<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant To Section 13 Or 15 (d) of the Securities
Exchange Act Of 1934 For The Period Ended September 30, 1996
( ) Transition Report Pursuant to Section 13 Or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to _________.
Commission File Number 0-8909
EMERGENT GROUP INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0513287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. BOX 17526
GREENVILLE, SOUTH CAROLINA 29606
(Address of principal executive offices)
Registrant's telephone number, including area code 864-235-8056
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each Class: Outstanding at October 31, 1996
- ----------------------------------------- -------------------------------
COMMON STOCK, PAR VALUE $0.05 PER SHARE 6,529,745
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EMERGENT GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1995 and September 30, 1996 4
Consolidated Statements of Income
for the three months and nine months ended
September 30, 1995 and September 30, 1996 6
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1995 and
September 30, 1996 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
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<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1996
1995 (Unaudited)
-------------- ---------------
<S> <C> <C>
(in thousands)
ASSETS
Cash and cash equivalents, including
reverse repurchase agreements of
$791,000 (1995) and $14,700,000 (1996) $ 1,260 $ 15,468
Restricted cash 912 2,993
Loans receivable:
Loans receivable 103,865 105,700
Mortgage loans held for sale 22,593 23,111
Excess servicing receivable 2,054 2,577
Other receivables 1,626 721
Accrued interest receivable 1,571 1,528
-------------- ---------------
Total loans receivable 131,709 133,637
Less allowance for credit losses (1,874) (3,036)
Less unearned discount, dealer reserves and deferred fee income (610) (1,899)
-------------- ---------------
Net loans receivable 129,225 128,702
Investment in asset-backed securities, net of allowance
for losses of $773,000 (1995) and $1,011,000 (1996) 865 2,279
Property and equipment 4,327 6,553
Less accumulated depreciation (957) (1,516)
-------------- ---------------
Net property and equipment 3,370 5,037
Excess of cost over net assets of acquired
businesses, net of accumulated amortization
of $597,000 (1995) and $735,000 (1996) 2,865 2,727
Real estate and personal property acquired through foreclosure 3,742 4,004
Deposit base intangibles, net of accumulated
amortization of $525,000 (1995) and $609,000 (1996) 600 516
Net assets of discontinued operations 77 --
Other assets 2,015 3,380
--------------- ---------------
Total Assets $ 144,931 $ 165,106
=============== ===============
</TABLE>
See Notes to Unaudited Financial Statements
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<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
-------------------- ----------------------
(in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks and others $ 31,633 $ 29,659
Subordinated investor savings:
Notes payable to investors, including
$873,000 (1995) and $846,000 (1996)
to related parties 82,132 94,889
Subordinated debentures, including $63,000 (1995)
and $23,000 (1996) to related parties 16,185 17,512
------------ -------------
Total subordinated investor savings 98,317 112,401
Other accrued liabilities 3,090 2,383
Remittance due to loan participants 1,188 2,088
Accrued interest payable 622 613
------------ -------------
Total other liabilities 4,900 5,084
------------ -------------
Total liabilities 134,850 147,144
Minority interest 196 128
Shareholders' equity:
Common Stock, par value $0.05 a share -
authorized 4,000,000 shares (1995) and 30,000,000
shares (1996); issued and outstanding 121,000 shares
(1995) and 6,529,745 shares (1996) 6 327
Class A Common Stock, par value $0.05 a share -
authorized 6,666,667 shares (1995) and - 0 - shares
(1996); issued and outstanding 6,276,474 shares (1995)
and - 0 - shares (1996) 314 --
Capital in excess of par value 6,632 6,839
Retained earnings 2,933 10,668
------------- ------------
Total shareholders' equity 9,885 17,834
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 144,931 $ 165,106
============ =============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
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<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1996 1995 1996
------------ ------------- --------------- -----------
(in thousands except share data)
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 3,647 $ 4,219 $ 10,837 $ 12,594
Servicing income 262 924 379 2,487
Gain on sale of loans 2,224 7,870 6,579 15,338
Management fees 80 129 490 385
Loan fee income 345 902 493 1,328
Other income 101 526 235 746
----------- ----------- ----------- -----------
Total revenues 6,659 14,570 19,013 32,878
Expenses:
Interest expense 2,161 2,603 5,941 8,181
Provision for credit losses 380 1,569 1,620 3,101
Salaries, wages and employee benefits 1,468 3,791 3,955 8,112
Depreciation 103 262 255 595
Amortization 90 127 235 290
Legal, audit and professional fees 105 191 387 531
Travel and entertainment 102 223 269 552
Telephone 59 165 179 396
Other general and administrative expense 693 1,299 1,854 3,204
----------- ----------- ----------- -----------
Total expenses 5,161 10,230 14,695 24,962
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and minority interest 1,498 4,340 4,318 7,916
Provision for income taxes:
Current 73 85 146 237
Deferred 14 44 34 11
----------- ----------- ----------- -----------
87 129 180 248
----------- ----------- ----------- -----------
Income from continuing operations
before minority interest 1,411 4,211 4,138 7,668
Minority interest in (earnings) loss of
subsidiaries (35) 90 (66) 68
----------- ----------- ----------- -----------
Income from continuing operations 1,376 4,301 4,072 7,736
Discontinued Transportation and Apparel
Manufacturing Segments:
Loss from operations, net of income
tax expense (408) -- (1,226) --
Loss on disposal, net of income tax expense (2,320) -- (2,253) --
----------- ----------- ----------- -----------
(2,728) -- (3,479) --
----------- ----------- ----------- -----------
Net income (loss) $ (1,352) $ 4,301 $ 593 $ 7,736
=========== =========== =========== ===========
Earnings per share:
Continuing operations $ 0.21 $ 0.63 $ 0.61 $ 1.14
Discontinued operations (0.41) -- (0.52) --
----------- ----------- ----------- -----------
Net income (loss) $ (0.20) $ 0.63 $ 0.09 $ 1.14
=========== =========== =========== ===========
Computed on the weighted average number
of shares issued and outstanding 6,705,140 6,777,494 6,705,140 6,773,583
</TABLE>
See Notes to Unaudited Financial Statements
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<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1996
---------- ----------
(in thousands)
<S> <C> <C>
Operating Activities:
Net income $ 593 $ 7,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 490 885
Provision for deferred income taxes 34 11
Provision for credit losses 1,620 3,101
Gain on sale of property and equipment (61) --
Gain on sale of other real estate owned acquired
through foreclosure -- (140)
Net (decrease) increase in unearned discount and
other deferrals (1,028) 1,212
Net (decrease) increase in deferred loan costs (161) 78
Loans originated with intent to sale (112,905) (192,969)
Principal proceeds from mortgage loans sold 76,601 199,000
Principal proceeds from small business loans sold 21,607 24,692
Proceeds from securitization of loans 15,357 14,140
Minority interest in income of subsidiaries 66 (68)
Changes in operating assets and liabilities increasing (decreasing) cash:
Restricted cash (652) (2,081)
Other receivables (29) 784
Excess servicing receivable (210) (522)
Customer commitment deposits (287) (93)
Remittance due loan participants 468 900
Accrued interest payable 59 (8)
Accounts payable, income taxes payable,
and other accrued liabilities 641 (615)
Accrued interest receivable (429) 44
Other assets (294) (1,610)
Net cash provided by operating
activities of discontinued operations 2,336 77
--------- ---------
Net cash provided by operating activities $ 3,816 $ 54,554
</TABLE>
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<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1996
----------- -----------
(in thousands)
<S> <C> <C>
INVESTING ACTIVITIES:
Loans originated for investment purposes $ (53,462) $ (99,170)
Principal collections on loans not sold 35,442 45,415
Principal collections on asset-backed securities 77 563
Proceeds from sale of short-term investments 417 --
Proceeds from sale of real estate and personal
property acquired through foreclosure 2,098 3,084
Proceeds from sale of property and equipment 112 --
Purchase of property and equipment (985) (2,262)
Rent received on real estate held for sale 79 68
Additional investment in subsidiary (2,287) --
Purchase of investments -- (115)
Improvements and related costs incurred on real estate
acquired through foreclosure (154) (252)
Net cash used in investing activities of discontinued
operations (106) --
--------- ---------
Net cash used in investing activities (18,769) (52,669)
FINANCING ACTIVITIES:
Advances under bank lines of credit 114,561 368,410
Payments on bank lines of credit (112,459) (370,384)
Net increase in notes payable to investors 19,871 12,757
Net (decrease) increase in subordinated debentures (5,958) 1,327
Proceeds from exercise of stock options and warrants -- 213
Payment for stock purchased in tender offer (568) --
--------- ---------
Net cash provided by financing activities 15,447 12,323
--------- ---------
Net increase in cash and cash equivalents 494 14,208
Cash and cash equivalents at beginning of year 384 1,260
--------- ---------
Cash and Cash Equivalents at September 30 $ 878 $ 15,468
========= =========
</TABLE>
See Notes to Unaudited Financial Statements.
-8-
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PREPARATION
The accompanying consolidated financial statements are prepared in accordance
with the SEC's rules regarding interim financial statements, and therefore do
not contain all disclosures required by generally accepted accounting principles
for annual financial statements. Reference should be made to the financial
statements included in the Company's Annual Report for the year ended December
31, 1995, or Form 10-K, including the footnotes thereto. Certain previously
reported amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on net income or shareholders' equity.
The consolidated balance sheet as of September 30, 1996, and the consolidated
statements of income for the nine-month and three-month periods ended September
30, 1995 and 1996, and the consolidated statements of cash flows for the
nine-month periods ended September 30, 1995 and 1996, are unaudited and in the
opinion of management contain all known adjustments, which consist of only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows of the Company.
Elliott, Davis & Company, L.L.P. previously examined and reported on the
Company's financial statements for the year ended December 31, 1995, from which
the consolidated balance sheet as of that date is derived.
The Company considers all highly liquid investments readily convertible to known
amounts of cash or having a maturity of three months or less to be cash
equivalents.
NOTE 2--INTEREST AND INCOME TAXES
For the nine-month periods ended September 30, 1995 and 1996, the Company
paid interest of $5,900,000 and $8,190,000, respectively.
For the nine-month periods ended September 30, 1995 and 1996, the Company
paid income taxes of $164,000 and $93,000, respectively.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company maintains its primary checking accounts with three principal banks
and makes overnight investments in reverse repurchase agreements with those
banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At September 30,
1996, the amounts maintained in overnight investments in reverse repurchase
agreements, which are not insured by the FDIC, totaled $14,700,000. The
investments were collateralized by U.S. Government securities held by the banks.
NOTE 4 - RESTRICTED CASH
The Company is required to establish and maintain cash reserve and collection
accounts with a trustee in connection with the securitization of certain SBA and
Auto Loans. These accounts are shown as restricted cash on the Company's
consolidated balance sheets.
NOTE 5 - SECURITIZATION OF LOANS
In March of 1996, the Company securitized $16,107,000 of auto loans. The
securitization was effected through a grantor trust (the "Trust"), the ownership
of which is represented by Class A and Class B certificates. The Class A
certificate was purchased by an investor, while the Company retained the Class B
certificate. This Class B certificate and the Class B certificate held by the
Company pursuant to the securitization of the unguaranteed portions of certain
SBA loans in 1995 are carried on the balance sheet as asset-backed securities in
the amount of $2,279,000, which is net of $1,011,000 allowance for losses. The
Company classifies its Class B certificates as trading securities under
Statement of Financial Accounting Standards No. 115 and such certificates are
carried at fair value. The Class A and Class B certificates give the holders
thereof the right to receive payments and other recoveries attributable to the
loans held by the Trusts. The Class B certificates represent approximately 10%
of the principal amount of the loans transferred in the securitizations and are
subordinate in payment and all other aspects to the Class A certificates.
Accordingly, in the event that payments received by either Trust are not
sufficient to pay certain expenses of that respective Trust and the required
principal and interest payments due on
9
<PAGE>
the respective Class A certificates, the Company, as holder of the respective
Class B certificates, would not be entitled to receive principal or interest
payments due thereon. Although securitizations provide liquidity, the Company
has utilized securitizations principally to provide a lower cost of funds and to
reduce interest rate risk. The Company's excess spread from these transactions
is recognized over the life of the underlying loans.
The Company serves as master servicer for both of the Trusts and,
accordingly, forwards payments received on account of the loans held by the
Trusts to the respective trustee, which, in turn, pays the holders of the
certificates in accordance with the terms of and priorities set forth in the
securitization documents. Because the transfers of the loans to the Trusts
constituted sales of the underlying loans, no liability was created on the
Company's Consolidated Financial Statements. However, the Company has the
obligation to repurchase the loans from the Trusts in the event that certain
representations made with respect to the transferred loans are breached or in
the event of certain defaults by the Company, as master servicer. To date the
Company has not been required to repurchase any SBA or Auto loans from the Trust
under this provision. The Class A certificates for both the SBA loan
securitization and the auto loan securitization received a rating of Aaa from
Moody's Investors Service, Inc. In addition, the Class A certificates for the
auto loan securitization received a rating of AAA from Standard and Poors
ratings group, and were guaranteed by Financial Security Assurance, Inc. The
Class B certificates were not rated for either transaction. In connection with
the auto loan securitization, the Company received cash proceeds, net of
securitization costs, of $14,195,000.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company appearing elsewhere herein. As
used herein, "Discontinued Operations" refers to the Company's former
Transportation and Apparel Segments. Unless otherwise noted, the discussion
contained herein relates to the continuing operations of the Company, which
consist of its Financial Services operations.
Statements discussed herein that reflect projections or expectations of
future financial or economic performance of the Company, and statements of the
Company's plans and objectives for future operations are "forward looking"
statements. No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated in any
such forward looking statements. Important factors that could result in such
differences include: general economic conditions in the Company's markets,
including inflation, recession, interest rates and other economic factors,
credit worthiness of borrowers, origination volumes, geographic concentrations,
availability of funding sources, general lending risks and competition.
GENERAL
Emergent Group, Inc. is a diversified financial services company
headquartered in Greenville, South Carolina that originates, services and sells
residential mortgage loans, small business loans, and used automobile loans. The
Company makes substantially all of its loans to borrowers who have limited
access to credit or who may be considered credit-impaired by conventional
lending standards ("non-prime borrowers"). The Company commenced its lending
operations in 1991 and has experienced significant loan growth over the past
several years. During the years 1993, 1994, and 1995, the Company originated
$63.6 million, $150.0 million, and $249.5 million in loans, respectively. During
the nine months ended September 30, 1996, the Company originated $283.5 million
in loans. Of the Company's loan originations in the first nine months of 1996,
$220.6 million were mortgage loans, $48.4 million were small business loans and
$14.5 million were auto loans.
The Company's total serviced loans receivable increased from $106.9
million at December 31, 1993, to $157.4 million at December 31, 1994, to $214.5
million at December 31, 1995, and to $238.7 million at September 30, 1996.
The Company originates mortgage loans ("Mortgage Loans") on both a
retail and wholesale basis through its mortgage loan division ("Mortgage Loan
Division"). Retail Mortgage Loans are originated by persons employed by the
Company, while wholesale Mortgage Loans are generally originated through
independent mortgage brokers and mortgage bankers (collectively, the "Mortgage
Bankers").
The Company utilizes two principal strategies in the retail mortgage
lending area, one which utilizes a regional approach to origination,
underwriting, processing and funding and a second which utilizes a centralized
approach to underwriting, funding and processing, but a decentralized,
state-by-state approach to origination. The Company expects that Mortgage Loan
volume associated with its retail lending operation will continue to experience
significant growth in the future.
The Company began its regional approach to retail mortgage lending in
April 1996 through the establishment of its Indianapolis, Indiana office under
its tradename, "HomeGold." This regional office originates loans in Indiana,
Illinois, Michigan, Ohio and Kentucky and is managed by the former National
Sales Manager of BancOne Financial Services, Inc. The Company has created a
marketing plan which utilizes the HomeGold tradename in direct mail, radio,
inbound and outbound telephone, and television marketing efforts, and is
designed to create national brand awareness and capitalize on the fragmentation
which currently exists in the marketplace. From May through September 1996,
HomeGold originated $22.0 million in Mortgage Loans. For the month of September,
Mortgage Loan volume totaled $8.4 million. The Company expects to open retail
lending operations which utilize this strategy in Greenville, South Carolina and
Phoenix, Arizona during the fourth quarter of 1996.
The second decentralized origination approach is conducted through
Sterling Lending Corporation, which has offices in Baton Rouge and New Orleans,
Louisiana. The Company's Baton Rouge office is a loan processing and
underwriting center for the loans originated through the New Orleans office. In
the future, the Company expects to open additional retail loan production
offices which will have their loan processing, underwriting, closing and loan
documentation performed through the Baton Rouge office. The Company expects to
open additional offices which utilize this approach in Atlanta, Georgia;
Nashville, Tennessee; Columbia, South Carolina
11
<PAGE>
and Charlotte, North Carolina in the first quarter of 1997. This operation is
managed by the former President of United Companies Financial Corporation. This
decentralized operation will utilize more offices than the HomeGold operation
and its potential customers will be identified through courthouse searches and
purchased lists, then solicited through direct mail and inbound and outbound
telephone.
The Company also originates Mortgage Loans on a wholesale basis through
approximately 225 Mortgage Bankers in approximately 12 states. The Company has
established strategic alliance agreements with certain Mortgage Bankers (the
"Strategic Alliance Mortgage Bankers"), which require the Strategic Alliance
Mortgage Bankers to refer all of their loans to the Company, up to specified
levels which meet the Company's underwriting criteria, in exchange for delegated
underwriting, administrative support and expedited funding.
To date, substantially all of the Mortgage Loans have been originated
on a wholesale basis by the Company through Mortgage Bankers with whom the
Company has a relationship (although the Company does not have contractual
arrangements regarding future loan origination with any Mortgage Bankers except
for the Strategic Alliance Mortgage Bankers). As a wholesale originator of
Mortgage Loans, the Company funds the Mortgage Loans at closing, although the
Mortgage Loans my be closed in either the Company's name or in the name of the
Mortgage Banker, with the Company taking an assignment of the Mortgage Banker's
interest. During 1994 and 1995 and the first nine months of 1996, the Company
originated loans through approximately 65, 120, and 225 Mortgage Bankers,
respectively, which are located principally in North Carolina, South Carolina,
and Florida. Of the approximately 120 and 225 Mortgage Bankers who were
responsible for origination of Mortgage Loans in 1995 and the first nine months
of 1996, the Strategic Alliance Mortgage Bankers accounted for approximately
$145 million, or 75%, of the Company's Mortgage Loans originated in 1995 and
approximately $156.7 million, or 71%, of the Company's Mortgage Loans originated
in the first nine months of 1996.
In July 1996, the former Vice President, Regional Sales Manager for
Fleet Finance, Inc. assumed management of the Company's wholesale mortgage
lending operation. Monthly wholesale Mortgage Loan production has grown from
$3.5 million in January 1996 to $4.4 million in September 1996, for a total
production of $40.8 million through September 30, 1996. The Company plans to add
approximately nine account executives and 15 Mortgage Bankers during the fourth
quarter of 1996 and the first quarter of 1997.
In 1994, the Company began seeking to enter into strategic alliance
agreements with Mortgage Bankers that the company believed were able to
consistently generate large volumes of quality mortgage loans. These strategic
alliance agreements require that the Strategic Alliance Mortgage Bankers must
first offer to the Company the right to fund all of their loans which meet the
Company's underwriting criteria services, information and authority by the
Company, including the provision of capital through arrangements similar to
warehouse lending and the provision of additional MIS and accounting services.
These strategic alliance agreements have terms ranging from three to five years
and are scheduled to terminate beginning in August 1999. The Company believes
that these strategic alliances are an important factor in providing a higher
level of customer service. The Company currently has four Strategic Alliance
Mortgage Bankers. The Company has a minority equity interest in certain of the
Strategic Alliance Mortgage Bankers, which enhances the Company's growth
potential.
On June 1, 1996, First Greensboro Home Equity, Inc. ("FGHE") terminated
its strategic alliance agreement with the Company in connection with its sale to
a third party. As a result of such termination, FGHE paid the Company $6.3
million (net of expenses) in September 1996. Although FGHE generated a large
percentage of the Company's mortgage loan originations, the Company believes
that it will be able to replace such originations through its retail lending
operations and through additional strategic alliance agreements, two of which
were entered into with the Company in the second and third quarters of 1996. In
October 1996, Amerifund, a Strategic Alliance Mortgage Banker, terminated its
strategic alliance agreement with the Company. During 1995 and the first nine
months of 1996, approximately 7.0% and 14.5%, respectively, of the Company's
total loans were originated through Amerifund. Under the terms of this
termination, Amerifund has agreed to pay the Company approximately $526,000 out
of its revenues, on a monthly basis, not to exceed $37,500 per month, beginning
in December 1996.
The Company's small business loan operation (the "Small Business Loan
Division") makes loans to small businesses ("Small Business Loans") primarily
for the acquisition or refinancing of property, plant and equipment and working
capital. A substantial portion of the Company's Small Business Loans are loans
("SBA Loans") guaranteed by the U.S. Small Business Administration ("the SBA").
The SBA Loans are secured by real or personal property. The SBA guarantees
approximately 75% of the original principal amount of the SBA Loans, up to
maximum guarantee amount of $750,000. The Company sells participations
representing the SBA-guaranteed
12
<PAGE>
portion of all of its SBA Loans in the secondary market. In connection with such
sales the Company receives, in addition to excess servicing revenue, cash
premiums of approximately 10% of the guaranteed portion being sold. SBA Loans
are originated directly by the Company's loan officers in its 6 branch offices
and are primarily generated through referral sources such as commercial loan and
real estate brokers ("Commercial Loan Brokers") located in its market areas.
Approximately 69% of the SBA Loans originated in the first nine months of 1996
were originated through Commercial Loan Brokers. The Small Business Loan
Division also provides working capital loans secured by accounts receivable,
inventory and equipment for small- to medium-sized businesses in the
Southeastern part of the country. The Company began its asset-based lending
operation in April 1996 in Atlanta, Georgia. The Small Business Loan Division
also manages two investment partnerships for which it receives management fees.
One of these funds focuses on start-up and early stage companies located in
South Carolina and the other of which provides senior and subordinated debt to
growth companies throughout the Southern part of the country. The Company serves
as the general partner for the latter fund, and has a $1 million investment in
the partnership.
The Company's auto loan operation (the"Auto Loan Division") makes loans
("Auto Loans") to non-prime borrowers for the purchase of used automobiles.
Substantially all of the Auto Loans are made directly by the Company to
purchasers of automobiles who are referred to the Company by automobile dealers.
Less than 10% of the Auto Loans made in 1995 were indirect loans purchased from
dealers. For the nine months ended September 30, 1996, 21% of the Auto Loans
were indirect loans purchased from dealers. The Auto Loan Division operates
through eight locations in South Carolina and originates Auto Loans in
connection with approximately 200 dealers.
RESULTS OF OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO NINE MONTHS
AND THREE MONTHS ENDED SEPTEMBER 30, 1995
Total revenues were $32.9 million and $14.6 million for the nine-month
and three-month periods ended September 30, 1996, respectively, an increase of
73% and 118%, respectively, compared to $19.0 million and $6.7 million for the
nine-month and three-month periods, respectively, ended September 30, 1995. The
increase in revenues resulted principally from increases in interest and
servicing revenue and gain on sale of loans and loan fee income.
Interest and servicing revenue was $15.1 million and $5.1 million,
respectively, for the nine-month and three-month periods ended September 30,
1996, an increase of 35% and 32%, respectively, compared to $11.2 million and
$3.9 million, respectively, for the nine-month and three-month periods ended
September 30, 1995. This increase was due principally to the growth in the
serviced loan portfolio, which increased from $197.5 million at September 30,
1995 to $238.7 million at September 30, 1996, an increase of 21%.
Gain on sale of loans was $15.3 million and $7.9 million, respectively,
for the nine-month and three-month periods ended September 30, 1996, an increase
of 132% and 259%, respectively, compared to $6.6 million and $2.2 million, for
the nine-month and three-month periods ended September 30, 1995. The increase
resulted partially from increased sales of Mortgage Loans and Small Business
Loans associated with the increased loan originations. Mortgage Loans of $75.5
million were sold in the nine-month period ended September 30, 1995, compared to
$189.7 million for the nine-month period ended September 30, 1996, an increase
of 151%. Additionally the Company received a recoupment of previously shared
premiums of $6.3 million in connection with the settlement with First
Greensboro, a former strategic partner.
Loan fees were $1.3 million and $902,000, respectively, for the
nine-month and three-month periods ended September 30, 1996, an increase of 164%
and 161%, respectively, compared to $493,000 and $345,000, respectively, for the
nine-month and three-month periods ended September 30, 1995. The increase in
loan fees was due principally to the increase in the Company's retail mortgage
loan originations.
Management fees were $385,000 and $129,000, respectively, for the
nine-month and three-month periods ended September 30, 1996, a decrease of 21%
and an increase of 61%, respectively, compared to $490,000 and $80,000,
respectively, for the nine-month and three-month periods ended September 30,
1995. These management fees were paid to the Company by the two funds managed by
the Company.
Other revenues were $746,000 and $526,000, respectively, for the
nine-month and three-month periods ended September 30, 1996, an increase of
217% and 421%, respectively, compared to $235,000 and $101,000, respectively,
for the nine-month and three-month periods ended September 30, 1995. Other
13
<PAGE>
revenues are comprised principally of insurance commissions. The increase in
other revenues resulted principally from the increase in the Company's loan
originations.
Total expenses were $25.0 million and $10.2 million, respectively, for
the nine-month and three-month periods ended September 30, 1996, an increase of
70% and 96%, respectively, compared to $14.7 million and $5.2 million,
respectively, for the nine-month and three-month periods ended September 30,
1995. Total expenses are comprised of interest expense, provision for credit
losses, and general and administrative expenses.
Interest expense was $8.2 million and $2.6 million, respectively, for
the nine-month and three-month periods ending September 30, 1996, an increase of
39.1% and 18%, respectively, compared to $5.9 million and $2.2 million,
respectively, for the nine-month and three-month periods ended September 30,
1995. The increase was due principally to increased borrowings by the Mortgage
and Small Business Loan Divisions associated with increased loan originations.
Borrowings attributable to the Mortgage Loan Division, both under the Credit
Facilities and in connection with the sales of notes payable to investors and
subordinated debentures, totaled $112.4 million as of September 30, 1996, an
increase of 20%, compared to $93.7 million as of September 30, 1995. Borrowings
attributable to the Small Business Loan Division totaled $23.2 million as of
September 30, 1996, an increase of 227%, compared to $7.1 million as of
September 30, 1995. This increase in debt resulted principally from the loan
origination activity for the nine-month period ended September 30, 1996, as
compared to the same period in 1995 and considering the repayment of bank debt
in connection with the securitization of certain SBA Loans in June 1995. This
increase in loan originations was due principally to the elimination in October
1995 of the SBA's $500,000 loan limitation and prohibition against refinancing
existing loans. Borrowings attributable to the Auto Loan Division at September
30, 1996, totaled $6.4 million, a decrease of 35% compared to $9.9 million at
September 30, 1995. This decrease was due to the repayment of bank debt with
proceeds of the securitization of $16.1 million of auto loans in March 1996.
Provision for credit losses was $3.1 million and $1.6 million,
respectively, for the nine-month and three-month period ended September 30,
1996, an increase of 94% and 321%, compared to $1.6 million and $380,000, for
the nine-month and three-month periods ended September 30, 1995. The provision
was made to maintain the general reserves for credit losses associated with
loan originations, as well as to fund specific reserves for possible losses
associated with particular loans.
General and administrative expense was $13.7 million and $6.1 million,
for the nine-month and three-month periods ended September 30, 1996, an increase
of 93% and 135%, respectively, compared to $7.1 million and $2.6 million, for
the nine-month and three-month periods ended September 30, 1995. This is a
result of increased personnel costs in the Mortgage Loan Division due to the
continued expansion in the servicing and underwriting areas, and increased
expenses associated with the opening of retail lending offices in Indianapolis,
Baton Rouge, New Orleans and Phoenix. General and administrative expense
increased from 5.0% of average serviced loans at September 30, 1995, to 7.8% at
September 30, 1996, principally as a result of the costs associated with the
retail mortgage origination facilities, for which the related production was
sold on a non-recourse serviced released basis. Accordingly, costs have
increased relative to the serviced portfolio.
Income from continuing operations totaled $7.7 million and $4.3
million, respectively, for the nine-month and three-month periods ended
September 30, 1996, an increase of 88% and 207%, respectively, compared to $4.1
million and $1.4 million for the nine-month and three-month periods ended
September 30, 1995.
ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE
The Company is exposed to the risk of loan delinquencies and defaults,
particularly with respect to loans retained in its portfolio. With respect to
loans to be sold on a non-recourse basis, the Company is at risk for loan
delinquencies and defaults on such loans while they are held by the Company
pending such sale. Following the sale of such loans, the Company's loan
delinquency and default risk with respect to such loans is limited to those
circumstances in which it is required to repurchase such loans due to a breach
of a representation or warranty in connection with the whole loan sale. This
risk with respect to breaches of representations or warranties also exists for
loans sold through securitization. In addition, in securitization transactions
the subordinate and/or residual certificates bear the risk of default for the
entire pool of securitized loans to the extent of such certificates' value.
Accordingly, the value of the subordinate and/or residual certificates retained
by the Company would be impaired to the extent of losses on the securitized
loans.
To provide for credit losses, the Company charges against current
earnings an amount necessary to maintain the allowance for credit losses at
levels expected to cover future losses of principal. At September 30,
14
<PAGE>
1996, the total allowance for credit losses for the Company was $4.0 million,
including $1.0 million reserved for potential losses relating to the Company's
securitized SBA and Auto Loans. This compares to an allowance for credit losses
at December 31, 1995, of $2.6 million including $773,000 reserved for potential
losses relating to the Company's securitized SBA loans. The increase in the
allowance resulted from increases in the general allowance due to corresponding
growth in the Company's serviced loans receivable, as well as to provide
specific reserves for possible losses associated with particular loans.
The allowance for credit losses is a composite of the allowance for
credit losses of the Mortgage Loan Division, the Small Business Loan Division
and the Auto Loan Division as of September 30, 1996. The Mortgage Loan Division
maintains an allowance for credit losses equal to approximately 1% of its loan
portfolio, the Small Business Loan Division currently maintains an allowance for
credit losses equal to approximately 3% of the unguaranteed portion of its loan
portfolio, and the Auto Loan Division currently maintains an allowance for
credit losses equal to approximately 7% of its loan portfolio. In addition, each
subsidiary may establish specific reserves for particular loans that are deemed
by management to be a potential problem where full recovery is questionable. The
Company does not currently service any loans for which it does not have credit
risk other than the guaranteed portion of its SBA Loans. However, the Company's
credit risk on its securitized loans is limited to its investment in its
residual asset-backed certificates.
The Company considers its allowance for credit losses to be adequate in
view of the Company's loss experience and the secured nature of most of the
Company's outstanding loans. Although management considers the allowance
appropriate and adequate to cover possible losses in the loan portfolio,
management's judgment is based upon a number of assumptions about future events,
which are believed to be reasonable, but which may or may not prove valid. Thus,
there can be no assurance that charge-offs in future periods will not exceed the
allowance for possible credit losses or that additional increases in the
allowance for possible credit losses will not be required.
Management closely monitors delinquency to measure the quality of its
loan portfolio and securitized loans and the potential for credit losses. The
Company's policy is to place a loan on non-accrual status after it becomes 90
days past due, or sooner if the interest is deemed uncollectible. Collection
efforts on charged-off loans continue until the obligation is satisfied or until
it is determined such obligation is not collectible or the cost of continued
collection efforts will exceed the potential recovery. Recoveries of previously
charged-off loans are credited to the allowance for credit losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. The Company's cash
requirements arise from loan originations and purchases, repayments of debt upon
maturity, payments of operating and interest expenses, expansion activities and
capital expenditures. The Company's primary sources of liquidity are cash flow
from operations, sales of the loans it originates and purchases, proceeds from
the sale of debentures, borrowings under available lines of credit and proceeds
from securitizations of loans. While the Company believes that such sources of
funds will be adequate to meet its liquidity requirements, no assurance of such
fact may be given.
Shareholders' equity increased from $9.9 million at December 31, 1995,
to $17.8 million at September 30, 1996. This increase resulted principally from
the retention of income by the Company.
Cash and cash equivalents increased from $1.3 million at December 31,
1995, to $15.5 million at September 30, 1996. Cash provided by operating
activities increased from $3.8 million for the nine-month period ended September
30, 1995, to $54.6 million for the nine-month period ended September 30, 1996;
cash used in investing activities increased from $18.8 million for the
nine-month period ended September 30, 1995, to $52.7 million for the nine-month
period ended September 30, 1996; and cash provided by financing activities
decreased from $15.4 million for the nine-month period ended September 30, 1995,
to $12.3 million for the nine-month period ended September 30, 1996. The
increase in cash provided by operations was due principally to the increase in
loans sold during the first nine-month period of 1996 and the increase in net
income. Cash used in investing activities was principally for the net increase
in loans originated for investment purposes with the expectation of holding the
loans until maturity. Cash provided by financing activities was due principally
to the cash provided by the sale of subordinated debentures and notes to
investors by the Mortgage Loan Division. At September 30, 1996, the Company's
Credit Facilities were comprised of credit facilities of $90 million for the
Mortgage Loan Division (the "Mortgage Loan Division Facility"), credit
facilities of $40 million for the Small Business Loan Division (the
15
<PAGE>
"Small Business Loan Division Facility"), and credit facilities of $26 million
for the Auto Loan Division (the "Auto Loan Division Facility"). Based on the
advance rates contained in the facilities, at September 30, 1996, the Company
had aggregate borrowing availability of $28.2 million under the Mortgage Loan
Division Facility (none of which was outstanding), $25.3 million under the Small
Business Loan Division Facility ($23.2 million of which was outstanding), and
$9.4 million of aggregate borrowing availability under the Auto Loan Division
Facility ($6.4 million of which was outstanding). The Mortgage Loan Division
Facility and the Small Business Loan Division Facility both bear interest at the
lender's prime rate, while the Auto Loan Division Facility bears interest at
.75% over the lender's prime rate. The Credit Facilities have terms ranging from
one to three years and are renewable upon the mutual agreement of the Company
and the respective lender.
The Credit Facilities contain a number of financial covenants,
including, but not limited to, covenants with respect to certain debt to equity
ratios, delinquent loans, and minimum adjusted tangible net worth. The Credit
Facilities also contain certain other covenants, including, but not limited to,
covenants that impose limitations on the Company with respect to declaring or
paying dividends, making payments with respect to certain subordinated debt, and
making certain changes to its equity capital structure. The Company believes
that it is currently in material compliance with these covenants.
The Company sells substantially all of its Mortgage Loans originated
through its retail lending operations and its Strategic Alliance Mortgage
Bankers, as well as its SBA Loan Participations. During the nine months ended
September 30, 1996, the Company sold $189.7 million of Mortgage Loans and $22.1
million of SBA Loan Participations.
In June 1995, the Company securitized $17.1 million of loans
representing the unguaranteed portions of the SBA Loans and in March 1996, the
Company securitized $16.1 million of Auto Loans. Although securitizations
provide liquidity, the Company has utilized securitizations principally to
provide a lower cost of funds and reduce interest rate risk. Additional
liquidity is not a material factor in the Company's determination to pursue
securitizations. In connection with its SBA Loan and Auto Loan securitizations,
the Company has retained subordinated certificates representing approximately
10% of the transferred loans. The retained subordinated certificates totaled
approximately $2.3 million, net of allowances, at September 30, 1996.
Carolina Investors, Inc. ("CII") engages in the sale of subordinated
debentures to investors ("Subordinated Investor Savings"). The Subordinated
Investor Savings are comprised of senior subordinated notes and subordinated
debentures bearing fixed rates of interest which are sold by CII only to South
Carolina residents. The offering of the debentures is registered under South
Carolina securities law and is exempt from Federal registration under the
Federal intrastate exemption. CII conducts its operations so as to qualify for
the safe harbor provisions of Rule 147 promulgated pursuant to the Securities
Act of 1933, as amended. At September 30, 1996, CII had an aggregate of $94.9
million of senior subordinated notes outstanding bearing a weighted average
interest rate of 8.2%, and an aggregate of $17.5 million of subordinated
debentures bearing a weighted average interest rate of 5.5%. Both senior
subordinated notes and subordinated debentures are subordinate in priority to
the Mortgage Loan Division Credit Facility. Substantially all of the debentures
have one year maturities.
The Company has no additional significant capital requirements as of
September 30, 1996.
TAX CONSIDERATIONS
As a result of the operating losses incurred by the Company under prior
management, the Company generated a net operating loss carryforward (" NOL"). At
September 30, 1996, the amount of the NOL remaining and available to the Company
was approximately $14 million. As a result of the utilization of the NOL, the
net income reported by the Company for the year ended December 31, 1995, and for
the nine months ended September 30, 1996, was approximately $1.2 million and
$2.8 million, respectively, higher than if the NOL were not available to the
Company. The NOL expires, to the extent that it is not utilized to offset
income, in varying amounts annually through 2001.
Federal tax laws provide that net operating loss carryforwards are
restricted or eliminated upon certain changes of control. Applicable federal tax
laws provide that a 50% "change of control," which is calculated over a rolling
three-year period, would cause the loss of substantially all of the NOL.
No net deferred tax asset was recognized with respect to the NOL for
the year ended December 31, 1995, or for the nine months ended September 30,
1996. A valuation allowance equal to the NOL was applied to the
16
<PAGE>
NOL in the year ended December 31, 1995, and for the nine months ended September
30, 1996. A valuation allowance of approximately $7.7 million was applied to the
tax effect of the NOL for the year ended December 31, 1995.
INFLATION
Unlike most industrial companies, the assets and liabilities of
financial services companies such as the Company are primarily monetary in
nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the general levels of inflation in the price of
goods and services. While the Company's noninterest income and expense and the
interest rates earned and paid are affected by the rate of inflation, the
Company believes that the effects of inflation are generally manageable through
asset/liability management.
INTEREST RATE SENSITIVITY
Asset/liability management is the process by which the Company monitors
and controls the mix and maturities of its assets and liabilities. The essential
purpose of asset/liability management is to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities.
The Company's asset/liability management varies by division. In
general, with respect to the Mortgage Division, the Company sells substantially
all of its Mortgage Loans on a monthly basis. Furthermore, commitments to a
prospective borrower for a Mortgage Loan do not extend beyond 45 days. In the
event that economic conditions necessitate a change in rate, such rate change is
communicated to potential borrowers and the Company's published rates are
adjusted. In addition, the Company may from time to time enter into forward
commitments to sell residential first mortgage loans to reduce risk associated
with originating and holding loans for sale.
With respect to the Small Business Loans, the Company generally
originates variable rate loans which adjust on the first day of each calendar
quarter. Therefore, interest rate risk exists for a maximum period of 60 days,
due to the Small Business Loan Division Credit Facility having a variable rate
which adjusts monthly.
With respect to the Auto Loans, the Company's rate spread is in excess
of 15% and is fixed. The Company believes that this interest rate spread
provides adequate margin to allow for any potential increase in interest rates.
The Company's average interest rates earned for the year ended December
31, 1995, and for the nine months ended September 30, 1996, were 13.94% and
15.52%, respectively, computed on a simple average monthly basis. The Company's
average interest rates paid for the year ended December 31, 1995, and for the
nine months ended September 30, 1996, were 7.57% and 8.02%, respectively, which
resulted in an average interest rate spread of 6.37% and 7.50%, respectively.
17
<PAGE>
PART II. OTHER INFORMATION
18
<PAGE>
Part II
Item 1. Legal Proceedings
` None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Company filed a registration statement with the Securities
and Exchange Commission on September 20, 1996, for the issuance of
3,000,000 shares of common stock of which 2,119,031 shares were
offered by the Company and 880,969 shares were offered by certain
selling shareholders. No officers or directors of the Company sold
any shares in connection with the offering.
The offering was effective on November 8, 1996, as the Company's
common stock was listed on the Nasdaq Stock Market's National Market
under the trading symbol "EMER."
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 30, 1996,
reporting that on September 17, 1996, the Company entered into a settlement
agreement with First Greensboro Home Equity, Inc. whereby all issues associated
with litigation between the Company and FGHE were resolved.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
EMERGENT GROUP, INC.
Date: , 1996
\s\Kevin J. Mast
-------------------------------------
Kevin J. Mast, Vice President of Finance,
Chief Financial Officer and Treasurer
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
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<SECURITIES> 0 0
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0 0
0 0
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<OTHER-SE> 17,507 17,507
<TOTAL-LIABILITY-AND-EQUITY> 165,106 165,106
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<TOTAL-COSTS> 10,230 24,962
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