders or in the related Loan (the "Defective Loan"), the related Loan Originator shall promptly upon receipt of written instructions from the Majority Noteholders either (i) remove such Defective Loan from the Trust (in which case it shall become a Deleted Loan) and substitute one or more Qualified Substitute Loans in the manner and subject to the conditions set forth in this Section 3.06 or (ii) purchase such Defective Loan at a purchase price equal to the Purchase Price with respect to such Defective Loan by depositing such Purchase Price in the Collection Account. The related Loan Originator shall provide the Servicer, the Indenture Trustee, the Initial Noteholder and the Issuer with a certification of a Responsible Officer on the Determination Date next succeeding the end of such 5 Business Days period indicating whether the related Loan Originator is purchasing the Defective Loan or substituting in lieu of such Defective Loan a Qualified Substitute Loan. To the extent that a Wet Funded Loan is repurchased by the related Loan Originator by means of a withdrawal of the Sales Price therefor from the Reserve Account and distribution of such amount to the Noteholders, the related Loan Originator shall pay an additional amount equal to the Note Interest Rate on the Principal Balance of such Wet Loan, computed for the period of time that the Wet Funded Loan was included in the Trust Estate; and the amount so withdrawn and such additional amount shall constitute the Purchase Price of such Wet Funded Loan. Any substitution of Loans pursuant to this Section 3.06(a) shall be accompanied by payment by the related Loan Originator of the Substitution Adjustment, if any, to be deposited in the Collection Account pursuant to Section 5.01(b)(1) hereof. It is understood and agreed that the obligation of the Loan Originator to repurchase or substitute any such Loan pursuant to this Section 3.06 shall constitute the sole remedy against it with respect to such breach of the foregoing representations or warranties or the existence of the foregoing conditions. (b) As to any Deleted Loan for which the related Loan Originator substitutes a Qualified Substitute Loan or Loans, the related Loan Originator shall effect such substitution by delivering to the Indenture Trustee and Initial Noteholder (i) a certification executed by a Responsible Officer of the related Loan Originator to the effect that the Substitution Adjustment, if any, has been credited to the Collection Account and (ii) the documents constituting the Custodial Loan File for such Qualified Substitute Loan or Loans. The Servicer shall deposit in the Collection Account all payments received in connection with such Qualified Substitute Loan or Loans after the date of such substitution. Monthly Payments received with respect to Qualified Substitute Loans on or before the date of substitution will be retained by the related Loan Originator. The Issuer will be entitled to all -63- 69 payments received on the Deleted Loan on or before the date of substitution and the related Loan Originator shall thereafter be entitled to retain all amounts subsequently received in respect of such Deleted Loan. The related Loan Originator shall give written notice to the Issuer, the Servicer (if the related Loan Originator is not then acting as such), the Indenture Trustee and Initial Noteholder that such substitution has taken place and the Servicer shall amend the Loan Schedule to reflect (i) the removal of such Deleted Loan from the terms of this Agreement and (ii) the substitution of the Qualified Substitute Loan. The related Loan Originator shall promptly deliver to the Issuer, the Servicer, the Indenture Trustee and Initial Noteholder, a copy of the amended Loan Schedule. Upon such substitution, such Qualified Substitute Loan or Loans shall be subject to the terms of this Agreement in all respects, and the related Loan Originator shall be deemed to have made with respect to such Qualified Substitute Loan or Loans, as of the date of substitution, the covenants, representations and warranties set forth in Section 3.05 hereof. On the date of such substitution, the related Loan Originator will deposit into the Collection Account an amount equal to the related Substitution Adjustment, if any. In addition, on the date of such substitution, the Servicer shall cause the Indenture Trustee to release the Deleted Loan from the lien of the Indenture and the Servicer will cause such Qualified Substitute Loan to be pledged to the Indenture Trustee under the Indenture as part of the Trust Estate. (c) With respect to all Defective Loans or other Loans repurchased by the related Loan Originator pursuant to this Agreement, upon the deposit of the Purchase Price therefor into the Collection Account, the Indenture Trustee shall assign to the related Loan Originator, without recourse, representation or warranty, all the Indenture Trustee's right, title and interest in and to such Defective Loans or Loans, which right, title and interest were conveyed to the Indenture Trustee pursuant to Section 2.01 hereof. The Indenture Trustee shall, at the expense of the related Loan Originator, take any actions as shall be reasonably requested by the related Loan Originator to effect the repurchase of any such Loans. (d) It is understood and agreed that the obligations of the related Loan Originator set forth in this Section 3.06 to cure, purchase or substitute for a Defective Loan constitute the sole remedies hereunder of the Depositor, the Issuer, the Indenture Trustee, the Owner Trustee and the Securityholders respecting a breach of the representations and warranties contained in Section 3.05 hereof. Any cause of action against the related Loan Originator relating to or arising out of a defect in a Custodial Loan File as contemplated by Section 2.05 hereof or against the related Loan Originator relating to or arising out of a breach of any representations and warranties made in Section 3.05 hereof shall accrue as to any Loan upon (i) discovery of such defect or breach by any party and notice thereof to the related Loan Originator or notice thereof by the related Loan Originator to the Indenture Trustee, (ii) failure by the related Loan Originator to cure such defect or breach or purchase or substitute such Loan as specified above, and (iii) demand upon the related Loan Originator, as applicable, by the Issuer or the Majority Noteholders for all amounts payable in respect of such Loan. (e) Neither the Issuer nor the Indenture Trustee shall have any duty to conduct any affirmative investigation other than as specifically set forth in this Agreement as -64- 70 to the occurrence of any condition requiring the repurchase or substitution of any Loan pursuant to this Section or the eligibility of any Loan for purposes of this Agreement. Section 3.07 Dispositions. (a) (i) In consideration of the consideration received from the Depositor under the Loan Purchase Agreement, and, with respect to ANB and ABC, from the Issuer hereunder, each Loan Originator hereby agrees and covenants that in connection with each Disposition it shall effect the following at the direction of the Disposition Agent with respect to the Loans it sold to the Issuer: (A) make such representations and warranties concerning the Loans as of the "cutoff date" of the related Disposition to the Disposition Participants as may be necessary to effect the Disposition and such additional representations and warranties as may be necessary, in the reasonable opinion of any of the Disposition Participants, to effect such Disposition; provided, that no Loan Originator shall be required to make any representation or warranty beyond the scope or substance of the representations and warranties delineated herein; and provided further that, to the extent that a Loan Originator has at the time of the Disposition actual knowledge of any facts or circumstances that would render any of such representations and warranties materially false, such Loan Originator may notify the Disposition Participants of such facts or circumstances and, in such event, shall have no obligation to make such materially false representation and warranty; (B) supply such information, opinions of counsel, letters from law and/or accounting firms and other documentation and certificates regarding the origination of the Loans as any Disposition Participant shall reasonably request to effect a Disposition and enter into such indemnification agreements customary for such transaction relating to or in connection with the Disposition as the Disposition Agent may reasonably require; (C) make itself available for and engage in good faith consultation with the Disposition Participants concerning information to be contained in any document, agreement, private placement memorandum, or filing with the Securities and Exchange Commission relating to the Loan Originator or the Loans in connection with a Disposition and shall use reasonable efforts to compile any information and prepare any reports and certificates, into a form, whether written or electronic, suitable for inclusion in such documentation; (D) to implement the foregoing and to otherwise effect a Disposition, enter into, or cause its Affiliates to enter into insurance and indemnity agreements, underwriting or placement agreements, servicing agreements, purchase agreements and any other documentation which may be required of or deemed appropriate by the Disposition Participants in order to effect a Disposition; and -65- 71 (E) take such further actions as may be reasonably necessary to effect the foregoing. provided, that notwithstanding anything to the contrary, (a) the Loan Originators shall have no liability for the Loans arising from or relating to the ongoing ability of the related Borrowers to pay under the Loans; (b) none of the indemnities hereunder shall constitute an unconditional guarantee by the Loan Originators of collectibility of the Loans; (c) the Loan Originators shall have no obligation with respect to the financial inability of any Borrower to pay principal, interest or other amount owing by such Borrower under a Loan; and (d) the Loan Originators shall only be required to enter into documentation in connection with Dispositions that is consistent with the prior public securitizations of affiliates of the Loan Originators, provided that to the extent an Affiliate of the Initial Noteholder acts as "depositor" or performs a similar function in a Securitization, additional indemnities and informational representations and warranties are provided which are consistent with those in the Basic Documents and may upon request of the Loan Originators be set forth in a separate agreement between an Affiliate of the Initial Noteholder and the Loan Originators. (ii) In connection with Dispositions the Loan Originators (A) may participate as a concurrent bidder for the Loans subject to such Whole Loan Sale, but may not pay a price higher than the fair market value thereof (as determined by the Market Value Agent), and (B) shall retain such underwriters or sales agents as shall be agreed in writing between the Servicer and the Initial Noteholder. (iii) Conditions to Dispositions. The following conditions shall apply to all Dispositions: (A) As long as no Event of Default or Default shall have occurred and be continuing under the Sale and Servicing Agreement or the Indenture, the Servicer shall continue to service the Loans included in any Disposition. (B) During a Termination Period, the Loan Originators, the Issuer and the Depositor shall use commercially reasonable efforts to effect a Disposition at the direction of the Disposition Agent prior to the expiration of the Termination Period. (b) In accordance with the terms of Section 3.07(a) or upon the exercise of the Put Option, the Issuer shall effect Dispositions at the direction of the Disposition Agent. In connection therewith, the Trust agrees to assist the Loan Originators in such Dispositions and accordingly it shall, at the request and direction of the Disposition Agent: (i) transfer, deliver and sell all or a portion of the Loans, as of the "cutoff dates" of the related Dispositions, to such Disposition Participants as may be necessary to effect the Dispositions; provided, that any such sale shall be for "fair market value," as determined by the Disposition Agent in its reasonable discretion; -66- 72 (ii) deposit the cash Disposition Proceeds into the Collection Account pursuant to Section 5.01(b)(1) and retain any Retained Securities created in any Securitizations in accordance with the terms of this Agreement; (iii) to the extent that a Securitization creates any Retained Securities, to accept such Retained Securities as a part of the Disposition Proceeds; and (iv) take such further actions as may be reasonably necessary to effect such Dispositions. (c) The Servicer hereby covenants that it will take such actions as may be reasonably necessary to effect Dispositions as the Disposition Agent may request and direct, including without limitation providing the Loan Originators such information as may be required to make representations and warranties required hereunder. (d) The right of the Disposition Agent to require the Issuer and the Loan Originators to effect Dispositions is subject to the conditions set forth in Section 3.07(a). (e) The Disposition Agent may effect Whole Loan Sales upon written notice to the Servicer of its intent to cause the Issuer to effect a Whole Loan Sale at least 5 Business Days in advance thereof. The Disposition Agent shall serve as agent for Whole Loan Sales and will receive a reasonable fee for such services provided that no such fee shall be payable if the Loan Originator or its Affiliates purchase such Loans, and no Event of Default or Default shall have occurred. The Loan Originator or its Affiliates may concurrently bid to purchase Loans in a Whole Loan Sale; however, it shall not pay a price in excess of the fair market value thereof as reasonably determined by the Disposition Agent. (f) The parties' obligations under this Section 3.07 shall continue notwithstanding the occurrence of an Event of Default. (g) The Disposition Agent (and the Majority Noteholders to the extent directing the Disposition Agent) shall be an independent contractor to the Issuer and shall have no fiduciary obligations to the Issuer or any of its affiliates. In that connection, the Disposition Agent shall not be liable for any error of judgment made in good faith and shall not be liable with respect to any action it takes or omits to take in good faith in the performance of its duties. (h) In the event there is a Disposition with respect to some but not all of the Loans then subject to this Agreement, the Disposition Agent may select the Loans to be included in such Disposition using the following criteria selection; (i) aggregate Loan Balance; (ii) type of loan (fixed, ARM, or intermediate) -67- 73 (iii) LTV; (iv) average Loan Balance; (v) production channel; (vi) lien position; or (vii) loan originator; provided that in the event that the Disposition Agent shall select Loans using any criteria listed above such that fewer than all Loans meeting any selection criteria are selected, such selection shall be based upon the Transfer Date of each Loan, commencing with the earliest Transfer Date, and progressing to the most recent Transfer Date (commonly referred to as the "first in/first out method"). Section 3.08 Loan Originator Put; Servicer Call. (a) Loan Originator Put. The related Loan Originator shall promptly repurchase, upon the written demand of the Majority Noteholders, any Put/Call Loan; provided, however, that such Loan Originator shall only be required to repurchase such Put/Call Loan whenever the limits set forth in the definition of Performance Trigger shall have been exceeded. (b) Servicer Call. The Servicer may repurchase any Put/Call Loan at any time. Such Servicer Calls shall be solely at the option of the Servicer. Prior to exercising a Servicer Call, the Servicer shall deliver written notice to the Majority Noteholders and the Indenture Trustee which notice shall identify each Loan to be repurchased and the Purchase Price therefor. (c) In connection with each Loan Originator Put, the related Loan Originator shall remit to the Servicer for deposit into the Collection Account, the Purchase Price for the Loans to be repurchased. In connection with each Servicer Call, the Servicer shall deposit into the Collection Account the Purchase Price for the Loans to be repurchased. The aggregate Purchase Price of all Loans transferred pursuant to Section 3.08(a) shall in no event exceed the Unfunded Transfer Obligation at the time of such Loan Originator Put. Section 3.09 Modification of Underwriting Guidelines. The Servicer shall give the Initial Noteholder prompt written notification of any material modification or change to the Underwriting Guidelines. -68- 74 ARTICLE IV ADMINISTRATION AND SERVICING OF THE LOANS Section 4.01 Duties of the Servicer. (a) Acting directly or through one or more Subservicers as provided in Section 4.03, the Servicer, as master servicer, shall service and administer the Loans in accordance with this Agreement and on behalf of the Indenture Trustee and the Initial Noteholder and with reasonable care, and using that degree of skill and attention that the Servicer exercises with respect to comparable mortgage loans that it services for itself or others, and shall have full power and authority, acting alone, to do or cause to be done any and all things in connection with such servicing and administration which it may deem necessary or desirable. (b) The duties of the Servicer shall include collecting and posting of all payments, responding to inquiries of Borrowers or by federal, state or local government authorities with respect to the Loans, investigating delinquencies, reporting tax information to Borrowers in accordance with its customary practices and accounting for collections and furnishing monthly and annual statements to the Indenture Trustee and the Initial Noteholder, with respect to distributions, making Periodic Advances and Servicing Advances pursuant hereto. The Servicer shall follow its customary standards, policies and procedures in performing its duties as Servicer. The Servicer shall cooperate with the Indenture Trustee and furnish to the Indenture Trustee with reasonable promptness information in its possession as may be necessary or appropriate to enable the Indenture Trustee to perform its tax reporting duties hereunder. The Indenture Trustee shall furnish the Servicer or any Subservicer with any powers of attorney and other documents necessary or appropriate to enable the Servicer or any Subservicer to carry out its servicing and administrative duties hereunder. (c) Without limiting the generality of the foregoing, the Servicer (i) shall continue, and is hereby authorized and empowered by the Indenture Trustee, to execute and deliver, on behalf of itself, the Noteholders, the Issuer and the Indenture Trustee or any of them, any and all instruments of satisfaction or cancellation, or of full release or discharge and all other comparable instruments, with respect to the Loans and with respect to the related Mortgaged Properties; (ii) may consent to any modification of the terms of any Promissory Note not expressly prohibited hereby if the effect of any such modification will not be to affect materially and adversely the security afforded by the related Mortgaged Property, the timing of receipt of any payments required hereby or the interests of the Indenture Trustee or Noteholders. (d) The Servicer shall have the right using that degree of skill and attention that the Servicer exercises with respect to comparable mortgage loans that it services for itself or others, to approve applications of Borrowers for consent to (i) partial releases of Mortgages, (ii) alterations to Mortgaged Properties and (iii) removal, demolition or division of Mortgaged Properties. No application for approval shall be considered by the Servicer unless: (x) the provisions of the related Promissory Note and Mortgage have been complied with; (y) -69- 75 the Combined Loan-to-Value Ratio (which may, for this purpose, be determined at the time of any such action in a manner reasonably acceptable to the Majority Noteholders) and the Borrower's debt-to-income ratio after any release does not exceed the Combined Loan-to-Value Ratio and debt-to-income ratio applicable to such Loan at origination and (z) the lien priority of the related Mortgage is not adversely affected; provided, however, that the foregoing requirements (x), (y) and (z) shall not apply to any such situation described in this paragraph if such situation results from any condemnation or easement activity by a governmental entity. (e) The Servicer may, and is hereby authorized to, perform any of its servicing responsibilities with respect to all or certain of the Loans through a Subservicer as it may from time to time designate, but no such designation of a Subservicer shall serve to release the Servicer from any of its obligations under this Agreement. Such Subservicer shall have all the rights and powers of the Servicer with respect to such Loans under this Agreement. (f) Without limiting the generality of the foregoing, but subject to Sections 4.12 and 4.13, the Servicer in its own name or in the name of a Subservicer may be authorized and empowered pursuant to a power of attorney executed and delivered by the Indenture Trustee to execute and deliver, and may be authorized and empowered by the Indenture Trustee to execute and deliver, on behalf of itself, the Noteholders, the Issuer and the Indenture Trustee or any of them, (i) any and all instruments of satisfaction or cancellation or of partial or full release or discharge and all other comparable instruments with respect to the Loans and with respect to the Mortgaged Properties, (ii) to institute foreclosure proceedings or obtain a deed in lieu of foreclosure so as to effect ownership of any Mortgaged Property on behalf of the Indenture Trustee, and (iii) to hold title to any Mortgaged Property upon such foreclosure or deed in lieu of foreclosure on behalf of the Indenture Trustee; provided, however, that Section 4.13 shall constitute a power of attorney from the Indenture Trustee to the Servicer or any Subservicer to execute an instrument of satisfaction (or assignment of mortgage without recourse) with respect to any Loan paid in full (or with respect to which payment in full has been escrowed). Subject to Sections 4.12 and 4.13, the Indenture Trustee shall furnish the Servicer and any Subservicer with any powers of attorney and other documents as the Servicer or such Subservicer shall reasonably request to enable the Servicer and such Subservicer to carry out their respective servicing and administrative duties hereunder. (g) The Servicer shall give prompt notice to the Indenture Trustee and the Initial Noteholder of any action, of which the Servicer has actual knowledge, to (i) assert a claim against the Trust or (ii) assert jurisdiction over the Trust. (h) Servicing Advances incurred by the Servicer or any Subservicer in connection with the servicing of the Loans (including any penalties in connection with the payment of any taxes and assessments or other charges) on any Mortgaged Property shall be recoverable by the Servicer or such Subservicer to the extent described in Section 4.08. -70- 76 (i) In the event of a Disposition or other removal of a Loan from the Trust Estate, the Servicer shall be terminated hereunder with respect to such Loan. (j) The Servicer agrees that in the event that any Notes are outstanding after the applicable Maturity Date, the Servicer will resign and the Majority Noteholders shall appoint a successor in accordance with provisions of Section 9.02. The Majority Noteholders may, by written notice to the Servicer and the Indenture Trustee, elect to have the Servicer continue its duties hereunder. Section 4.02 Collection of Certain Loan Payments. (a) The Servicer shall, to the extent such procedures shall be consistent with this Agreement and the terms and provisions of any applicable Insurance Policies, follow Accepted Servicing Practices. Consistent with the foregoing, the Servicer may in its discretion (i) waive any assumption fees, late payment charges, charges for checks returned for insufficient funds, prepayment fees, if any, or other fees which may be collected in the ordinary course of servicing the Loans, (ii) if a Borrower is in default or about to be in default because of a Borrower's financial condition, arrange with the Borrower a schedule for the payment of delinquent payments due on the related Loan; provided, however, the Servicer shall not reschedule the payment of delinquent payments more than one time in any twelve consecutive months with respect to any Borrower. (b) The Servicer shall hold in escrow on behalf of the related Borrower all Prepaid Installments received by it, and shall apply such Prepaid Installments as directed by such Borrower and as set forth in the related Promissory Note. Section 4.03 Subservicing Agreements Between Servicer and Subservicers. The Servicer may enter into Subservicing Agreements for any servicing and administration of Loans with any institution which is in compliance with the laws of each state necessary to enable it to perform its obligations under such Subservicing Agreement and is an Eligible Servicer. The Servicer shall give notice to the Indenture Trustee and the Initial Noteholder of the appointment of any Subservicer and shall furnish to the Indenture Trustee and the Initial Noteholder a copy of the Subservicing Agreement. For purposes of this Agreement, the Servicer shall be deemed to have received payments on Loans when any Subservicer has received such payments. Any such Subservicing Agreement shall be consistent with and not violate the provisions of this Agreement. Section 4.04 Successor Subservicers. Upon notice to the Indenture Trustee and the Initial Noteholder, the Servicer shall be entitled to terminate any Subservicing Agreement in accordance with the terms and conditions of such Subservicing Agreement and to either itself directly service the related Loans or enter into a Subservicing Agreement with a successor Subservicer which qualifies under Section 4.03. -71- 77 Section 4.05 Liability of Servicer. The Servicer shall not be relieved of its obligations under this Agreement notwithstanding any Subservicing Agreement or any of the provisions of this Agreement relating to agreements or arrangements between the Servicer and a Subservicer or otherwise, and the Servicer shall be obligated to the same extent and under the same terms and conditions as if it alone were servicing and administering the Loans. The Servicer shall be entitled to enter into any agreement with a Subservicer for indemnification of the Servicer by such Subservicer and nothing contained in such Subservicing Agreement shall be deemed to limit or modify this Agreement. The Trust shall not indemnify the Servicer for any losses due to the Servicer's negligence. Section 4.06 No Contractual Relationship Between Subservicer and Indenture Trustee or the Securityholders. Any Subservicing Agreement and any other transactions or services relating to the Loans involving a Subservicer shall be deemed to be between the Subservicer and the Servicer alone and no party hereto nor the Securityholders shall be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to any Subservicer except as set forth in Section 4.07. Section 4.07 Assumption or Termination of Subservicing Agreement by Successor Servicer . In connection with the assumption of the responsibilities, duties and liabilities and of the authority, power and rights of the Servicer hereunder by a successor Servicer pursuant to Section 9.02, it is understood and agreed that the Servicer's rights and obligations under any Subservicing Agreement then in force between the Servicer and a Subservicer may be assumed or terminated by the successor Servicer at its option without the payment of any fee (notwithstanding any contrary provision in any Subservicing Agreement). The Servicer shall, upon request of the successor Servicer, but at the expense of the Servicer, deliver to the assuming party documents and records relating to each Subservicing Agreement and an accounting of amounts collected and held by it and otherwise use its best reasonable efforts to effect the orderly and efficient transfer of the Subservicing Agreements to the assuming party, without the payment of any fee by the successor Servicer, notwithstanding any contrary provision in any Subservicing Agreement. Section 4.08 Servicing Advances. The Servicer will pay all "out-of-pocket" costs and expenses incurred in the performance of its servicing obligations including, but not limited to, the cost of (i) Preservation Expenses, (ii) any enforcement or judicial proceedings, including foreclosures, and (iii) the management and liquidation of Foreclosure Property but is only required to pay such costs and expenses to the extent the Servicer reasonably believes such costs and expenses will increase Net Liquidation Proceeds on the related Loan. Each such amount so paid will -72- 78 constitute a "Servicing Advance". The Servicer may recover Servicing Advances (x) from the Borrowers to the extent permitted by the Loans, from Liquidation Proceeds realized upon the liquidation of the related Loan and (y) as provided in Sections 5.01(c)(1)(ii) or 5.01(c)(3)(i) hereof. In no case may the Servicer recover Servicing Advances from principal and interest payments on any Loan or from any amounts relating to any other Loan except as provided pursuant to Sections 5.01(c)(1)(ii) or 5.01(c)(3)(i) hereof. Section 4.09 Periodic Advances. (a) If, on any Remittance Date, the Servicer determines that the interest portions of Monthly Payments due in the Remittance Period immediately preceding such Payment Date have not been received as of the related Remittance Date, the Servicer shall determine the amount of any Periodic Advance required to be made with respect to the related Payment Date. The Servicer shall include in the amount to be deposited in the Collection Account on such Payment Date an amount equal to the Periodic Advance, if any, from its own funds. (b) The Servicer shall be permitted to fund its payment of Periodic Advances on any Remittance Date and to reimburse itself for any Periodic Advances paid from the Servicer's own funds, from collections on the related Loan. The Servicer may use funds deposited to the Collection Account subsequent to the related Remittance Period and shall deposit into the Collection Account with respect thereto (i) late collections from the Borrower whose Delinquency gave rise to the shortfall which resulted in such Periodic Advance and (ii) Net Liquidation Proceeds recovered on account of the related Loan to the extent of the amount of aggregate Periodic Advances related thereto or (iii) from its own funds. If not therefore recovered from the related Borrower or the related Net Liquidation Proceeds, Periodic Advances constituting Nonrecoverable Periodic Advances shall be recoverable pursuant to Section 5.01(c)(1)(iv). Section 4.10 Maintenance of Insurance. (a) The Servicer shall cause to be maintained with respect to each Loan a hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage, and which provides for a recovery by the Servicer on behalf of the Trust of insurance proceeds relating to such Loan in an amount not less than the least of (i) the outstanding principal balance of the Loan, (ii) the minimum amount required to compensate for loss or damage on a replacement cost basis and (iii) the full insurable value of the premises. (b) If the Loan at the time of origination relates to a Mortgaged Property in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, the Servicer will cause to be maintained with respect thereto a flood insurance policy in a form meeting the requirements of the current guidelines of the Federal Insurance Administration with a generally acceptable carrier in an amount representing coverage, and which provides for a recovery by the Servicer on behalf of the Trust of insurance proceeds relating to such Loan of not less than the least of (i) the outstanding -73- 79 principal balance of the Loan, (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis and (iii) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. The Servicer shall indemnify the Indenture Trustee out of the Servicer's own funds for any loss to the Trust and the Majority Noteholders resulting from the Servicer's failure to maintain the insurance required by this Section. (c) In the event that the Servicer shall obtain and maintain a blanket policy insuring against fire and hazards of extended coverage on all of the Loans, then, to the extent such policy names the Servicer as loss payee and provides coverage in an amount equal to the aggregate unpaid principal balance on the Loans with co-insurance, and otherwise complies with the requirements of this Section 4.10, the Servicer shall be deemed conclusively to have satisfied its obligations with respect to fire and hazard insurance coverage under this Section 4.10, it being understood and agreed that such blanket policy may contain a deductible clause, in which case the Servicer shall, in the event that there shall not have been maintained on the related Mortgaged Property a policy complying with the preceding paragraphs of this Section 4.10, and there shall have been a loss which would have been covered by such policy, deposit in the Collection Account from the Servicer's own funds the difference, if any, between the amount that would have been payable under a policy complying with the preceding paragraph of this Section 4.10 and the amount paid under such blanket policy. Upon the request of the Indenture Trustee, the Issuer or the Initial Noteholder, the Servicer shall cause to be delivered to the Indenture Trustee, the Issuer or the Initial Noteholder, a certified true copy of such policy. Section 4.11 Due-on-Sale Clauses; Assumption and Substitution Agreements. When a Mortgaged Property has been or is about to be conveyed by the Borrower, the Servicer shall, to the extent it has knowledge of such conveyance or prospective conveyance, exercise its rights to accelerate the maturity of the related Loan under any "due on sale" clause contained in the related Mortgage or Promissory Note; provided, however, that the Servicer shall not exercise any such right if (i) the "due on sale" clause, in the reasonable belief of the Servicer, is not enforceable under applicable law; or (ii) the Servicer reasonably believes that to permit an assumption of the Loan would not materially and adversely affect the interest of the Majority Noteholders or of the Issuer. In such event, the Servicer shall enter into an assumption and modification agreement with the person to whom such property has been or is about to be conveyed, pursuant to which such person becomes liable under the Promissory Note and, unless prohibited by applicable law or the Loan Documents, the Borrower remains liable thereon. If the foregoing is not permitted under applicable law, the Servicer is authorized to enter into a substitution of liability agreement with such person, pursuant to which the original Borrower is released from liability and such person is substituted as Borrower and becomes liable under the Promissory Note; provided, however, that to the extent any such substitution of liability agreement would be delivered by the Servicer outside of its usual procedures for mortgage loans held in its own portfolio the Servicer shall, prior to executing and delivering such agreement, obtain the prior written consent of the Majority Noteholders. The Loan, as assumed, shall conform in all respects to the requirements, representations and warranties of this Agreement. The Servicer shall notify -74- 80 the Indenture Trustee that any such assumption or substitution agreement has been completed by forwarding to the Indenture Trustee the original copy of such assumption or substitution agreement, which copy shall be added by the Indenture Trustee to the related Loan File and which shall, for all purposes, be considered a part of such Loan File to the same extent as all other documents and instruments constituting a part thereof. The Servicer shall be responsible for recording or causing the recordation any such assumption or substitution agreements. In connection with any such assumption or substitution agreement, the required monthly payment on the related Loan shall not be changed but shall remain as in effect immediately prior to the assumption or substitution, the stated maturity or outstanding principal amount of such Loan shall not be changed nor shall any required monthly payments of principal or interest be deferred or forgiven. Any fee collected by the Servicer or the Subservicer for consenting to any such conveyance or entering into an assumption or substitution agreement shall be retained by or paid to the Servicer as additional servicing compensation. Notwithstanding the foregoing paragraph or any other provision of this Agreement, the Servicer shall not be deemed to be in default, breach or any other violation of its obligations hereunder by reason of any assumption of a Loan by operation of law or any assumption which the Servicer may be restricted by law from preventing, for any reason whatsoever. Section 4.12 Realization Upon Defaulted Loans. (a) The Servicer shall foreclose upon or otherwise comparably effect the ownership on behalf of the Trust of Mortgaged Properties relating to defaulted Loans as to which no satisfactory arrangements can be made for collection of Delinquent payments and which the Servicer has not purchased pursuant to a Servicer Call. In connection with such foreclosure or other conversion, the Servicer shall exercise such of the rights and powers vested in it hereunder, and use the same degree of care and skill in their exercise or use, as prudent mortgage lenders would exercise or use under the circumstances in the conduct of their own affairs, including, but not limited to, advancing funds for the payment of taxes, amounts due with respect to senior liens, and insurance premiums. Any amounts so advanced shall constitute "Servicing Advances" within the meaning of Section 4.08 hereof. The Servicer shall sell any Foreclosure Property as soon as practicable in accordance with the servicing standard set forth herein. Notwithstanding the generality of the foregoing provisions, the Servicer shall manage, conserve, protect and operate each Foreclosure Property for the Issuer and the Majority Noteholders solely for the purpose of its prompt disposition and sale. Pursuant to its efforts to sell such Foreclosure Property, the Servicer shall either itself or through an agent selected by the Servicer protect and conserve such Foreclosure Property in the same manner and to such extent as is customary in the locality where such Foreclosure Property is located and may, incident to its conservation and protection of the interests of the Securityholders, rent the same, or any part thereof, as the Servicer deems to be in the best interest of the Securityholders for the period prior to the sale of such Foreclosure Property. The Servicer shall take into account the existence of any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource -75- 81 Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation, on a Foreclosure Property in determining whether to foreclose upon or otherwise comparably convert the ownership of such Foreclosure Property. With respect to any Loan secured by a mixed use Foreclosure Property, the Servicer shall, prior to foreclosing upon or otherwise comparably effecting the ownership in the name of the Servicer on behalf of the Trust, either (x) perform a "phase one environmental study" of such Foreclosure Property or (y) repurchase such Foreclosure Property at the Purchase Price. Pursuant to its efforts to sell such Foreclosure Property, the Servicer shall either itself or through an agent selected by the Servicer protect and conserve such Foreclosure Property in the same manner and to such extent as is customary in the locality where such Foreclosure Property is located and may, incident to its conservation and protection of the interests of the Securityholders, rent the same, or any part thereof, as the Servicer deems to be in the best interest of the Securityholders for the period prior to the sale of such Foreclosure Property. The Servicer shall take into account the existence of any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation, on a Mortgaged Property in determining whether to foreclose upon or otherwise comparably convert the ownership of such Mortgaged Property. (b) The Servicer shall determine, with respect to each Defaulted Loan, when it has recovered, whether through trustee's sale, foreclosure sale or otherwise, all amounts it expects to recover from or on account of such defaulted Loan, whereupon such Loan shall become a "Liquidated Loan" and shall promptly deliver to the Initial Noteholder a related liquidation report with respect to such Liquidated Loan. Section 4.13 Release of Files. Upon the payment in full of any Loan (including the repurchase of any Loan or any liquidation of such Loan through foreclosure or otherwise), or the receipt by the Servicer or any Subservicer of a notification that payment in full will be escrowed in a manner customary for such purposes, the Servicer shall deliver to the Custodian a Request for Release and Receipt in accordance with the terms of the Custodial Agreement. The Servicer shall either hold such Custodial File in trust or deliver it to (i) an escrow agent or (ii) any employee, agent or attorney of the Indenture Trustee, in each case pending its release by the Servicer, such escrow agent or such employee, agent or attorney of the Indenture Trustee, as the case may be. Upon any such payment in full, or the receipt of such notification that such funds have been placed in escrow, the Servicer or any Subservicer is authorized to give, as attorney-in-fact for the Issuer and the Indenture Trustee and the mortgagee under the Mortgage which secured the Promissory Note, an instrument of satisfaction (or assignment of Mortgage without recourse) regarding the Mortgaged Property relating to such Mortgage, which instrument of satisfaction or -76- 82 assignment, as the case may be, shall be delivered to the Person or Persons entitled thereto against receipt therefor of payment in full, it being understood and agreed that no expense incurred in connection with such instrument of satisfaction or assignment, as the case may be, shall be chargeable to the Collection Account. In lieu of executing any such satisfaction or assignment, as the case may be, the Servicer may prepare and submit to the Indenture Trustee, a satisfaction (or assignment without recourse, if requested by the Person or Persons entitled thereto) in form for execution by the Indenture Trustee with all requisite information completed by the Servicer or any Subservicer; in such event, the Indenture Trustee shall execute and acknowledge such satisfaction or assignment, as the case may be, and deliver the same with the related Custodial File, as aforesaid. Section 4.14 Access to Information. (a) The Servicer understands that, in connection with the transfer of the Notes, Noteholders may request that the Servicer make available to the Noteholders and to prospective Noteholders annual audited financial statements of Advanta Corp. if AMCUSA or any Affiliate thereof is the Servicer, or if not, the Servicer for any or all of the most recently completed five fiscal years for which such statements are available, which request shall not be unreasonably denied. (b) So long as any Notes remain outstanding, each of the Issuer and any Noteholder shall, at any time and from time to time during regular business hours, or at such other times upon reasonable notice to the Servicer and the Servicer shall permit the Issuer and any Noteholder, or its agents or representatives to: (i) examine all books, records and documents (including computer tapes and disks) in the possession or under the control of the Servicer relating to the Loans, the servicing of the Loans and the compliance of the terms of the Basic Documents, as may be reasonably requested; (ii) visit the offices and property of the Servicer for the purpose of examining such materials described in clause (b)(i) above; (iii) consult with such professionals as may reasonably be aware of the operations or condition of the Servicer, including, without limitation, accountants and auditors, and the Servicer shall cause such professionals to cooperate with any examination conducted in accordance with the terms of this Section 4.14 and to provide access to those materials listed in subclause (b)(i) above in the possession or under the control of such professionals. Section 4.15 Release of Loan Files. If with respect to any Loan: (i) such Loan has become a Defective Loan and has been repurchased or a Qualified Substitute Loan has been conveyed to the Trust pursuant to Section 3.06 hereof; -77- 83 (ii) such Loan or the related Foreclosure Property has been sold in connection with the termination of the Trust pursuant to Section 10.01 hereof; (iii) such Loan has been purchased by the related Loan Originator in accordance with the terms of Section 3.08; or (iv) such Loan has been included in a Disposition and concurrently with such release the cash Disposition Proceeds associated therewith will be deposited into the Collection Account, then, in each such case, the Servicer shall deliver a certificate to the effect that the Servicer has complied with all of its obligations under this Agreement with respect to such Loan and requesting that the Indenture Trustee release to the Servicer the related Custodial Loan File, and the Indenture Trustee shall, within five Business Days or such shorter period as may be required by applicable law, release, or cause the Custodian to release (unless such Custodial Loan File has previously been released), the related Custodial Loan File to the Servicer and execute and deliver such instruments of transfer or assignment prepared and delivered to it by the Servicer, in each case without recourse, representation or warranty as shall be necessary to vest ownership of such Loan in the Servicer or such other Person as may be specified in such certificate, the forms of any such instrument to be appended to such certificate. Section 4.16 Servicing Compensation. As compensation for its services hereunder, the Servicer shall be entitled to retain from collections on the Loans or otherwise withdraw from the Collection Account the Servicing Fee, out of which the Servicer shall pay any servicing fees owed or payable to any Subservicer. Additional servicing compensation in the form of assumption fees, modification fees, and other administrative fees, and any prepayment premiums, insufficient funds charges, amounts remitted pursuant to Section 5.01 hereof and late payment charges shall be part of the Servicing Compensation payable to the Servicer hereunder and shall be paid either by the Servicer's retaining such additional servicing compensation prior to deposit into the Collection Account pursuant to Section 5.01(b)(1) hereof or, if deposited into the Collection Account, as part of the Servicing Compensation withdrawn therefrom pursuant to Section 5.01 hereof. The Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to reimbursement therefor except as specifically provided for herein. The Servicer also agrees to pay all reasonable costs and expenses incurred by any successor Servicer or the Indenture Trustee in replacing the Servicer in the event of a default by the Servicer in the performance of its duties under the terms and conditions of this Agreement. Section 4.17 Statement as to Compliance and Financial Statements. The Servicer will deliver to the Initial Noteholder: -78- 84 (a) not later than 105 days following the end of each calendar year (beginning in March, 1999), an Officer's Certificate stating that (i) a review of the activities of the Servicer during the preceding year and of performance under this Agreement has been made under such officer's supervision and (ii) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all of its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof and what action the Servicer proposes to take with respect thereto. (b) As soon as available and in no event later than 5 Business Days after the filing thereof with the Commission each of the first three quarterly fiscal periods of Advanta Corp., a Quarterly Report on "Form 10-Q" filed by Advanta Corp. with the Commission. (c) As soon as available and in no event later than 5 Business Days after the filing thereof with the Commission, an Annual Report on "Form 10-K" filed by Advanta Corp. with the Commission. (d) As soon as available and in any event within 5 Business Days after the delivery thereof to its shareholders, the annual report that is delivered to its shareholders. (e) Within 10 days after service of process on any of the following, notice of all legal or arbitrable proceedings affecting the Servicer or any of its subsidiaries that questions or challenges the validity or enforceability of any of the Basic Documents or as to which there is a reasonable likelihood of adverse determination which would result in a material adverse effect with respect to the value of the Loans or the interests of any of the Securityholders therein. The Servicer shall also furnish and certify to the requesting party such other information as to (i) its organization, activities and personnel relating to the performance of the obligations of the Servicer hereunder, (ii) its financial condition, (iii) the Loans and (iv) the performance of the obligations of any Subservicer under the related Subservicing Agreement, in each case as the Indenture Trustee or the Issuer may reasonably request from time to time. Section 4.18 Independent Public Accountants' Servicing Report. Not later than 105 days following the end of each calendar year (beginning in March, 1999), the Servicer at its expense shall cause a nationally recognized firm of Independent Certified Public Accountants (which may also render other services to the Servicer) to furnish a statement to the Indenture Trustee, the Depositor and the Initial Noteholder to the effect that such firm has examined certain documents and records relating to the servicing of the Loans under this Agreement or of loans under pooling and servicing agreements (including the Loans and this Agreement) substantially similar to one another (such statement to have attached thereto a schedule setting forth the pooling and servicing agreements covered thereby) and that, on the basis of such examination conducted substantially in compliance with SAS 70, such firm confirms that such servicing has been conducted in compliance with such pooling and servicing agreements except for such significant exceptions or errors in records that, in the opinion of such firm, SAS 70 requires it to report, each of -79- 85 which errors and omissions shall be specified in such statement. In rendering such statement, such firm may rely, as to matters relating to direct servicing of loans by Subservicers, upon comparable statements for examinations conducted substantially in compliance with SAS 70 (rendered within one year of such statement) of Independent certified public accountants with respect to the related Subservicer. Section 4.19 ARMs. The Servicer shall enforce each ARM in accordance with its terms and shall timely calculate, record, report and apply all interest rate adjustments in accordance with the related Promissory Note. The Servicer's records shall, at all times, reflect the then Loan Interest Rate and monthly payment and the Servicer shall timely notify the Borrower of any changes to the Loan Interest Rate or the Borrower's monthly payment. If the Servicer fails to make either a timely or accurate adjustment to the Loan Interest Rate or monthly payment or to notify the Borrower of such adjustments, the Servicer shall pay from its own funds any shortage. If the Servicer's failure to make a scheduled change affects the Trust's rights to make future adjustments under the terms of the ARM, the Servicer shall purchase the ARM, in accordance with the provisions of the last sentence of Section 3.08(b). Any amounts paid by the Servicer pursuant to this Section shall not be an advance and shall not be reimbursable from the proceeds of any Loan. Section 4.20 Year 2000 Compliance. By December 31, 1999, the Servicer will maintain all hardware, firmware or software, or any system consisting of one or more thereof, including, without limitation, any and all enhancements, upgrades, customizations, modifications, maintenance and the like (collectively, the "System"), used by or for the benefit of the Servicer in order for the Servicer to perform its obligations under the Basic Documents to which it is a party in a manner that permits the Servicer to record, store, process, provide and where appropriate, insert, true and accurate dates and calculations for dates and spans, including and following January 1, 2000 (herein referred to as "Year 2000 Compliant"). In addition, "Year 2000 Compliant" shall mean that the System will support the ability for its continued normal usage such that neither the performance nor the correct functioning of the System will be affected by the approach, and passing into, the year 2000. Section 4.21 Inspections by the Majority Noteholders and the Indenture Trustee. At any reasonable time and from time to time upon reasonable notice, the Majority Noteholders, the Indenture Trustee, or any agents or representatives thereof may inspect the Servicer's servicing operations and discuss the servicing operations of the Servicer with any of its officers or directors. The costs and expenses incurred by the Servicer or its agents or representatives in connection with any such examinations or discussions shall be paid by the Servicer. -80- 86 Section 4.22 Errors and Omissions Insurance. The Servicer agrees to maintain errors and omissions coverage and a fidelity bond, each at least to the extent generally maintained by prudent mortgage loan servicers having servicing portfolios of similar size. ARTICLE V ESTABLISHMENT OF TRUST ACCOUNTS; TRANSFER OBLIGATION Section 5.01 Collection Account and Distribution Account; Reserve Account. (a) (1) Establishment of Collection Account. The Servicer, for the benefit of the Noteholders, shall cause to be established and maintained one or more Collection Accounts (collectively, the "Collection Account"), which shall be separate Eligible Accounts entitled "Collection Account, Bankers Trust Company of California, N.A., as Indenture Trustee, for the benefit of the Advanta Home Equity Loan Asset-Backed Notes". The Collection Account shall be maintained with the Indenture Trustee or any other depository institution which satisfies the requirements set forth in the definition of Eligible Account. Funds in the Collection Account shall be invested in accordance with Section 5.03 hereof. The Collection Account shall be established, as of the date hereof, as an Eligible Account pursuant to the definition thereof. (2) Establishment of Distribution Account. No later than the date hereof, the Servicer, for the benefit of the Noteholders, shall cause to be established and maintained with Bankers Trust Company of California, N.A., one or more Distribution Accounts (collectively, the "Distribution Account"), which shall be separate Eligible Accounts, entitled "Distribution Account, Bankers Trust Company of California, N.A., as Indenture Trustee, for the benefit of the Advanta Home Equity Loan Asset-Backed Notes." Funds in the Distribution Account shall not be invested. (3) Establishment of Reserve Account. No later than the date hereof, the Servicer, for the benefit of the Noteholders, shall cause to be established and maintained with Bankers Trust Company of California, N.A. a Reserve Account (the "Reserve Account"), which shall be an Eligible Account, entitled "Reserve Account, Bankers Trust Company of California, N.A., as Indenture Trustee, for the benefit of the Advanta Home Equity Loan Asset Backed Notes." Funds in the Reserve Account shall be invested in accordance with Section 5.03 hereof. (b)(1) Deposits to Collection Account. The Servicer shall deposit or cause to be deposited (without duplication): (i) all payments on or in respect of each Loan collected on or after the related Transfer Cutoff Date (other than interest accrued prior to such -81- 87 Transfer Cutoff Date and net of any Servicing Compensation retained therefrom) within two (2) Business Days after receipt thereof; (ii) all Net Liquidation Proceeds pursuant to Section 4.12 hereof within two (2) Business Days after receipt thereof; (iii) all Insurance Proceeds not required to be applied to restoration or repair of Mortgaged Property pursuant to Section 4.10 within two (2) Business Days after receipt thereof; (iv) all Released Mortgaged Property Proceeds within two (2) Business Days after receipt thereof; (v) any amounts payable in connection with the repurchase of any Loan and the amount of any Substitution Adjustment pursuant to Sections 2.05 and 3.06 hereof concurrently with payment thereof; (vi) any Purchase Price payable in connection with a Servicer Call pursuant to Section 3.08 hereof concurrently with payment thereof; (vii) the deposit of the Termination Price under Section 10.02 hereof concurrently with payment thereof; (viii) any Periodic Advances pursuant to Section 4.09 concurrently with payment thereof; (ix) any cash Disposition Proceeds pursuant to Section 3.07 in accordance with the last sentence of this Section 5.01(b)(1); (x) any payments received under Hedging Instruments or the return of amounts by the Hedging Counterparty pledged pursuant to prior Hedge Funding Requirements in accordance with the last sentence of this Section 5.01(b)(1); and (xi) any Purchase Price payable in connection with a Loan Originator Put remitted by the related Loan Originator pursuant to Section 3.08 hereof in accordance with the last sentence of this Section 5.01(b)(1). The Servicer agrees that it will cause the Loan Originator, Borrower or other appropriate Person paying such amounts, as the case may be, to remit directly to the Indenture Trustee for deposit into the Collection Account all amounts referenced in clauses (ix), (x) and (xi) to the extent such amounts are in excess of a Monthly Payment on the related Loan. To the extent the Servicer receives any such amounts, it will deposit them into the Collection Account on the same Business Day as receipt thereof. (2) Deposits to the Reserve Account. On any Transfer Date on which Wet Funded Loans are purchased by the Issuer and pledged to the Noteholders, the Initial -82- 88 Noteholder shall deposit into the Reserve Account the Sales Prices for each such Wet Funded Loan. (c) Withdrawals From Collection Account; Deposits to Distribution Account. (1) Withdrawals From Collection Account -- Reimbursement Items. The Indenture Trustee, at the written direction of the Servicer, shall periodically but in any event on each Determination Date, make the following withdrawals from the Collection Account prior to any other withdrawals, in no particular order of priority: (i) to withdraw any amount not required to be deposited in the Collection Account or deposited therein in error; (ii) to withdraw the Servicing Advance Reimbursement Amount; (iii) to clear and terminate the Collection Account in connection with the termination of this Agreement; and (iv) to reimburse the Servicer for any Nonrecoverable Periodic Advances (but only to the extent made from the Servicer's own funds). (2) Indenture Trustee Deposits to Distribution Account - Payment Dates. (A) On the Business Day prior to each Payment Date, the Indenture Trustee shall deposit into the Distribution Account such amounts as are required from the Transfer Obligation Account pursuant to Sections 5.05(e), 5.05(f), 5.05(g) and 5.05(h). The Indenture Trustee shall deposit into the Distribution Account all investment earnings as required by Section 5.03. (B) After making all withdrawals specified in Section 5.01(c)(1) above, on each Remittance Date, the Indenture Trustee (based on information provided by the Servicer for such Payment Date), shall withdraw the Monthly Remittance Amount from the Collection Account not later than 5:00 P.M. Noon, New York City time and deposit such amount into the Distribution Account. (C) The Indenture Trustee shall make such deposits into the Distribution Account from the Reserve Account as required by Section 5.01(d)(2). (3) Withdrawals From Distribution Account -- Payment Dates. On each Payment Date, to the extent funds are available in the Distribution Account, the Indenture Trustee (based on the information provided by the Servicer contained in the Servicer's Remittance Report for such Payment Date) shall make withdrawals therefrom for application in the following order of priority: (i) to distribute on such Payment Date the following amounts in the following order: (a) to the Indenture Trustee, an amount equal to the -83- 89 Indenture Trustee Fee and all unpaid Indenture Trustee Fees from prior Payment Dates, (b) to the Custodian, an amount equal to the Custodian Fee, if any, and all unpaid Custodian Fees from prior Payment Dates, (c) to the Servicer, (x) an amount equal to the Servicing Compensation and all unpaid Servicing Compensation from prior Payment Dates (to the extent not retained from collections) and (y) all Nonrecoverable Servicing Advances not previously reimbursed, (d) to the Servicer, in trust for the Owner Trustee, an amount equal to the Owner Trustee Fee and all unpaid Owner Trustee Fees from prior Payment Dates; (ii) to distribute on such Payment Date, the Hedge Funding Requirement to the appropriate Hedging Counterparties; provided, that only cash on or in respect of fixed rate Loans (including cash Disposition Proceeds received therefrom) shall be distributed for such purpose and; provided, further, that amounts distributed pursuant to clause (i) above to the extent not attributable to a specific Loan shall be deemed paid from fixed rate Loans, pro rata based on their aggregate Principal Balances relative to the Pool Principal Balance on such Payment Date; (iii) to the holders of the Notes pro rata, the sum of the Interest Payment Amount for such Payment Date and the Interest Carry-Forward Amount for such Payment Date; (iv) to the holders of the Notes pro rata, the sum of the Overcollateralization Shortfall for such Payment Date and the Principal Carry-Forward Amount for such Payment Date; provided, however, that if (a) a Rapid Amortization Trigger shall have occurred and not been Deemed Cured or (b) an Event of Default under the Indenture or Default shall have occurred, the holders of the Notes shall receive, in respect of principal, all remaining amounts on deposit in the Distribution Account; (v) to the appropriate Person, amounts in respect of Issuer/Depositor Indemnities (as defined in the Trust Agreement) and Due Diligence Fees until such amounts are paid in full; (vi) to the Transfer Obligation Account, all remaining amounts until the balance therein equals the Transfer Obligation Target Amount; and (vii) to the holders of the Trust Certificates of record on the next preceding Record Date, pro rata, all amounts remaining therein. (4) To the extent that there is deposited in the Collection Account any amounts referenced in Section 5.01(b)(1)(vii) and (ix) and, the Majority Noteholders and the Issuer may agree, upon reasonable written notice to the Indenture Trustee, to additional Payment Dates. The Issuer and the Majority Noteholder shall give the Indenture Trustee at least one (1) Business Day's written notice prior to such additional Payment Date and such -84- 90 notice shall specify each amount in Section 5.01(c) to be withdrawn from the Collection Account and Distribution Account on such day. Notwithstanding that the Notes have been paid in full, the Indenture Trustee and the Servicer shall continue to maintain the Distribution Account hereunder until this Agreement has been terminated. (d) Withdrawals from the Reserve Account. (1) On each day on which (A) the Indenture Trustee shall have been directed by the Initial Noteholder pursuant to instructions substantially in the form of Exhibit D hereto, which instructions shall be delivered by the Initial Noteholder by no later than 12:00 p.m. Noon New York City time on the Business Day following any day on which the Indenture Trustee and the Initial Noteholder shall have received, by 6:00 p.m. New York City time, a Loan Schedule and Exceptions Report, complete and in form and substance satisfactory to the Initial Noteholder, confirming that the Custodial Loan File has been received by the Custodian for the related Wet Funded Loan in accordance with Section 2.04 (provided, that if such Loan Schedule and Exceptions Report shall be received after 6:00 p.m. New York City time it shall be deemed to have been received by 6:00 p.m. New York City time on the following Business Day) or on which (B) the Indenture Trustee and the Initial Noteholder shall have confirmed receipt of the Purchase Price on account of such Wet Funded Loan in the Collection Account paid pursuant to Section 2.05(b), the Indenture Trustee shall distribute an amount equal to the Sales Price for such Wet Funded Loan to the applicable Loan Originator that conveyed such Wet Funded Loan, as the assignee of the Reserve Account Right. (2) For each Wet Funded Loan for which the Custodian shall not have received a Custodial Loan File in accordance with Section 2.04, on or before the related Wet Custodial File Delivery Date the related Loan Originator, upon demand of the Initial Noteholder or Issuer, shall repurchase such Wet Funded Loan pursuant to Section 2.05(b)(ii), provided that if the related Purchase Price is not received prior to 1:00 P.M., New York City time on such date, the Indenture Trustee, at the direction of the Initial Noteholder, shall withdraw from the Reserve Account and deposit into the Distribution Account for payment to the Noteholders, an amount equal to the Sales Price for such Loan. (3) Notwithstanding anything set forth in the Basic Documents, the Reserve Account shall be applied in accordance with this Section 5.01(d) regardless of the occurrence of a Default or Event of Default. Section 5.02 Payments to Securityholders. (a) All distributions made on the Notes on each Payment Date will be made on a pro rata basis among the Noteholders of record of the Notes on the next preceding Record Date based on the Percentage Interest represented by their respective Notes, without preference or priority of any kind, and, except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Noteholder, if such Noteholder shall own of record Notes having a Percentage Interest (as -85- 91 defined in the Indenture) of at least 20% and shall have so notified the Indenture Trustee, 5 Business Days prior to the related Record Date and otherwise by check mailed to the address of such Noteholder appearing in the Notes Register. The final distribution on each Note will be made in like manner, but only upon presentment and surrender of such Note at the location specified in the notice to Noteholders of such final distribution. (b) All distributions made on the Trust Certificates on each Payment Date will be made pro rata among the holders of the Trust Certificates of record on the next preceding Record Date based on their Percentage Interests (as defined in the Trust Agreement), without preference or priority of any kind, and, except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of each such holder, if such holder shall be the Depositor, ANB or ABC or an Affiliate thereof or shall own of record a Trust Certificate in an original denomination aggregating at least 25% of the Percentage Interests (as defined in the Trust Agreement) and shall have so notified the Indenture Trustee 5 Business Days prior to the related Record Date, and otherwise by check mailed to the address of such Certificateholder appearing in the Certificate Register. The final distribution on each Trust Certificate will be made in like manner, but only upon presentment and surrender of such Trust Certificate at the location specified in the notice to holders of the Trust Certificates of such final distribution. Any amount distributed to the holders of the Trust Certificates on any Payment Date shall not be subject to any claim or interest of the Noteholders. In the event that at any time there shall be more than one Certificateholder, the Indenture Trustee shall be entitled to reasonable additional compensation from the Servicer for its obligations hereunder, including, without limitation, its obligations to distribute funds and produce and deliver statements. (c) For purposes of this Section 5.02, the sole holders of the Trust Certificates shall be deemed to be the Depositor, ANB and ABC until such time as the Depositor, ANB or ABC provides written notice to the contrary to the Indenture Trustee and the Initial Noteholder. Section 5.03 Trust Accounts; Trust Account Property. (a) Control of Trust Accounts. Each of the Trust Accounts established hereunder has been pledged by the Issuer to the Indenture Trustee under the Indenture and shall be subject to the lien of the Indenture. Amounts distributed from each Trust Account in accordance with the terms of this Agreement shall be released for the benefit of the Securityholders from the Trust Estate upon such distribution thereunder or hereunder. The Indenture Trustee shall possess all right, title and interest in and to all funds on deposit from time to time in the Trust Accounts and in all proceeds thereof (including all income thereon) and all such funds, investments, proceeds and income shall be part of the Trust Account Property and the Trust Estate. If, at any time, any Trust Account ceases to be an Eligible Account, the Indenture Trustee shall, within ten Business Days (or such longer period, not to exceed 30 calendar days, with the prior written consent of the Majority Noteholders) (i) establish a new Trust Account as an Eligible Account, (ii) terminate the ineligible Trust -86- 92 Account, and (iii) transfer any cash and investments from such ineligible Trust Account to such new Trust Account. With respect to the Trust Accounts, the Issuer and the Indenture Trustee agree, that each such Trust Account shall be subject to the sole and exclusive dominion, custody and control of the Indenture Trustee for the benefit of the Noteholders, and, except as may be consented to in writing by the Majority Noteholders, the Indenture Trustee shall have sole signature and withdrawal authority with respect thereto. The Servicer shall have the power, revocable by the Majority Noteholder or by the Indenture Trustee, to instruct the Indenture Trustee to make withdrawals and payments from the Trust Accounts for the purpose of permitting the Servicer to carry out its duties hereunder or permitting the Indenture Trustee or Owner Trustee to carry out their respective duties herein or under the Indenture or the Trust Agreement, as applicable. (b)(1) Investment of Funds. Funds held in the Collection Account, Reserve Account and the Transfer Obligation Account may be invested (to the extent practicable and consistent with any requirements of the Code) in Permitted Investments, as directed by the Servicer prior to the occurrence of an Event of Default and by the Majority Noteholders thereafter, in writing or facsimile transmission confirmed in writing by the Servicer or Majority Noteholders, as applicable. In the event the Indenture Trustee has not received such written direction, such Funds shall remain uninvested. Funds held in the Reserve Account may be invested at the direction of the Majority Noteholders in the same method. In any case, funds in the Collection Account, Reserve Account and the Transfer Obligation Account must be available for withdrawal without penalty, and any Permitted Investments must mature or otherwise be available for withdrawal, one Business Day prior to the next Payment Date and shall not be sold or disposed of prior to its maturity subject to Subsection (b)(2) of this Section. All interest and any other investment earnings on amounts or investments held in the Collection Account and the Transfer Obligation Account shall be paid to the Servicer immediately upon receipt by the Indenture Trustee. All investment income on the Reserve Account shall be distributed to the Loan Originators as assignees of the Reserve Account Right in accordance with the applicable Allocation Percentage by the Indenture Trustee upon receipt. All Permitted Investments in which funds in the Collection Account, Reserve Account or the Transfer Obligation Account are invested must be held by or registered in the name of "Bankers Trust Company of California, N.A., as Indenture Trustee, in trust for the Advanta Home Equity Loan Asset-Backed Notes." (2) Insufficiency and Losses in Trust Accounts. If any amounts are needed for disbursement from the Collection Account, Reserve Account or the Transfer Obligation Account held by or on behalf of the Indenture Trustee and sufficient uninvested funds are not available to make such disbursement, the Indenture Trustee shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in the Collection Account, Reserve Account or the Transfer Obligation Account, as the case may be. The Indenture Trustee shall not be liable for any investment loss or other charge resulting therefrom, unless such loss or -87- 93 charge is caused by the failure of the Indenture Trustee to perform in accordance with written directions provided pursuant to this Section 5.03. If any losses are realized in connection with any investment in the Collection Account or the Transfer Obligation Account pursuant to this Agreement, then the Servicer shall deposit the amount of such losses (to the extent not offset by income from other investments in the Collection Account or the Transfer Obligation Account, as the case may be) into the Collection Account, or the Transfer Obligation Account, as the case may be, immediately upon the realization of such loss, provided that all such losses incurred with respect to Permitted Investments in the Reserve Account specified in clause (8) of the definition thereof shall be reimbursed by the Initial Noteholder. All interest and any other investment earnings on amounts held in the Collection Account, Reserve Account and the Transfer Obligation Account shall be taxed to the Issuer and for federal and state income tax purposes the Issuer shall be deemed to be the owner of the Collection Account, Reserve Account and/or the Transfer Obligation Account, as the case may be. (c) Subject to Section 6.01 of the Indenture, the Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any Trust Account held by the Indenture Trustee resulting from any investment loss on any Permitted Investment included therein. (d) With respect to the Trust Account Property, the Indenture Trustee acknowledges and agrees that: (1) any Trust Account Property that is held in deposit accounts shall be held solely in the Eligible Accounts, subject to the last sentence of Subsection (a) of this Section 5.03; and each such Eligible Account shall be subject to the sole and exclusive dominion, custody and control of the Indenture Trustee; and, without limitation on the foregoing, the Indenture Trustee shall have sole signature authority with respect thereto; (2) any Trust Account Property that constitutes Physical Property shall be delivered to the Indenture Trustee in accordance with paragraph (a) of the definition of "Delivery" in Section 1.01 hereof and shall be held, pending maturity or disposition, solely by the Indenture Trustee or a financial intermediary (as such term is defined in Section 8-102(a)(14) of the UCC) acting solely for the Indenture Trustee; (3) any Trust Account Property that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations shall be delivered in accordance with paragraph (b) of the definition of "Delivery" in Section 1.01 hereof and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued book-entry registration of such Trust Account Property as described in such paragraph; and (4) any Trust Account Property that is an "uncertificated security" under Article 8 of the UCC and that is not governed by clause (3) above shall be delivered to the Indenture Trustee in accordance with paragraph (c) of the definition of "Delivery" in Section 1.01 hereof and shall be maintained by the Indenture Trustee, pending maturity or disposition, -88- 94 through continued registration of the Indenture Trustee's (or its nominee's) ownership of such security. Section 5.04 Advance Account. (a) The Servicer shall cause to be established and maintained in its name, an Advance Account (the "Advance Account"), which need not be a segregated account. The Advance Account shall be maintained with any financial institution the Servicer elects. (b) Deposits and Withdrawals. Amounts in respect of the transfer of Additional Note Principal Balances and Loans shall be deposited in and withdrawn from the Advance Account as provided in Sections 2.01(c) and 2.06 hereof, Section 3.01 of the Note Purchase Agreement. Section 5.05 Transfer Obligation Account. (a) The Servicer, for the benefit of the Noteholders, shall cause to be established and maintained in the name of the Indenture Trustee a Transfer Obligation Account (the "Transfer Obligation Account"), which shall be a separate Eligible Account and may be interest-bearing, entitled "Transfer Obligation Account, Bankers Trust Company of California, N.A., as Indenture Trustee, in trust for the Advanta Home Equity Loan Asset-Backed Notes." The Transfer Obligation Account shall be maintained with the Indenture Trustee. The Indenture Trustee shall have no monitoring or calculation obligation with respect to withdrawals from the Transfer Obligation Account. Amounts in the Transfer Obligation Account shall be invested in accordance with Section 5.03. (b) In accordance with Section 5.06, the Transfer Obligors shall deposit into the Transfer Obligation Account such amounts as may be required thereby. (c) (i) On each Payment Date, the Indenture Trustee will deposit in the Transfer Obligation Account any amounts required to be deposited therein pursuant to Section 5.01(c)(3)(v). (ii) On each Collateral Value Excess Date, the Issuer shall deposit in the Transfer Obligation Account any amounts required to be deposited therein pursuant to Section 2.06(b). (d) On the date of each Disposition, the Indenture Trustee shall withdraw from the Transfer Obligation Account such amount on deposit therein as may be requested by the Disposition Agent in writing to effect such Disposition. (e) On each Payment Date, the Indenture Trustee, upon the written direction of the Servicer shall withdraw from the Transfer Obligation Account and deposit into the Distribution Account on such Payment Date the lesser of (x) the amount then on deposit in the Transfer Obligation Account and (y) the Interest Carry-Forward Amount as of such date. -89- 95 (f) If with respect to any Business Day the Overcollateralization Shortfall exceeds the lesser of (x) 1% of the aggregate Principal Balance of all Loans as of the prior Business Day and (y) $500,000, the Indenture Trustee, upon the written direction of the Servicer shall withdraw from the Transfer Obligation Account and deposit into the Distribution Account on the related Payment Date the lesser of the amount then on deposit in the Transfer Obligation Account and the amount of such Overcollateralization Shortfall as of such date. (g) If with respect to any Payment Date there shall exist a Hedge Funding Requirement, the Indenture Trustee, upon the written direction of the Servicer shall withdraw from the Transfer Obligation Account and deposit into the Distribution Account on the Business Day prior to such Payment Date the lesser of (x) the amount then on deposit in the Transfer Obligation Account (after making all other required withdrawals therefrom with respect to such Payment Date) and (y) the amount of such Hedge Funding Requirement as of such date. (h) In the event of the occurrence of an Event of Default under the Indenture, the Indenture Trustee shall withdraw all remaining funds from the Transfer Obligation Account and apply such funds in satisfaction of the Notes as provided in Section 5.04(b) of the Indenture. (i) (i) The Indenture Trustee shall return to the Transfer Obligors (as the Transfer Obligors shall agree) all amounts on deposit in the Transfer Obligation Account (after making all other withdrawals pursuant to this Section 5.05) until the Majority Noteholders provide written notice to the Indenture Trustee (with a copy to the Transfer Obligors) of the occurrence of a default or event of default (however defined) under any Basic Document with respect to the Issuer, Transfer Obligors, the Depositor, ANB or ABC or any of their Affiliates and (ii) upon the date of the termination of this Agreement pursuant to Article X, the Indenture Trustee, at the written direction of the Loan Originator, shall withdraw any remaining amounts from the Transfer Obligation Account and remit all such amounts to the Transfer Obligors. Section 5.06 Transfer Obligation. (a) In consideration of the transactions contemplated by the Basic Documents, each Transfer Obligor jointly and severally agrees and covenants with the Depositor that: (i) In connection with each Disposition it shall fund, or cause to be funded, reserve funds, pay credit enhancer fees, pay, or cause to be paid, underwriting fees, fund any difference between the cash Disposition Proceeds and the aggregate Note Principal Balance at the time of such Disposition, and make, or cause to be made, such other payments as may be, in the reasonable opinion of the Disposition Agent, commercially reasonably necessary to effect Dispositions, in each case to the extent that Disposition Proceeds are insufficient to pay such amounts; (ii) In connection with Hedging Instruments, on the Business Day prior to each Payment Date, it shall deliver to the Indenture Trustee for deposit into the -90- 96 Transfer Obligation Account any Hedge Funding Requirement (to the extent amounts available on the related Payment Date pursuant to Section 5.01 are insufficient to make such payment), when as and if due to any Hedging Counterparty; (iii) If any Interest Carry-Forward Amount shall occur, it shall deposit into the Transfer Obligation Account any such Interest Carry-Forward Amount on or before the Business Day preceding such related Payment Date; (iv) If on any Business Day, the Overcollateralization Shortfall exceeds the lesser of (x) 1% of the aggregate Principal Balance of all Loans in the Loan Pool as of the prior Business Day and (y) $500,000, it shall, on the following Business Day deposit into the Transfer Obligation Account the full amount of the Overcollateralization Shortfall as of such date; and (v) Notwithstanding anything to the contrary herein, in the event of the occurrence of an Event of Default under the Indenture, the Transfer Obligors shall promptly deposit into the Transfer Obligation Account the entire amount of the Unfunded Transfer Obligation; provided, that notwithstanding anything to the contrary contained herein, the Transfer Obligors' cumulative payments under or in respect of the Transfer Obligations (after subtracting therefrom any amounts returned to the Transfer Obligors pursuant to Section 5.05(i)(i)) together with the related Loan Originator's payments in respect of any Loan Originator Puts shall not in the aggregate exceed the Unfunded Transfer Obligation. (b) The Transfer Obligors shall pay such amounts upon one Business Day's notice from either the Servicer or the Majority Noteholders. (c) The Transfer Obligors agree that the Noteholders, as ultimate assignee of the rights of the Depositor, ANB and ABC, respectively under this Agreement and the other Basic Documents, may enforce the rights of the Depositor, ANB and ABC, respectively, directly against the Transfer Obligors. ARTICLE VI STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Statements. (a) No later than 12 noon (California time) on each Remittance Date, the Servicer shall deliver to the Indenture Trustee and the Initial Noteholder by facsimile, the receipt and legibility of which shall be confirmed by telephone, and with hard copy thereof to be delivered no later than one (1) Business Day after such Remittance Date, the Servicer's Remittance Report, setting forth the date of such Report (day, month and year), the name of -91- 97 the Issuer (i.e., "Advanta Home Equity Loan Owner Trust 1998-MS1"), the Series designation of the Notes (i.e., "Series 1998-MS1") and the date of this Agreement, all in substantially the form set out in Exhibit B hereto. Furthermore, on each Remittance Date, the Servicer shall deliver to the Indenture Trustee and the Initial Noteholder a magnetic tape or computer disk providing, with respect to each Loan in the Loan Pool as of the last day of the related Remittance Period (i) the related Loan Originator's internal loan identifying number; (ii) if such Loan is an ARM, the current Loan Interest Rate; (iii) the Principal Balance with respect to such Loan; (iv) the date of the last Monthly Payment paid in full; and (v) such other information as may be reasonably requested by the Initial Noteholder and the Indenture Trustee. (b)(i) No later than 12 noon (California time) on each Remittance Date, the Servicer shall prepare and provide to the Indenture Trustee via fax, receipt confirmed by telephone, the Initial Noteholder and each Noteholder, a statement (the "Payment Statement"), stating each date and amount of a purchase of Additional Note Principal Balance (day, month and year), the name of the Issuer (i.e., "Advanta Home Equity Loan Owner Trust 1998-MS1"), the Series designation of the Notes (i.e., "Series 1998-MS1"), the date of this Agreement and the following information: (1) the aggregate amount of collections in respect of principal of the Loans received by the Servicer during the preceding Remittance Period; (2) the aggregate amount of collections in respect of interest on the Loans received by the Servicer during the preceding Remittance Period; (3) all Insurance Proceeds received by the Servicer and not required to be applied to restoration or repair of the related Mortgaged Property during the preceding Remittance Period; (4) all Net Liquidation Proceeds deposited by the Servicer into the Collection Account during the preceding Remittance Period; (5) all Released Mortgaged Property Proceeds deposited by the Servicer into the Collection Account during the preceding Remittance Period; (6) the aggregate amount of all Periodic Advances and all Servicing Advances, set forth separately, made by the Servicer during the preceding Remittance Period; (7) the aggregate of all amounts deposited into the Collection Account in respect of the repurchase of Defective Loans and the repurchase of Loans pursuant to Section 2.05 hereof during the preceding Remittance Period; (8) the aggregate Principal Balance of all Loans for which a Servicer Call was exercised during the preceding Remittance Period; -92- 98 (9) the aggregate Principal Balance of all Loans for which a Loan Originator Put was exercised during the preceding Remittance Period; (10) the aggregate amount of all payments received under Hedging Instruments during the preceding Remittance Period; (11) the aggregate amount of all withdrawals from the Collection Account pursuant to Section 5.01(c)(1)(i) hereof during the preceding Remittance Period; (12) the aggregate amount of cash Disposition Proceeds received during the preceding Remittance Period; (13) withdrawals from the Collection Account in respect of the Servicing Advance Reimbursement Amount with respect to the Payment Date; (14) withdrawals from the Collection Account in respect of Nonrecoverable Periodic Advances with respect to the Payment Date; (15) the number and aggregate Principal Balance of all Loans that are (i) 30-59 days Delinquent, (ii) 60-89 days Delinquent, (iii) 90 or more days Delinquent as of the end of the related Remittance Period; (16) the aggregate amount of Liquidated Loan Losses incurred (i) during the preceding Remittance Period, and (ii) during the preceding three Remittance Periods; (17) the aggregate of the Principal Balances of all Loans in the Loan Pool as of the end of the related Remittance Period; (18) the aggregate amount of all deposits into the Distribution Account from the Transfer Obligation Account pursuant to Sections 5.05(e), 5.05(f), 5.05(g), and 5.05(h) on the preceding Payment Date; (19) if the Servicer is not Advanta Corp. or an Affiliate thereof, the aggregate amount of distributions in respect of Servicing Compensation to the Servicer, and unpaid Servicing Compensation from prior Payment Dates for the related Payment Date; (20) the aggregate amount of distributions in respect of Indenture Trustee Fees and unpaid Indenture Trustee Fees from prior Payment Dates for the related Payment Date; (21) the aggregate amount of distributions in respect of the Custodian Fee and unpaid Custodian Fees from prior Payment Dates for the related Payment Date; -93- 99 (22) the Unfunded Transfer Obligation and Overcollateralization Shortfall on such Payment Date and the Principal Carry-Forward Amount for the related Payment Date; (23) the aggregate amount of distributions in respect of Servicing Compensation and unpaid Servicing Compensation from prior Payment Dates, to the Servicer, if Advanta Corp. or an Affiliate thereof is the Servicer, for the related Payment Date; (24) the aggregate amount of distributions to the Transfer Obligation Account for the related Payment Date; (25) the aggregate amount of distributions in respect of Trust/Depositor Indemnities for the related Payment Date; (26) the aggregate amount of distributions to the holders of the Trust Certificates for the related Payment Date; (27) the Note Principal Balance of the Notes as of the last day of the related Remittance Period (without taking into account any additional Note Principal Balance between the last day of the related Remittance Period and the Payment Date) before and after giving effect to distributions made to the holders of the Notes for the related Payment Date; (28) the Pool Principal Balance as of the end of the preceding Remittance Period; and (29) whether a Rapid Amortization Trigger shall exist with respect to such Payment Date. Such Payment Statement shall also be provided on the Remittance Date to the Initial Noteholder and Indenture Trustee in the form of a magnetic tape or computer disk in a form mutually agreed to by and between the Initial Noteholder, the Indenture Trustee and the Servicer. The Indenture Trustee shall have no duty to monitor the occurrence of a Performance Trigger, Rapid Amortization Trigger, Collateral Value Excess or any events resulting in withdrawals from the Transfer Obligation Account. (c) On each Payment Date, the Indenture Trustee shall forward to the holders of the Securities a copy of the Payment Statement in respect of such Payment Date, together with such other information as the Indenture Trustee deems necessary or appropriate. Section 6.02 Specification of Certain Tax Matters. The Indenture Trustee shall comply with all requirements of the Code and applicable state and local law with respect to the withholding from any distributions made to any Securityholder of any applicable withholding taxes imposed thereon and with respect to -94- 100 any applicable reporting requirements in connection therewith, giving due effect to any applicable exemptions from such withholding and effective certifications or forms provided by the recipient. Any amounts withheld pursuant to this Section 6.02 shall be deemed to have been distributed to the Securityholders, as the case may be, for all purposes of this Agreement. Section 6.03. Valuation of Loans, Hedge Value and Retained Securities Value; Market Value Agent. (a) The Issuer hereby irrevocably appoints the Market Value Agent to determine the Market Value of each Loan, the Hedge Value of each Hedging Instrument and the Retained Securities Value of all Retained Securities. (b) The Market Value Agent shall determine the Market Value of each Loan in its sole judgment. In determining the Market Value of each Loan, the Market Value Agent may consider any information that it may deem relevant and shall base such determination primarily on the lesser of its estimate of the projected proceeds from such Loan's inclusion in (i) a Securitization (inclusive of the projected Retained Securities Value of any Retained Securities to be issued in connection with such Securitization) and (ii) a Whole Loan Sale, in each case net of such Loan's ratable share of all costs and fees associated with such Disposition, including, without limitation, any costs of issuance, sale, underwriting and funding reserve accounts. The Market Value Agent's determination, in its sole judgment, of Market Value shall be conclusive and binding upon the parties hereto, absent manifest error (including without limitation, any error contemplated in Section 2.08). (c) On each Business Day the Market Value Agent shall determine in its sole judgment the Hedge Value of each Hedging Instrument as of such Business Day. In making such determination the Market Value Agent may rely exclusively on quotations provided by the Hedging Counterparty, by leading dealers in instruments similar to such Hedging Instrument, which leading dealers may include the Market Value Agent and its Affiliates and such other sources of information as the Market Value Agent may deem appropriate. (d) On each Business Day, the Market Value Agent shall determine in its sole judgment the Retained Securities Value of the Retained Securities, if any, expected to be issued pursuant to such Securitization as of the closing date of such Securitization. In making such determination the Market Value Agent may rely exclusively on quotations provided by leading dealers in instruments similar to such Retained Securities, which leading dealers may include the Market Value Agent and its Affiliates and such other sources of information as the Market Value Agent may deem appropriate. -95- 101 ARTICLE VII HEDGING Section 7.01 Hedging Instruments. (a) If the Unfunded Transfer Obligation Percentage is less than 7%, the Trust, upon request of the Majority Noteholders, shall enter into such Hedging Instruments as the Market Value Agent, on behalf of the Majority Noteholders shall determine are necessary, in order to hedge the interest rate risk with respect to at least 80% of the Collateral Value of fixed rate Loans acquired by the Trust on or after the date of such request relative to the expected Disposition Proceeds therefrom. The Market Value Agent shall determine, in its sole discretion, whether any Hedging Instrument conforms to the requirements of Section 7.01(b), (c) and (d). (b) Each Hedging Instrument shall expressly provide that in the event of a Disposition or other removal of the Loan from the Trust, such portion of the Hedging Instrument shall terminate as the Disposition Agent deems appropriate to facilitate the hedging of the risks specified in Section 7.01(a). In the event that the Hedging Instrument is not otherwise terminated, it shall contain provisions that allow the position of the Trust to be assumed by an Affiliate of the Trust upon the liquidation of the Trust. The terms of the assignment documentation and the credit quality of the successor to the Trust shall be subject to the Hedging Counterparty's approval. (c) Any Hedging Instrument that provides for any payment obligation on the part of the Issuer must (i) be without recourse to the assets of the Issuer, (ii) contain a non-petition covenant provision in the form of Section 11.13, (iii) limit payment dates thereunder to Payment Dates and (iv) contain a provision limiting any cash payments due on any day under such Hedging Instrument solely to funds available therefor in the Collection Account on such day pursuant to Section 5.01(c)(3)(ii) hereof and funds available therefor in the Transfer Obligation Account. (d) Each Hedging Instrument must (i) provide for the direct payment of any amounts thereunder to the Collection Account pursuant to Section 5.01(b)(1)(x), (ii) contain an assignment of all of the Issuer's rights (but none of its obligations) under such Hedging Instrument to the Indenture Trustee and shall include an express consent to the Hedging Counterparty to such assignment, (iii) provide that in the event of the occurrence of an Event of Default, such Hedging Instrument shall terminate upon the direction of the Majority Noteholders, (iv) prohibit the Hedging Counterparty from "setting-off" or "netting" other obligations of the Issuer or its Affiliates against such Hedging Counterparty's payment obligations thereunder, (v) provide that the appropriate portion of the Hedging Instrument will terminate upon the removal of the related Loans from the Trust Estate and (vi) have economic terms that are fixed and not subject to alteration after the date of assumption or execution. (e) If agreed to by the Majority Noteholders, the Issuer may pledge its assets in order to secure its obligations in respect of Hedge Funding Requirements, provided -96- 102 that such right shall be limited solely to Hedging Instruments for which an Affiliate of the Initial Noteholder is a Hedging Counterparty. ARTICLE VIII THE SERVICER Section 8.01 Indemnification; Third Party Claims. (a) The Servicer shall indemnify the Loan Originators, the Owner Trustee, the Trust, the Depositor, the Indenture Trustee and the Noteholders, their respective officers, directors, employees, agents and "control persons," as such term is used under the Act and under the Securities Exchange Act of 1934 as amended (each a "Servicer Indemnified Party") and hold harmless each of them against any and all claims, losses, damages, penalties, fines, forfeitures, reasonable legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of any of the Servicer's representations and warranties and covenants contained in this Agreement or in any way relating to the failure of the Servicer to perform its duties and service the Loans in compliance with the terms of this Agreement except to the extent such loss arises out of such Servicer Indemnified Party's gross negligence or willful misconduct; provided, however, that if the Servicer is not liable pursuant to the provisions of Section 8.01(d) hereof for its failure to perform its duties and service the Loans in compliance with the terms of this Agreement, then the provisions of this Section 8.01 shall have no force and effect with respect to such failure. (b) None of the Loan Originators, the Depositor or the Servicer or any of their respective Affiliates, directors, officers, employees or agents shall be under any liability to the Owner Trustee, the Issuer, the Indenture Trustee or the Securityholders for any action taken, or for refraining from the taking of any action, in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Loan Originators, the Depositor, the Servicer or any of their respective Affiliates, directors, officers, employees, agents against the remedies provided herein for the breach of any warranties, representations or covenants made herein, or against any expense or liability specifically required to be borne by such party without right of reimbursement pursuant to the terms hereof, or against any expense or liability which would otherwise be imposed by reason of misfeasance, bad faith or negligence in the performance of the respective duties of the Servicer, the Depositor or the Loan Originators, as the case may be. The Loan Originators, the Depositor, the Servicer and any of their respective Affiliates, directors, officers, employees, agents may rely in good faith on any document of any kind which, prima facie, is properly executed and submitted by any Person respecting any matters arising hereunder. (c) Each Loan Originator agrees to indemnify and hold harmless the Depositor and the Noteholders, as the ultimate assignees from the Depositor (each an "Originator Indemnified Party," together with the Servicer Indemnified Parties, the "Indemnified Parties"), from and against any loss, liability, expense, damage, claim or injury -97- 103 arising out of or based on (i) any breach of any representation, warranty or covenant of the Loan Originators, the Servicer or their Affiliates, in any Basic Document, including, without limitation, the origination or prior servicing of the Loans by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Loan Originators, the Servicer or their Affiliates, and (ii) any untrue statement by the Loan Originators, the Servicer or its Affiliates of any material fact or any such Person's failure to state a material fact necessary to make such statements not misleading with respect to any such Person's statements contained in any Basic Document, including, without limitation, any Officer's Certificate, statement, report or other document or information prepared by any such Person and furnished or to be furnished by it pursuant to or in connection with the transactions contemplated thereby including, without limitation, such written information as may have been and may be furnished in connection with any due diligence investigation with respect to the Loans or any such Person's business, operations or financial condition, including reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Loan Originators shall not indemnify an Originator Indemnified Party to the extent such loss, liability, expense, damage or injury is due to either an Originator Indemnified Party's willful misfeasance, bad faith or negligence or by reason of an Originator Indemnified Party's reckless disregard of its obligations hereunder; provided, further, that the Loan Originators shall not be so required to indemnify an Originator Indemnified Party or to otherwise be liable to an Originator Indemnified Party for any losses in respect of the performance of the Loans, the creditworthiness of the Borrowers under the Loans, changes in the market value of the Loans or other, similar investment risks associated with the Loans arising from a breach of any representation or warranty set forth in Section 3.05(a) or (b) hereof, a remedy for the breach of which is provided in Section 3.06 hereof. The provisions of this indemnity shall run directly to and be enforceable by an Originator Indemnified Party subject to the limitations hereof. (d) With respect to a claim subject to indemnity hereunder made by any Person against an Indemnified Party (a "Third Party Claim"), such Indemnified Party shall notify the related indemnifying parties (each an "Indemnifying Party") in writing of the Third Party Claim within a reasonable time after receipt by such Indemnified Party of written notice of the Third Party Claim unless the Indemnifying Parties shall have previously obtained actual knowledge thereof. Thereafter, the Indemnified Party shall deliver to the Indemnifying Parties, within a reasonable time after the Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to the Third Party Claim. No failure to give such notice or deliver such documents shall effect the rights to indemnity hereunder. Each Indemnifying Party shall promptly notify the Indenture Trustee and the Indemnified Party (if other than the Indenture Trustee) of any claim of which it has been notified and shall promptly notify the Indenture Trustee and the Indemnified Party (if applicable) of its intended course of action with respect to any claim. (e) If a Third Party Claim is made against an Indemnified Party, (a) the related Indemnifying Party will be entitled to participate in the defense thereof and, (b) if it so chooses, to assume the defense thereof with counsel selected by the Indemnifying Party, provided that in connection with such assumption (i) such counsel is not reasonably objected to -98- 104 by the Indemnified Party and (ii) the Indemnifying Party first admits in writing its liability to indemnify the Indemnified Party with respect to all elements of such claim in full. Should the related Indemnifying Party so elect to assume the defense of a Third Party Claim, the Indemnifying Party will not be liable to the Indemnified Party for any legal expenses subsequently incurred by the Indemnified Party in connection with the defense thereof. If the Indemnifying Party elects to assume the defense of a Third Party Claim, the Indemnified Party will (i) cooperate in all reasonable respects with the Indemnifying Party in connection with such defense and (ii) not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the Indemnifying Party' prior written consent, as the case may be. If the Indemnifying Party shall assume the defense of any Third Party Claim, the Indemnified Party shall be entitled to participate in (but not control) such defense with its own counsel at its own expense. If the Indemnifying Party does not assume the defense of any such Third Party Claim, the Indemnified Party may defend the same in such manner as it may deem appropriate, including settling such claim or litigation after giving notice to the Indemnifying Party of such terms and the Indemnifying Party will promptly reimburse the Indemnified Party upon written request. Anything contained in this Agreement to the contrary notwithstanding, the Indemnifying Party shall not be entitled to assume the defense of any part of a Third Party Claim that seeks an order, injunction or other equitable relief or relief for other than money damages against an Indemnified Party unless the Indemnifying Party has demonstrated to such Indemnified Party reasonable financial capacity to meet its obligations with respect to such Third Party Claim. Section 8.02 Merger or Consolidation of the Servicer. The Servicer shall keep in full effect its existence, rights and franchises as a corporation, and will obtain and preserve its qualification to do business as a foreign corporation and maintain such other licenses and permits in each jurisdiction necessary to protect the validity and enforceability of each Basic Document to which it is a party and each of the Loans and to perform its duties under each Basic Document to which it is a party; provided, however, that the Servicer may merge or consolidate with any other corporation upon the satisfaction of the conditions set forth in the following paragraph. Any Person into which the Servicer may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Servicer shall be a party, or any Person succeeding to the business of the Servicer, shall be an Eligible Servicer and shall be the successor of the Servicer, as applicable hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall send notice of any such merger, conversion, consolidation or succession to the Indenture Trustee and the Issuer. Section 8.03 Limitation on Liability of the Servicer and Others. The Servicer and any director, officer, employee or agent of the Servicer may rely on any document of any kind which it in good faith reasonably believes to be genuine and to have been adopted or signed by the proper authorities respecting any matters arising -99- 105 hereunder. Subject to the terms of Section 8.01 hereof, the Servicer shall have no obligation to appear with respect to, prosecute or defend any legal action which is not incidental to the Servicer's duty to service the Loans in accordance with this Agreement. Section 8.04 Servicer Not to Resign; Assignment. The Servicer shall not resign from the obligations and duties hereby imposed on it except (a) with the consent of the Majority Noteholders or (b) upon determination that its duties hereunder are no longer permissible under applicable law. Any such determination pursuant to clause (b) of the preceding sentence permitting the resignation of the Servicer shall be evidenced by an Independent opinion of counsel to such effect delivered (at the expense of the Servicer) to the Indenture Trustee and Majority Noteholders. No resignation of the Servicer shall become effective until a successor servicer, appointed pursuant to the provisions of Section 9.02 hereof shall have assumed the Servicer's responsibilities, duties, liabilities (other than those liabilities arising prior to the appointment of such successor) and obligations under this Agreement. Except as expressly provided herein, the Servicer shall not assign or transfer any of its rights, benefits or privileges hereunder to any other Person, or delegate to or subcontract with, or authorize or appoint any other Person to perform any of the duties, covenants or obligations to be performed by the Servicer hereunder and any agreement, instrument or act purporting to effect any such assignment, transfer, delegation or appointment shall be void. The Servicer agrees to cooperate with any successor Servicer in effecting the transfer of the Servicer's servicing responsibilities and rights hereunder pursuant to the first paragraph of this Section 8.04, including, without limitation, the transfer to such successor of all relevant records and documents (including any Loan Files in the possession of the Servicer) and all amounts received with respect to the Loans and not otherwise permitted to be retained by the Servicer pursuant to this Agreement. In addition, the Servicer, at its sole cost and expense, shall prepare, execute and deliver any and all documents and instruments to the successor Servicer including all Loan Files in its possession and do or accomplish all other acts necessary or appropriate to effect such termination and transfer of servicing responsibilities. Section 8.05 Relationship of Servicer to Issuer and the Indenture Trustee. The relationship of the Servicer (and of any successor to the Servicer as servicer under this Agreement) to the Issuer, the Owner Trustee and the Indenture Trustee under this Agreement is intended by the parties hereto to be that of an independent contractor and not of a joint venturer, agent or partner of the Issuer, the Owner Trustee or the Indenture Trustee. Section 8.06 Servicer May Own Securities. Each of the Servicer and any Affiliate of the Servicer may in its individual or any other capacity become the owner or pledgee of Securities with the same rights as it would -100- 106 have if it were not the Servicer or an Affiliate thereof except as otherwise specifically provided herein; provided, however, that at any time that AMCUSA or any of its Affiliates is the Servicer, neither the Servicer nor any of its Affiliates (other than an Affiliate which is a corporation whose purpose is limited to holding securities and related activities and which cannot incur recourse debt) may be a Noteholder. Securities so owned by or pledged to the Servicer or such Affiliate shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority, or distinction as among all of the Securities; provided, however, that any Securities owned by the Servicer or any Affiliate thereof, during the time such Securities are owned by them, shall be without voting rights for any purpose set forth in this Agreement unless the Servicer or such Affiliate owns all outstanding Securities of the related class. The Servicer shall notify the Indenture Trustee promptly after it or any of its Affiliates becomes the owner or pledgee of a Security. Section 8.07 Indemnification of the Indenture Trustee and Initial Noteholder. The Servicer agrees to indemnify the Indenture Trustee and its employees, officers, directors and agents, and reimburse its reasonable out-of-pocket expenses in accordance with Section 6.07 of the Indenture as if it was a signatory thereto. The Servicer agrees to indemnify the Initial Noteholder in accordance with Section 9.01 of the Note Purchase Agreement as if it were signatory thereto. ARTICLE IX SERVICER EVENTS OF DEFAULT Section 9.01 Servicer Events of Default. (a) In case one or more of the following Servicer Events of Default by the Servicer shall occur and be continuing, that is to say: (i) any failure by Servicer to deposit (A) into the Collection Account in accordance with Section 5.01(b) any amount required to be deposited by it under any Basic Document to which it is a party, which failure continues unremedied for two Business Days following the date on which such deposit was first requested to be made or (B) the full amount of any Periodic Advance required to be made on the day such Periodic Advances are required to be made, which failure continues unremedied until 12:00 p.m. New York City time on the Business Day following such day; or (ii) any failure on the part of the Servicer duly to observe or perform in any material respect any other of the material covenants or agreements on the part of the Servicer, contained in any Basic Document to which it is a party, which continues unremedied for a period of 30 days (or, in the case of payment of insurance premiums, for a period of 15 days) after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by any other party -101- 107 hereto or to the Servicer (with copy to each other party hereto), by Holders of 25% of the Percentage Interests of the Notes or the Trust Certificates; or (iii) any breach on the part of the Servicer of any representation or warranty contained in any Basic Document to which it is a party that materially and adversely affects the interests of any of the parties hereto or any Securityholder and which continues unremedied for a period of 30 days after the date on which notice of such breach, requiring the same to be remedied, shall have been given to the Servicer by any other party hereto or to the Servicer (with copy to each other party hereto), by the Initial Noteholder or Holders of 25% of the Percentage Interests (as defined in the Indenture) of the Notes; or (iv) there shall have been commenced before a court or agency or supervisory authority having jurisdiction in the premises an involuntary proceeding against the Servicer under any present or future federal or state bankruptcy, insolvency or similar law for the appointment of a conservator, receiver, liquidator, trustee or similar official in any bankruptcy, insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, which action shall not have been dismissed for a period of 60 days; or (v) the Servicer shall consent to the appointment of a conservator, receiver, liquidator, trustee or similar official in any bankruptcy, insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to it or of or relating to all or substantially all of its property; or (vi) the Servicer shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable bankruptcy, insolvency or reorganization statute, make an assignment for the benefit of its creditors, voluntarily suspend payment of its obligations, or take any corporate action in furtherance of the foregoing. (b) Then, and in each and every such case, so long as an Servicer Event of Default shall not have been remedied, the Indenture Trustee or the Majority Noteholders, by notice in writing to the Servicer may, in addition to whatever rights such Person may have at law or in equity to damages, including injunctive relief and specific performance, may terminate all the rights and obligations of the Servicer under this Agreement and in and to the Loans and the proceeds thereof, as servicer under this Agreement. Upon receipt by the Servicer of such written notice, all authority and power of the Servicer under this Agreement, whether with respect to the Loans or otherwise, shall, subject to Section 9.02 hereof, pass to and be vested in a successor servicer, and the successor servicer is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and do or cause to be done all other acts or things necessary or appropriate to effect the purposes of such notice of termination, including, but not limited to, the transfer and endorsement or assignment of the Loans and related documents. The Servicer agrees to cooperate with the successor servicer in effecting the -102- 108 termination of the Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to the successor servicer for administration by it of all amounts which shall at the time be credited by the Servicer to each Collection Account or thereafter received with respect to the Loans. Section 9.02 Appointment of Successor. On and after the date the Servicer receives a notice of termination pursuant to Section 9.01 hereof, or the Owner Trustee receives the resignation of the Servicer evidenced by an Opinion of Counsel or accompanied by the consents required by Section 8.04 hereof, or the Servicer is removed as servicer pursuant to this Article IX or Section 4.01(i), then, the Majority Noteholders shall appoint a successor servicer to be the successor in all respects to the Servicer in its capacity as Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof; provided, however, that the successor servicer shall not be liable for any actions of any servicer prior to it. The successor servicer shall be obligated to make Servicing Advances hereunder. As compensation therefor, the successor servicer appointed pursuant to the following paragraph, shall be entitled to all funds relating to the Loans which the Servicer would have been entitled to receive from the Collection Account pursuant to Section 5.01(c) hereof as if the Servicer had continued to act as servicer hereunder, together with other Servicing Compensation in the form of assumption fees, late payment charges or otherwise as provided in Section 4.16 hereof. The Servicer shall not be entitled to any termination fee if it is terminated pursuant to Section 9.01 hereof but shall be entitled to any accrued and unpaid Servicing Compensation to the date of termination. Any collections received by the Servicer after removal or resignation shall be endorsed by it to the Indenture Trustee and remitted directly to the successor servicer. The compensation of any successor servicer appointed shall be the Servicing Fee, together with other Servicing Compensation provided for herein. The Indenture Trustee, the Issuer, any Custodian, the Servicer and any such successor servicer shall take such action, consistent with this Agreement, as shall be reasonably necessary to effect any such succession. Any costs or expenses incurred by the Indenture Trustee in connection with the termination of the Servicer and the succession of a successor servicer shall be an expense of the outgoing Servicer and, to the extent not paid thereby, an expense of such successor servicer. The Servicer agrees to cooperate with the Indenture Trustee and any successor servicer in effecting the termination of the Servicer's servicing responsibilities and rights hereunder and shall promptly provide the successor servicer all documents and records reasonably requested by it to enable it to assume the Servicer's functions hereunder and shall promptly also transfer to the successor servicer all amounts which then have been or should have been deposited in any Trust Account maintained by the Servicer or which are thereafter received with respect to the Loans. Upon the occurrence of an Event of Default, the Majority Noteholders shall have the right to order the Servicer's Loan Files and all other files of the Servicer relating to the Loans and all other records of the Servicer and all documents relating to the Loans which are then or may -103- 109 thereafter come into the possession of the Servicer or any third party acting for the Servicer to be delivered to such custodian or servicer as it selects and the Servicer shall deliver to such custodian or servicer such assignments as the Majority Noteholders shall request. No successor servicer shall be held liable by reason of any failure to make, or any delay in making, any distribution hereunder or any portion thereof caused by (i) the failure of the Servicer to deliver, or any delay in delivering, cash, documents or records to it or (ii) restrictions imposed by any regulatory authority having jurisdiction over the Servicer hereunder. No appointment of a successor to the Servicer hereunder shall be effective until written notice of such proposed appointment shall have been provided by the Indenture Trustee to the Initial Noteholder, the Issuer and the Depositor, ANB, ABC, the Majority Noteholders and the Issuer shall have consented in writing thereto. In connection with such appointment and assumption, the Majority Noteholder may make such arrangements for the compensation of such successor servicer out of payments on the Loans as they and such successor servicer shall agree. Section 9.03 Waiver of Defaults. The Majority Noteholders may waive any events permitting removal of the Servicer as servicer pursuant to this Article IX. Upon any waiver of a past default, such default shall cease to exist and any Servicer Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto except to the extent expressly so waived. Section 9.04 Accounting Upon Termination of Servicer. Upon termination of the Servicer under this Article IX, the Servicer shall, at its own expense: (a) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee the funds in any Trust Account maintained by the Servicer; (b) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee all Loan Files and related documents and statements held by it hereunder and a Loan portfolio computer tape; (c) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee and to the Issuer and the Securityholders a full accounting of all funds, including a statement showing the Monthly Payments collected by it and a statement of monies held in trust by it for payments or charges with respect to the Loans; and (d) execute and deliver such instruments and perform all acts reasonably requested in order to effect the orderly and efficient transfer of servicing of the Loans to its successor and to more fully and definitively vest in such successor all rights, powers, duties, responsibilities, obligations and liabilities of the Servicer under this Agreement. -104- 110 ARTICLE X TERMINATION; PUT OPTION Section 10.01 Termination. (a) This Agreement shall terminate upon either: (a) the later of (i) the satisfaction and discharge of the Indenture and the provisions thereof, to the Noteholders of all amounts due and owing in accordance with the provisions hereof or (ii) the disposition of all funds with respect to the last Loan and the remittance of all funds due hereunder and the payment of all amounts due and payable, including, in both cases, without limitation, indemnification payments payable pursuant to any Basic Document to the Indenture Trustee, the Owner Trustee, the Issuer and the Custodian, written notice of the occurrence of either of which shall be provided to the Indenture Trustee by the Servicer; or (b) the mutual consent of the Servicer, the Depositor, ANB, ABC and all Securityholders in writing and delivered to the Indenture Trustee by the Servicer. (b) The Securities shall be subject to an early redemption or termination at the option of the Majority Noteholders in the manner and subject to the provisions of Section 10.02 of this Agreement. (c) Except as provided in Sections 10.01 and 10.02, none of the Depositor, the Servicer nor any Noteholder shall be entitled to revoke or terminate the Trust. Section 10.02 Optional Termination. (a) The Majority Certificateholders may, at their option, effect an early termination of the Trust on any Payment Date on or after the Clean-up Call Date. The Majority Certificateholders shall effect such early termination by providing notice thereof to the Indenture Trustee and Owner Trustee and by purchasing all of the Loans at a purchase price, payable in cash, equal to or greater than the Termination Price. The expense of any Independent appraiser required under this Section 10.02 shall be a nonreimbursable expense of the Majority Certificateholders. Any such early termination by the Majority Certificateholders shall be accomplished by depositing into the Collection Account on the third Business Day prior to the Payment Date on which the purchase is to occur the amount of the Termination Price to be paid. The Termination Price and any amounts then on deposit in the Collection Account (other than any amounts withdrawable pursuant to Section 5.01(c)(1) hereof) shall be distributed by the Indenture Trustee pursuant to Section 5.01(c)(3) of this Agreement and Section 9.1 of the Trust Agreement on the next succeeding Payment Date; and any amounts received with respect to the Loans and Foreclosure Properties subsequent to the final Payment Date shall belong to the purchaser thereof. -105- 111 Section 10.03 Notice of Termination. Notice of termination of this Agreement or of early redemption and termination of the Issuer pursuant to Section 10.01 shall be sent by the Indenture Trustee to the Noteholders in accordance with Section 10.02 of the Indenture. Section 10.04 Put Option. The Majority Noteholders may, at their option, effect a put of the entire outstanding Note Principal Balance, or any portion thereof, to the Trust on any Payment Date by exercise of the Put Option. The Majority Noteholders shall effect such put by providing notice thereof in accordance with Section 10.05 of the Indenture. On the third Business Day prior to the Payment Date on which the exercise of the Put Option is to occur the Issuer shall deposit the Note Redemption Amount into the Collection Account and any amounts then on deposit in the Collection Account (other than any amounts withdrawable pursuant to Section 5.01(c)(1) hereof) shall be distributed by the Indenture Trustee pursuant to Section 5.01(c)(3) of this Agreement on the next succeeding Payment Date; and any amounts received with respect to the Loans and Foreclosure Properties subsequent to the final Payment Date shall belong to the Issuer. ARTICLE XI MISCELLANEOUS PROVISIONS Section 11.01 Acts of Securityholders. Except as otherwise specifically provided herein, whenever action, consent or approval of the Securityholders is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Securityholders if the Majority Noteholders agree to take such action or give such consent or approval. Section 11.02 Amendment. (a) This Agreement may be amended from time to time by the Depositor, the Servicer, the Loan Originators, the Indenture Trustee and the Issuer by written agreement with notice thereof to the Securityholders, without the consent of any of the Securityholders, to cure any error or ambiguity, to correct or supplement any provisions hereof which may be defective or inconsistent with any other provisions hereof or to add any other provisions with respect to matters or questions arising under this Agreement; provided, however, that such action will not adversely affect in any material respect the interests of the Securityholders. An amendment described above shall be deemed not to adversely affect in any material respect the interests of the Securityholders if an Opinion of Counsel is obtained to such effect. -106- 112 (b) This Agreement may also be amended from time to time by the Depositor, the Servicer, the Loan Originators, the Indenture Trustee and the Issuer by written agreement, with the prior written consent of the Majority Noteholders, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement, or of modifying in any manner the rights of the Securityholders; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, collections of payments on Loans or distributions which are required to be made on any Security, without the consent of the holders of 100% of the Securities, (ii) adversely affect in any material respect the interests of any of the holders of the Securities in any manner other than as described in clause (i), without the consent of the holders of 100% of the Securities, or (iii) reduce the percentage of the Securities, the consent of which is required for any such amendment, without the consent of the holders of 100% of the Securities. (c) It shall not be necessary for the consent of Securityholders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Issuer and the Indenture Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Issuer and the Indenture Trustee may, but shall not be obligated to, enter into any such amendment which affects the Issuer's own rights, duties or immunities of the Issuer or the Indenture Trustee, as the case may be, under this Agreement. Section 11.03 Recordation of Agreement. To the extent permitted by applicable law, this Agreement, or a memorandum thereof if permitted under applicable law, is subject to recordation in all appropriate public offices for real property records in all of the counties or other comparable jurisdictions in which any or all of the Mortgaged Property is situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Servicer at the Securityholders' expense on direction of the Majority Noteholders but only when accompanied by an Opinion of Counsel to the effect that such recordation materially and beneficially affects the interests of the Securityholders or is necessary for the administration or servicing of the Loans. Section 11.04 Duration of Agreement. This Agreement shall continue in existence and effect until terminated as herein provided. Section 11.05 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN -107- 113 ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 11.06 Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered personally, mailed by overnight mail, certified mail or registered mail, postage prepaid, or (ii) transmitted by telecopy, upon telephone confirmation of receipt thereof (with a copy delivered by overnight courier), as follows: (I) in the case of the Depositor, to Advanta Loan Warehouse Corporation, Welsh & McKean Roads, Spring Hill, Pennsylvania 19477, Attention: Mark Dunsheath, telecopy number: (215) 444-4586, telephone number: (215) 444-4745, or such other addresses or telecopy or telephone numbers as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Depositor; (II) in the case of the Trust, to Advanta Home Equity Loan Owner Trust 1998-MS1, c/o Wilmington Trust Company, One Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration, telecopy number: (302) 651-8882, telephone number: (302) 651-1000, or such other address or telecopy or telephone numbers as may hereafter be furnished to the Noteholders and the other parties hereto in writing by the Trust; (III) in the case of the Transfer Obligors, to Advanta Corp., Welsh & McKean Roads, Spring House, Pennsylvania 19477, Attention: Philip M. Browne, telecopy number: (215) 444-5915, telephone number: (215) 444-5060 and/or to Advanta Mortgage Corp. USA, Welsh & McKean Roads, Spring House, Pennsylvania 19477, Attention: Mark Dunsheath, telecopy number: (215) 444-4586, telephone number: (215) 444-4745 or such other addresses or telecopy or telephone numbers as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Transfer Obligors, (IV) in the case of the Loan Originators, to Advanta Mortgage Corp. USA, Welsh & McKean Roads, Spring House, Pennsylvania 19477, Attention: Mark Dunsheath, telecopy number: (215) 444-4586, telephone number: (215) 444-4745 and/or to Advanta National Bank, One Righter Parkway, Wilmington, DE 19803, Attention: Philip M. Browne, telecopy number: (215) 444-5915, telephone number: (215) 444-5060 and/or to Advanta Bank Corp., Welsh & McKean Roads, Spring House, Pennsylvania 19477, Attention: Philip M. Browne, telecopy number: (215) 444-5915, telephone number: (215) 444-5060 with a copy to Mark Dunsheath, Advanta Mortgage Corp. USA, Welsh & McKean Roads, Spring House, Pennsylvania 19477, telecopy number: (215) 444-4586, telephone number: (215) 444-4745 or such other addresses or telecopy or telephone numbers as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Loan Originators, (V) in the case of the Servicer, to Advanta Mortgage Corp. USA, Welsh & McKean Roads, Spring House, Pennsylvania 19477, Attention: Mark Dunsheath, telecopy number: (215) 444-4586, telephone number: (215) 444-4745 or such other addresses or telecopy or telephone numbers as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Servicer; and, (V) in the case of the Indenture Trustee, at the Corporate Trust Office, as defined in the Indenture, any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice or telephone confirmation thereof by such party, except; provided, that notices to the Securityholders shall be effective upon mailing or personal delivery. -108- 114 Section 11.07 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 11.08 No Partnership. Nothing herein contained shall be deemed or construed to create any partnership or joint venture between the parties hereto and the services of the Servicer shall be rendered as an independent contractor. Section 11.09 Counterparts. This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same Agreement. Section 11.10 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Servicer, the Loan Originators, the Depositor, the Indenture Trustee, the Issuer and the Securityholders and their respective successors and permitted assigns. Section 11.11 Headings. The headings of the various Sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. Section 11.12 Actions of Securityholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by agent duly appointed in writing; and except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Depositor, ANB, ABC, the Servicer or the Issuer. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement and conclusive in favor of the Depositor, ANB, ABC, the Servicer and the Issuer if made in the manner provided in this Section 11.12. (b) The fact and date of the execution by any Securityholder of any such instrument or writing may be proved in any reasonable manner which the Depositor, ABC, ANB the Servicer or the Issuer may deem sufficient. -109- 115 (c) Any request, demand, authorization, direction, notice, consent, waiver or other act by a Securityholder shall bind every holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, or omitted to be done, by the Depositor, ANB, ABC, the Servicer or the Issuer in reliance thereon, whether or not notation of such action is made upon such Security. (d) The Depositor, ANB, ABC, the Servicer or the Issuer may require additional proof of any matter referred to in this Section 11.12 as it shall deem necessary. Section 11.13 Non-Petition Agreement. Notwithstanding any prior termination of any Basic Document, the Loan Originators, the Transfer Obligors, the Servicer, the Depositor and the Indenture Trustee each severally and not jointly covenants that it shall not, prior to the date which is one year and one day after the payment in full of the all of the Notes, acquiesce, petition or otherwise, directly or indirectly, invoke or cause the Trust or the Depositor to invoke the process of any governmental authority for the purpose of commencing or sustaining a case against the Issuer or Depositor under any Federal or state bankruptcy, insolvency or similar law or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or Depositor or any substantial part of their respective property or ordering the winding up or liquidation of the affairs of the Issuer or the Depositor. Section 11.14 Holders of the Certificates. (a) Any sums to be distributed or otherwise paid hereunder or under this Agreement to the holders of the Securities shall be paid to such holders pro rata based on their Percentage Interests; (b) Where any act or event hereunder is expressed to be subject to the consent or approval of the holders of the Securities, such consent or approval shall be capable of being given by the holder or holders evidencing in the aggregate not less than 51% of the Percentage Interests. Section 11.15 Due Diligence Fees, Due Diligence. Each Loan Originator acknowledges that the Initial Noteholder has the right to perform continuing due diligence reviews with respect to the Loans, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and each Loan Originator agrees that upon reasonable (but no less than 10 Business Days') prior notice (with no notice being required upon the occurrence of an Event of Default) to any Loan Originator, the Initial Noteholder, the Indenture Trustee and Custodian or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Loan Files and any and all documents, records, agreements, instruments or information relating to such Loans in the possession or under the control of the Servicer and the Indenture Trustee. The Loan Originators also shall make available to the Initial Noteholder a knowledgeable financial or accounting officer for the -110- 116 purpose of answering questions respecting the Loan Files and the Loans. Without limiting the generality of the foregoing, each Loan Originator acknowledges that the Initial Noteholder may purchase Notes based solely upon the information provided by the Loan Originators to the Initial Noteholder in the Loan Schedule and the representations, warranties and covenants contained herein, and that the Initial Noteholder, at its option, has the right at any time to conduct a partial or complete due diligence review on some or all of the Loans securing such purchase, including without limitation ordering new credit reports and new appraisals on the related Mortgaged Properties and otherwise re-generating the information used to originate such Loan. The Initial Noteholder may underwrite such Loans itself or engage a mutually agreed upon third party underwriter to perform such underwriting. Each Loan Originator agrees to cooperate with the Initial Noteholder and any third party underwriter in connection with such underwriting, including, but not limited to, providing the Initial Noteholder and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Loans in the possession, or under the control, of the Servicer. Each Loan Originator further agrees that the Loan Originators shall reimburse the Initial Noteholder for any and all reasonable out-of-pocket costs and expenses incurred by the Initial Noteholder in connection with the Initial Noteholder's activities pursuant to this Section 11.15 hereof (the "Due Diligence Fees"), provided that, unless an Event of Default shall occur, the sum of (i) the aggregate reimbursement obligation of the Loan Originators under this Agreement, and (ii) the reimbursement obligation of Morgan Stanley Mortgage Capital Inc. pursuant to the Warehouse Lines, shall be limited to $25,000 per annum. The Initial Noteholder agrees (on behalf of itself and its Affiliates, directors, officers, employees and representatives) to use reasonable precaution to keep confidential, in accordance with its customary procedures for handling confidential information and in accordance with safe and sound practices, and not to disclose to any third party, any non-public information supplied to it or otherwise obtained by it hereunder with respect to any of the Loan Originators, Advanta Corp. or any of its Affiliates; provided, however, that nothing herein shall prohibit the disclosure of any such information to the extent required by statute, rule, regulation or judicial process; provided, further that, unless specifically prohibited by applicable law or court order, the Initial Noteholder shall, prior to disclosure thereof, notify Loan Originators of any request for disclosure of any such non-public information. The Initial Noteholder further agrees not to use any such non-public information for any purpose unrelated to this Agreement. Section 11.16 Liability. AMCUSA shall be liable for all obligations of the Loan Originators set forth in this Agreement. [SIGNATURE PAGE FOLLOWS] -111- 117 IN WITNESS WHEREOF, the Issuer, the Depositor, the Servicer, the Indenture Trustee, the Loan Originators and the Transfer Obligors have caused their names to be signed by their respective officers thereunto duly authorized, as of the day and year first above written, to this SALE AND SERVICING AGREEMENT. ADVANTA HOME EQUITY LOAN OWNER TRUST 1998-MS1, By: Wilmington Trust Company not in its individual capacity but solely as Owner Trustee By: /s/ -------------------------------------------- Name: Title: ADVANTA LOAN WAREHOUSE CORPORATION, as Depositor By: /s/ --------------------------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA, as Servicer By: /s/ --------------------------------------------- Name: Title: BANKERS TRUST COMPANY OF CALIFORNIA, N.A., as Indenture Trustee By: /s/ --------------------------------------------- Name: Title: 118 ADVANTA CORP., as Transfer Obligor By: /s/ -------------------------------------------- Name: Title: ADVANTA MORTGAGE CORP. USA, as Transfer Obligor and Loan Originator By: /s/ -------------------------------------------- Name: Title: ADVANTA NATIONAL BANK, as Loan Originator By: /s/ -------------------------------------------- Name: Title: ADVANTA BANK CORP., as Loan Originator By: /s/ -------------------------------------------- Name: Title: EX-12 10 COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 ADVANTA CORP. AND SUBSIDIARIES STATEMENT SETTING FORTH DETAILS OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Net Earnings $447,880 $ 71,625 $175,657 $136,677 $106,063 Federal and state income taxes (9,044) 24,905 89,104 75,226 59,144 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes(A) 438,836 96,530 264,761 211,903 165,207 - --------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest 184,275 324,558 269,700 166,032 94,758 One-third of all rentals 2,627 3,492 2,834 1,641 1,809 Preferred stock dividend of subsidiary trust 8,990 8,990 350 0 0 - --------------------------------------------------------------------------------------------------------------------- Total fixed charges 195,892 337,040 272,884 167,673 96,567 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes and fixed charges 634,728 433,570 537,645 379,576 261,774 - --------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges(B) 3.24x 1.29x 1.97x 2.26x 2.71x - ---------------------------------------------------------------------------------------------------------------------
(A) Earnings before income taxes in 1998 include a $541.3 million gain on transfer of consumer credit card business and $125.1 million of other charges including severance and outplacement costs associated with workforce reduction, option exercise and other employee costs associated with the Fleet Transaction/Tender Offer; expense associated with exited business/product; and asset impairment. (B) For purposes of computing these ratios, "earnings" represent income before income taxes plus fixed charges. "Fixed charges" consist of interest expense, one-third (the portion deemed representative of the interest factor) of rental expense on operating leases, and preferred stock dividends of subsidiary trust. 95 EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 CURRENT LIST OF SUBSIDIARIES OF REGISTRANT Advanta Corp. (DE) Advanta National Corp. (DE) Advanta National Bank Advanta Bank Corp. (UT) Advanta Leasing Receivables Corp. VI (NV) Advanta Leasing Receivables Corp. VII (NV) Advanta GP Corp. (DE) Advanta 101 GP Corp. (DE) Advanta Investment Corp. (DE) Advanta Investment Corp. II (DE) Advanta Information Services, Inc. (DE) Advanta International Corporation I (DE) Advanta International Corporation II (DE) Advanta UK (Scotland)* Advanta Leasing Holding Corp. (DE) Advanta Business Services Corp. (DE) Advanta Leasing Receivables Corp. (DE) Advanta Leasing Receivables Corp. II (DE) Advanta Leasing Receivables Corp. III (NV) Advanta Business Receivables LLC (NV) Advanta Leasing Receivables Corp. IV Advanta Leasing Receivables Corp. V Advanta Business Receivables Corp. (NV) Advanta Commercial Credit Corp. (NV) Mt. Vernon Leasing, Inc. (NJ) Service Partners I Corp. (NV) Service Partners II Corp. (NV) Colorado Credit Card Service, LLC (CO)** Advanta Service Corp. (DE) Coltex Leverage Lease Corporation I (DE) TSLL Jedobert CAL, Inc. (DE) Advanta Properties I Corp. Advanta Properties II Corp. Advanta Life Insurance Company (AZ) Advanta Insurance Company (AZ) Advanta Insurance Agency Inc. (DE) First Advanta Insurance Agency Inc. (PA) AICM, Inc. (AZ) Advanta Name Corp. (DE) Advanta Advertising, Inc. (DE) ADVANTENNIS Corp. (DE) Advanta Residual Holding Corp. (DE) Advanta Mortgage Holding Company (DE) Advanta Auto Finance Corporation (NV) Advanta Auto Receivables Corp. I (NV) Advanta Mortgage Corp. USA (DE) Advanta Finance Corp. (NV) Advanta Finance Residential Mortgage Corp. (NV) Advanta Finance Residual Corporation (NV) Advanta Mortgage Corp. Midatlantic (PA) Advanta Mortgage Corp. Midatlantic II (PA) Advanta Mortgage Corp. New Jersey (NJ) Advanta Mortgage Corp. Northeast (NY) Advanta Mortgage Corp. Midwest (PA) Advanta Nominee Services, Inc. (DE) Advanta Mortgage Conduit Services, Inc. (DE) Advanta Conduit Receivables, Inc. (NV) Advanta Mortgage Receivables Inc. (DE) Advanta Mortgage Funding Corp. (DE) Advanta Loan Warehouse Corporation (DE) * Advanta International Corp. I and Advanta International Corp. II each owns 50% of Advanta UK. ** The Managing Member of Colorado Credit Card Service, LLC is Service Partners I Corp. and Service Partners II Corp. is also a Member. EX-23 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements; File No. 33-12510, No. 33-19290, No. 33-31456, No. 33-32969, No. 33-33350, No. 33-39331, No. 33-47308, No. 33-47305, No. 33-50256, No. 33-50254, No. 33-50258, No. 33-55492, No. 33--57516, No. 33-53205, No. 33-53475, No. 33-54991, No. 33-58029, No. 33-59219, No. 33-61555, No. 33-60419, No. 333-01681, No. 333-01833, No. 333-04471, No. 333-04465, No. 333-04468, No. 333-04469, No. 333-05701, No. 333-18993, No. 333-28291 and No. 333-74575. Arthur Andersen LLP Philadelphia, PA March 31, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1998 DEC-31-1998 90,597 80,028 267,400 501,563 521,410 0 0 1,172,370 33,437 3,795,750 1,749,790 413,690 319,208 652,758 0 1,010 267 559,027 3,795,750 129,748 89,668 21,674 241,090 85,935 184,275 56,815 67,193 7,281 513,716 438,836 447,880 0 0 447,880 16.65 15.71 1.35 49,568 30 0 0 137,773 61,430 8,321 33,437 33,437 0 0
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