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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 657-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE N/A
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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).
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DOCUMENT FORM 10-K REFERENCE
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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".
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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,
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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 $14.5 billion at December 31, 1997.
Approximately 92% of the managed mortgage loan portfolio is secured by
first lien position loans and the balance is secured by second lien position
loans. Approximately 65% of the managed portfolio is comprised of fixed rate
loans. The remainder represents intermediate rate loans which bear interest at a
fixed rate for a period of two to three years and an adjustable rate thereafter
and adjustable rate loans. The following table shows the geographic distribution
by state for the top five states of total managed and non-performing Advanta
Mortgage loans at December 31, 1998.
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PERCENT
PERCENT OF NON-
ADVANTA PERCENT OF OF NON- PERFORMING
MORTGAGE TOTAL PORTFOLIO PERFORMING TO TOTAL
($ IN MILLIONS) LOANS NONPERFORMING BY STATE BY STATE LOANS
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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
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TOTAL $8,285.2 $375.5 100.0% 100.0% 4.5%
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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
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.
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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.
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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.,
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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
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* MasterCard(R) is a federally registered servicemark of MasterCard
International, Inc.; VISA(R) is a federally registered servicemark of VISA,
U.S.A., Inc.
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
<TABLE>
<CAPTION>
NAME AGE OFFICE DATE ELECTED
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
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<PAGE> 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:
<TABLE>
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PORTFOLIO
AS REPORTED ADJUSTMENTS LENDER
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------
</TABLE>
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 $13.5 million in pretax income reflecting the estimated net
impact the new funding strategy would have had if it had been in place since
January 1, 1998.
LOAN ORIGINATIONS
Advanta Mortgage loan production is generated through multiple distribution
channels. Home equity loans and lines of credit are originated directly from
consumers using targeted direct mail and direct response television and radio
techniques, and through a branch office system("Advanta Finance") of 57 branches
throughout the country (collectively "Direct" originations). First and second
mortgage loans are also
18
<PAGE> 20
originated through a broker network ("Broker") and correspondent relationships,
and purchased from other financial institutions ("Conduit" and "Corporate
Finance"). Auto finance contracts are purchased from correspondent originators
on a flow basis or in bulk purchases. "Advanta Mortgage loans" include home
equity and auto loans and exclude loans which were never owned by the Company,
but which the Company services for a fee ("contract servicing" or
"subservicing"). Originations for Advanta Mortgage were as follows ($ in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
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 $54.9
million. The increase in interest income was principally the result of an
increase in the average yield on interest earning assets to 8.15% for 1997 as
compared to 7.83% for 1996, which primarily resulted from the repricing of the
consumer credit card portfolio. The increase in the owned net interest margin
was negatively impacted by the mix of interest earning assets reflecting the
conservative position in cash and cash equivalents on the balance sheet. The
increase in interest expense reflects both higher average balances of interest
bearing liabilities and an increase in the average rate paid on those
liabilities.
Advanta Mortgage, business card, lease and consumer credit card receivable
securitization activity shifts revenues from interest income to non-interest
revenues. This activity reduces the level of higher-yielding receivables on the
balance sheet while proportionately increasing the balance sheet levels of new
lower-yielding receivables and short-term, high quality investments earning
money market rates.
The owned average cost of funds decreased to 6.26% in 1998 from 6.31% in
1997. The owned average cost of funds was 6.12% in 1996. The Company has
utilized derivatives to manage interest rate risk (see discussion under
"Derivatives Activities").
20
<PAGE> 22
The following table provides an analysis of owned interest income and
expense data, average balance sheet data, net interest spread (the difference
between the yield on interest-earning assets and the average rate paid on
interest-bearing liabilities), and net interest margin (the difference between
the yield on interest-earning assets and the average rate paid to fund
interest-earning assets) for 1996 through 1998. Average owned loan and lease
receivables and the related interest revenues include certain loan fees.
INTEREST RATE ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- -------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 $14,918,660
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes consumer credit cards through February 20, 1998.
(2) Interest and average rate for tax-free securities, loans, and leases are
computed on a tax equivalent basis using a statutory rate of 35%.
(3) Includes assets held and available for sale and nonaccrual loans and leases.
(4) Managed net interest margin for 1998 was 2.73%, representing a combination
of owned interest-earning assets/owned interest-bearing liabilities and
securitized Advanta Mortgage assets/liabilities.
21
<PAGE> 23
INTEREST VARIANCE ANALYSIS: ON-BALANCE SHEET
The following table presents the effects of changes in average volume and
interest rates on individual financial statement line items on a tax equivalent
basis and including certain loan fees. Changes not solely due to volume or rate
have been allocated on a pro rata basis between volume and rate. The effects on
individual financial statement line items are not necessarily indicative of the
overall effect on net interest income.
<TABLE>
<CAPTION>
1998 VS. 1997 1997 VS. 1996
($ IN THOUSANDS) ---------------------------------- -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
(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 $20 million. See Note 2 to the
Consolidated Financial Statements.
22
<PAGE> 24
OTHER REVENUES
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
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 $197.3 million in 1996, primarily due to increases in consumer credit card
overlimit and cash advance fees as a result of the Company's risk based pricing
strategy on consumer credit cards. These increases were partially offset by
decreases in consumer credit card interchange income as a result of lower
transaction volume and equity securities losses reflecting a decrease in the
carrying value of Advanta Partners LP investments.
23
<PAGE> 25
OPERATING EXPENSES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
AVERAGE
MANAGED
RECEIVABLES
FOR THE YEAR ENDED YEAR ENDED
-------------------- 12/31/98
1998 1997 1996 (IN MILLIONS)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage only 0.56% 0.53% 0.70% $6,509
Auto 9.30 7.25 0.13 228
Business Card 5.88 3.73 2.65 744
Leases 2.66 2.71 2.15 609
- -------------------------------------------------------------------------------------------------
</TABLE>
On the total owned portfolio, the charge-off rate was 3.7% in 1998 compared
to 5.6% for 1997. The charge-off rate on the owned consumer credit card
portfolio decreased to 7.4% from 7.9% in 1997. The charge-off rate on owned
Advanta Mortgage loans increased from 1.0% in 1997 to 1.5% in 1998. The 1998
charge-off rate on leases and business cards was 4.8% compared to 2.5% in 1997
and 1.5% in 1996.
Past due loans represent accruing loans that are past due 90 days or more
as to collection of principal and interest. Loans are put on nonaccrual status
when they become 90 days past due.
During 1994, the Company implemented a new policy for the charge-off of
mortgage loans. Under this policy, when a nonperforming mortgage loan becomes
twelve months delinquent, the Company writes down the loan to its net realizable
value, regardless of anticipated collectibility. Consequently, in 1994, all
mortgage loans that had been twelve or more months delinquent, as well as any
mortgages that became twelve months delinquent during the year were written down
(through a recorded charge-off) to their net realizable value.
26
<PAGE> 28
The following tables provide a summary of reserves, impaired assets,
delinquencies and charge-offs for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
($ IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $115,218
As a percentage of average gross
receivables:
New methodology(2) 7.0% 7.0% 3.7%
Prior methodology 4.1(3) 2.5% 2.5%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
(1) Includes consumer credit cards through February 20, 1998.
(2) The 1998, 1997 and 1996 figures reflect the adoption of a new charge-off
methodology in August 1996 relating to consumer credit card bankruptcies
(see Asset Quality).
(3) Pro forma calculation reflecting charge-off of all credit card bankruptcies
within 30 days of notification.
(4) In 1994, the Company implemented a new mortgage loan charge-off policy (see
Asset Quality).
(5) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(6) Includes leases for all years presented and business cards beginning in
1996.
28
<PAGE> 30
The following tables provide a summary of allowances, impaired assets,
delinquencies and charge-offs for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $27,486
Nonperforming assets N/A 21,055 13,890 2,466 3,502
Accruing loans past due 90 days or more N/A 49,410 40,574 17,385 11,238
Impaired assets N/A 70,465 54,464 19,851 14,740
Total loans 30 days or more delinquent N/A 141,000 107,263 50,651 35,156
As a percentage of gross receivables:
Allowance for credit losses N/A 4.6% 3.7% 1.6% 1.6%
Nonperforming assets N/A .8 .7 .1 .2
Accruing loans past due 90 days or more N/A 1.9 2.0 .7 .6
Impaired assets N/A 2.7 2.7 .8 .9
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
DECEMBER 31,
($ IN THOUSANDS) -----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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 $200 million. Also, deposit sources proved readily
expandable in 1998 as demonstrated in the growth noted above. In addition,
notwithstanding the Company's current liquidity, efforts continue to develop new
sources of funding, both through previously untapped customer segments and
through development of new financing structures.
The following tables detail the composition of the deposit base and the
composition of debt and other borrowings at year end for each of the past five
years.
COMPOSITION OF DEPOSIT BASE
<TABLE>
<CAPTION>
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% $1,159.4 100%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 37
COMPOSITION OF DEBT AND OTHER BORROWINGS
<TABLE>
<CAPTION>
($ IN MILLIONS) AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 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 $900,000 in
capital expenditures. Funding for the project is being provided out of operating
revenues. The Company notes that GAAP generally requires that the costs of
becoming Year 2000 compliant, including without limitation modifying computer
software or converting to new programs, be charged to expense as they are
incurred. Therefore, except for the cost of replacement systems or other items
that have a future use, the Company will expense the cost of the Year 2000
project as incurred. The Company has deferred development on selected business
systems due to Year 2000 priorities. These deferrals are not expected to have a
material effect on the financial condition and results of operations of the
Company.
The Company believes that the Year 2000 Issue will not pose significant
operational problems for it and will not have a material adverse effect on its
future financial condition, liquidity or results of operations during 1999 and
in future periods. The projected costs and expenditures and project completion
dates are based on management's best estimates, are subject to the performance
of third parties over which the Company has no control and may be updated from
time to time as additional information becomes available.
38
<PAGE> 40
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
($ IN THOUSANDS)
DECEMBER 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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, $.01 par value;
Authorized -- 230,000,000 shares; Issued -- 16,294,825
shares in 1998 and 26,564,546 shares in 1997 163 266
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
($ IN THOUSANDS)
DECEMBER 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE> 42
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements
41
<PAGE> 43
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
INCOME EARNINGS STOCK EQUITY
- ---------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE> 44
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents activity in subordinated trust assets related
to Advanta Mortgage loan securitizations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
- ---------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------
</TABLE>
"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
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of managed (owned and serviced) receivables
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
- -----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. ALLOWANCE FOR CREDIT LOSSES
The following table displays five years of allowance history:
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- -------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- --------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------
</TABLE>
(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:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 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:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Warehouse facility $18,517 $ 3,857
Other borrowings 17,784 48,917
- --------------------------------------------------------------------------------
Total $36,301 $52,774
- --------------------------------------------------------------------------------
</TABLE>
58
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<S> <C>
Year Ended December 31,
1999 $ 7,043
2000 6,484
2001 5,237
2002 4,063
2003 3,790
Thereafter 13,310
</TABLE>
60
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
RESTRICTED
PLAN PERFORMANCE ORIGINAL SHARES
PLAN YEARS COVERED STOCK PRICE OUTSTANDING
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AMIPWISE III 1996-1998 $17.00 398,125
AMIPWISE IV 1999-2001 $25.00 943,350
- -----------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
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) ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
(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
------------------------------------------------- ------------------------------
<C> <C> <S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- -------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
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
<PAGE> 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
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ADVANTA
ADVANTA PERSONAL
ADVANTA BUSINESS PAYMENT RECONCILING
MORTGAGE SERVICES SERVICES OTHER(2) ITEMS TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. SELECTED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
OTHER REVENUES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
(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.
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. NET INTEREST INCOME
The following table presents the components of net interest income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE 19. INCOME TAXES
Income tax (benefit) expense consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the statutory federal income tax to the consolidated
tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
- -----------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred taxes:
Gross assets $ 44,541 $ 84,676
Gross liabilities (80,566) (118,655)
- -----------------------------------------------------------------------------------
Total deferred taxes $(36,025) $ (33,979)
- -----------------------------------------------------------------------------------
</TABLE>
A summary of deferred tax assets and liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
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)
- ----------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
CHARGED TO
ACCRUAL IN 1998
------------------ 12/31/98
1998 NON- ACCRUAL
ACCRUAL CASH CASH BALANCE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22. PARENT COMPANY FINANCIAL STATEMENTS
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
(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 $41.2 million of equity securities
accounted for at fair value as of December 31, 1998.
74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $175,657
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Dividends from subsidiaries include only dividends from current year net
income of subsidiaries. See Parent Company Only Condensed Statements of Cash
Flows for total dividends received from subsidiaries.
The Parent Company Only Statements of Changes in Stockholders' Equity is
the same as the Consolidated Statements of Changes in Stockholder's Equity.
75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVANTA CORP. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ IN THOUSANDS) YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
- ------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
RECEIVE PAY
FIXED RATE FIXED RATE TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
BALANCES MATURING IN:
BALANCE AT ----------------------------------------------------------------------------------
12/31/98 1999 2000 2001 2002 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 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.
<TABLE>
<S> <C> <C>
/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
</TABLE>
82
<PAGE> 84
SUPPLEMENTAL SCHEDULES (UNAUDITED)
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31,
($ IN THOUSANDS) 1998
- ----------------------------------------------------------------------------
<S> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
CASH
DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company had approximately 775 and 338 holders of
record of Class B and Class A Common Stock, respectively.
83
<PAGE> 85
QUARTERLY DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE> 86
QUARTERLY DATA -- CONTINUED
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 87
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% $41,617 100%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPOSITION OF GROSS RECEIVABLES
<TABLE>
<CAPTION>
($ IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% $1,964,444 100%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes mortgage and home equity loans for all years presented and auto
loans beginning in 1996.
(2) Includes leases for all years presented and business cards beginning in
1996.
86
<PAGE> 88
YIELD AND MATURITY OF INVESTMENTS AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
($ 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)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <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%
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
($ IN THOUSANDS) MATURING
- --------------------- ------------------------
AFTER TEN YEARS
------------------------
MARKET VALUE YIELD(C)
- --------------------- ------------------------
<S> <C> <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%
- ----------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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.
<TABLE>
<C> <S>
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.
</TABLE>
(a)(2) Schedules.
<TABLE>
<C> <S>
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.
</TABLE>
88
<PAGE> 90
(a)(3) Exhibits
<TABLE>
<C> <S>
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).
</TABLE>
89
<PAGE> 91
<TABLE>
<C> <S>
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).
</TABLE>
90
<PAGE> 92
<TABLE>
<C> <S>
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.
</TABLE>
- --------------------------------------------------------------------------------
* 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/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
</TABLE>
93
<PAGE> 95
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/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
</TABLE>
94
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
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<TABLE>
<S> <C>
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
</TABLE>
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<TABLE>
<S> <C>
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
</TABLE>
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<TABLE>
<S> <C>
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
</TABLE>
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
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"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.
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"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.
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"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,
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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.
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(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
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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.
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(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:
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(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;
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(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
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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
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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.
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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.
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(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);
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(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
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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
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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
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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
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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
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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
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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).
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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
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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)
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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
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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
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(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
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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.
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(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-
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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
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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,
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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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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:
<PAGE> 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:
<PAGE> 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:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF INTEREST AMOUNT PAID UNPAID PRINCIPAL NOTATION
DATE MADE LOAN RATE OR PREPAID AMOUNT MADE BY
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
- ------------------ ----------------------- ---------------- ------------------- ----------------------- --------------
</TABLE>
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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:
<PAGE> 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:
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<PAGE> 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-
<PAGE> 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.
<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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-
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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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.
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<PAGE> 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.
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<PAGE> 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).
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<PAGE> 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
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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
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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
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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
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(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
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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,
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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
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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
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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
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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
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<PAGE> 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.
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(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.
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(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.
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(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.
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(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
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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);
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<PAGE> 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
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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.
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(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.
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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
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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
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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
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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
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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
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(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.
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(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
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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.
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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
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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
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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.
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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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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]
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<PAGE> 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:
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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:
<PAGE> 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:
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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:
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<PAGE> 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
================================================================================
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TABLE OF CONTENTS
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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
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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
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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
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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.
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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.
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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.
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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;
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(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.
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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:
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(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
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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.
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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
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<PAGE> 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%.
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<PAGE> 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
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<PAGE> 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:
<TABLE>
<CAPTION>
Unfunded Transfer Obligation Percentage: LIBOR Margin:
<S> <C>
>= 8.00% 0.60%
>= 5.00%, but < 8.00% 1.10%
< 5.00% 2.10%
</TABLE>
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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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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.
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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:
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(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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
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(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
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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).
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(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:
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(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
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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.
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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
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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
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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;
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(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
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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
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(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
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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.
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(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.
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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
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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
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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-
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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,
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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
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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
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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.
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(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
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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
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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
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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)
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(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
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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.
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(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
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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
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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
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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
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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
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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
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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
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(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;
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(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)
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(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.
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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)
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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.
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(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.
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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
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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
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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
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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
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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
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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;
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(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:
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(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
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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.
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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
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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
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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
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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
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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
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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
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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
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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,
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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.
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(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
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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
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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;
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(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;
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(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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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.
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(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
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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.
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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.
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(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-
<PAGE> 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-
<PAGE> 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:
<PAGE> 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:
<PAGE> 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
<TABLE>
<CAPTION>
($ IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE> 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.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE>9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 90,597
<INT-BEARING-DEPOSITS> 80,028
<FED-FUNDS-SOLD> 267,400
<TRADING-ASSETS> 501,563
<INVESTMENTS-HELD-FOR-SALE> 521,410
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,172,370
<ALLOWANCE> 33,437
<TOTAL-ASSETS> 3,795,750
<DEPOSITS> 1,749,790
<SHORT-TERM> 413,690
<LIABILITIES-OTHER> 319,208
<LONG-TERM> 652,758
0
1,010
<COMMON> 267
<OTHER-SE> 559,027
<TOTAL-LIABILITIES-AND-EQUITY> 3,795,750
<INTEREST-LOAN> 129,748
<INTEREST-INVEST> 89,668
<INTEREST-OTHER> 21,674
<INTEREST-TOTAL> 241,090
<INTEREST-DEPOSIT> 85,935
<INTEREST-EXPENSE> 184,275
<INTEREST-INCOME-NET> 56,815
<LOAN-LOSSES> 67,193
<SECURITIES-GAINS> 7,281
<EXPENSE-OTHER> 513,716
<INCOME-PRETAX> 438,836
<INCOME-PRE-EXTRAORDINARY> 447,880
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447,880
<EPS-PRIMARY> 16.65
<EPS-DILUTED> 15.71
<YIELD-ACTUAL> 1.35
<LOANS-NON> 49,568
<LOANS-PAST> 30
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 137,773
<CHARGE-OFFS> 61,430
<RECOVERIES> 8,321
<ALLOWANCE-CLOSE> 33,437
<ALLOWANCE-DOMESTIC> 33,437
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
