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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,1996
COMMISSION FILE NO. 0-8909
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EMERGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0513287
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
15 SOUTH MAIN STREET SUITE 750 GREENVILLE, SOUTH CAROLINA 29601
- ---------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 864-235-8056
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
Name of Each Exchange on which registered
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NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Title of Each Class
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Common Stock, par value $.05
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of voting stock held by
non-affiliates of registrant was approximately $104,083,349.
As of March 14, 1997, the shares outstanding of the issuer's class of common
stock were as follows: 9,144,430.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders scheduled for May 27, 1997 are incorporated by reference into Part
III hereof.
Portions of the Company's Annual Report to the shareholders for the year ended
December 31, 1996, are incorporated by reference into Part II hereof.
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PART I
ITEM 1. BUSINESS
Emergent Group, Inc. (the "Company") is a diversified financial
services company headquartered in Greenville, South Carolina which originates,
services and sells residential mortgage loans ("Mortgage Loans"), commercial
loans to small businesses ("Small Business Loans"), and pre-owned automobile
loans ("Auto Loans"). The Company also serves as investment manager for a
venture capital fund and a mezzanine level fund which originates loans to
certain small businesses in which the fund retains stock purchase warrants. 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 1994, 1995, and 1996, the Company originated $150.0
million, $249.5 million and $415.1 million in loans, respectively. Of the
Company's loan originations in 1996, $328.6 million were Mortgage Loans, $68.2
million were Small Business Loans and $18.3 million were Auto Loans. For the
years ended December 31, 1994, 1995, and 1996, the Company's pre-tax income from
continuing operations was $2.4 million, $4.9 million, and $10.5 million,
respectively.
The Company's Mortgage Loan operation (the "Mortgage Loan
Division") makes Mortgage Loans primarily to owners of single family residences
who use the loan proceeds for such purposes as debt consolidation, home
improvements and educational expenditures. The majority of the Company's
Mortgage Loans generally have initial principal balances ranging from $25,000 to
$100,000 and fixed rates of interest ranging from 9% to 16% per annum. The
Mortgage Loan Division has experienced significant growth over the past several
years. During 1994, 1995, and 1996, Mortgage Loan originations totaled $99.4
million, $192.8 million, and $328.6 million, respectively. To date, a majority
of the Mortgage Loans were sold on a non-recourse basis to institutional
investors, with customary representations and warranties. However, in 1997 the
Company plans to begin Securitizing a substantial portion of its Mortgage Loans.
Because the Company has not securitized any Mortgage Loans to date, no assurance
can be given that this forward-looking statement can be accomplished.
The Mortgage Loan Division originates Mortgage Loans on both a
retail basis through regional offices and a wholesale basis through independent
mortgage brokers and mortgage bankers (collectively, the "Mortgage Bankers").
The Company's retail lending operations were established in the second quarter
of 1996, and currently operate through eight offices. Through its retail
offices, the Company targets Mortgage Loan borrowers through a variety of
marketing methods, but to date has achieved its best results in connection with
its direct mail campaigns.
The Company also originates Mortgage Loans on a wholesale basis
through approximately 330 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 sell to the Company all of their loans up to
specified levels which meet the Company's underwriting criteria, in exchange for
delegated underwriting, administrative support and expedited funding. The
Company has a minority equity interest in certain of the Strategic Alliance
Mortgage Bankers. The Company believes that its use of retail and wholesale
origination and strategic alliances is a unique strategy which enables the
Company to penetrate the non-prime mortgage loan market through multiple
channels.
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The Company's Small Business Loan operation (the "Small Business
Loan Division") makes loans to small businesses primarily for the acquisition or
refinancing of property, plant and equipment and working capital. During 1994,
1995, and 1996, Small Business Loan originations totaled $43.1 million, $39.6
million, and $68.2 million, respectively.
A substantial portion of the Company's Small Business Loans are
loans ("SBA Loans") which are partially guaranteed by the U.S. Small Business
Administration (the "SBA"). The SBA Loans are secured by real or personal
property and have initial principal balances ranging from $250,000 to $1.5
million and variable interest rates limited to a maximum of 2.75% over the prime
rate. The SBA guarantees approximately 75% of the original principal amount of
the SBA Loans, up to a maximum guarantee amount of $750,000. The Company sells
participations representing the SBA-guaranteed portion of its SBA Loans (the
"SBA Loan Participations") 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 eight branch
offices, and are primarily generated through referral sources such as commercial
loan and real estate brokers ("Commercial Loan Brokers") located in its market
area.
The Small Business Loan Division also provides working capital
loans secured by accounts receivable, inventory and equipment to small- to
medium -sized businesses in the southeastern United States ("Asset-based Small
Business Loans"). The Company began its asset-based lending operation in April
1996 in Atlanta, GA.
The Company's Auto Loan operation (the "Auto Loan Division")
makes 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
("Dealers"). The Auto Loans generally have initial principal balances ranging
from $3,000 to $10,000, terms ranging from 24 to 48 months, and fixed interest
rates from 18% to 46% per annum. The Auto Loan Division operates through eight
locations and originates Auto Loans in connection with approximately 200
Dealers. During 1994, 1995, and 1996, Auto Loan originations totaled $7.5
million, $17.1 million, and $18.3 million, respectively.
FORWARD-LOOKING INFORMATION
Certain statements throughout this document 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, including in particular statements
regarding additional office expansion plans, geographic expansion plans,
establishment of additional strategic alliances as well as other 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 are many and include: the Company generally lends to "sub-prime"
borrowers which have higher incidents of default. The Company's projections
could be adversely affected if defaults exceed expected levels. The Company's
retail operations are relatively new. Whether the Company meets its overall
earnings and growth projections will be materially affected by the Company's
ability to "ramp up" its retail operations and achieve profitability. The
Company's ability to meet growth and/or earnings projections could also be
adversely affected by one or more of the following: the termination or
nonrenewal of strategic alliance agreements with Mortgage Bankers or other
significant Mortgage Banker relationships; a general economic downturn, which
could stunt loan growth or result in increased delinquencies; the loss of
funding sources, which are necessary to fund loan demand at profitable margins;
the loss of the ability to sell loans, which could require the Company to obtain
additional funding sources; the failure to open additional offices as scheduled;
the loss of all or part of the NOL; restrictions in federal programs through
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which it originates loans or other regulatory changes, which could affect
profitability or risk associated with certain loans; and the loss of key
executives on which the Company is materially dependent.
GENERAL BACKGROUND
The Company currently has three primary divisions consisting of
its Mortgage Loan Division, its Small Business Loan Division, and its Auto Loan
Division. Prior to the current management obtaining control of the Company in
December 1990, the Company was primarily engaged in its transportation segment
operations. Under previous management, the Company incurred significant losses.
In 1991, current management implemented a strategic plan to acquire profitable
businesses. Pursuant to such strategy, the Company acquired Carolina Investors,
Inc. ("CII"), Premier Financial Services, Inc. ("Premier"), Emergent Business
Capital, Inc. ("EBC") and The Loan Pro$, Inc. ("Loan Pro$") in 1991 and Young
Generations, Inc. ("YGI") in 1993. In 1994, the Company made a strategic
decision to divest all non-financial operations and to focus exclusively on the
financial services industry. In accordance with such strategy, the Company
completed the divestiture of its apparel segment consisting solely of YGI, and
transportation segment operations in 1995.
BUSINESS STRATEGY
The Company's business strategy is to be a diversified
financial services company that meets the credit needs of borrowers in what the
Company believes to be under-served credit markets. The key elements of the
Company's business strategy are as follows:
- - Emphasis on Profitability Rather than Asset Growth. The Company will
continue to focus principally on increasing earnings and equity, rather
than increasing total assets. The Company believes that it can maximize
its return on assets and equity by maintaining a "high velocity"
capital strategy, whereby a substantial majority of loans are made and
sold or securitized within 90 days of origination. Recycling its
capital in this manner enables the Company to recognize gains on the
sale of its loans and quickly redeploy its capital, as well as reduce
its interest rate risk and borrowing costs.
- - Decentralized Loan Approval. The Company believes that one of the most
important factors to customers is the length of time between the
lender's initial contact with the customer and the disbursement of loan
proceeds. Accordingly, the Company emphasizes minimizing the length of
time involved in the lending process, without sacrificing credit
quality. It attempts to accomplish this goal, in part, by fostering an
entrepreneurial, decentralized management culture and by maintaining
up-to-date Management Information Systems for loan production, asset
quality management and servicing. In the Mortgage Loan Division, the
Company has an expedited review process with respect to loans submitted
by the Strategic Alliance Mortgage Bankers. The Company also utilizes a
decentralized approval process with respect to its retail Mortgage Loan
operations which generally results in the lending decision being made
within one business day. Also, in the Small Business Loan Division, the
Company uses its "Preferred Lender" status, as well as
specially-trained officers who handle only loans partially guaranteed
by the SBA, to shorten the loan approval process. Furthermore, the
Small Business Loan Division maintains relatively autonomous regional
offices which generally have significant underwriting capabilities and
credit authority. Because of the increased risk of decentralized credit
approval, the Company just recently hired a National Credit Manager to
provide close guidance and supervision over the underwriting related
activities of its Small Business Loan Division regional offices to
ensure uniform credit decisions consistent with corporate policies.
- - Proactive Underwriting Process. The Company takes a proactive approach
to its loan underwriting process. Because the Company's borrowers are
generally non-prime borrowers, standardized credit scoring and
underwriting criteria are not always meaningful in assessing a
borrower's creditworthiness. Consequently,
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the Company attempts to analyze each application independently and to
craft a loan package which meets the needs of the borrower while
providing the Company with adequate security. Underwriting adjustments
often suggested by Company underwriters include requiring a guarantor
or co-borrower with better credit history and/or additional disposable
income, lowering the loan-to-value ratio, increasing the interest rate,
securing additional collateral and lowering the loan amount.
- - Uniform Credit Guidelines and Procedures. The Company attempts to
mitigate the risks often associated with non-prime borrowers by
utilizing uniform guidelines and procedures for evaluating credit
applications in connection with its loan originations. This is designed
to complement the Company's decentralized management strategy by
ensuring consistent credit quality. The Company's guidelines and
procedures relate to such matters as the borrower's stability of
residence, employment history, credit history, capacity to pay, total
income, discretionary income and debt ratios, as well as the value of
the collateral. With respect to its Small Business Loans, the Company's
guidelines and procedures also emphasize factors pertaining to the
business of the borrower, such as business plans, historical and
projected financial statements, strength of management, and value of
the collateral.
- - Corporate Monitoring and Supervision of Operations. The Company has in
place corporate policies designed to monitor and ensure continued
quality of credit underwriting and servicing and to evaluate management
in each of the Mortgage, Small Business and Auto Loan Divisions. Such
policies include on-site audits of loan files and underwriting and
servicing procedures at each branch office as well as ongoing
evaluation of general portfolio credit and performance quality, the
effectiveness of business development efforts and branch office
profitability. The Company's Management Information Systems provide
management with reports on a regular basis which contain operational
information from each of the Mortgage, Small Business and Auto Loan
Divisions, including the volume of loan originations, delinquency
experience and foreclosure and repossession activities.
GROWTH STRATEGY
The Company's growth strategy is to continue to expand its
lending operations, while emphasizing profitability and return on equity, rather
than asset growth. Many of the statements in this section are forward-looking
statements and no assurance can be given that actual results or events will not
differ materially from those projected, estimated, assured, or anticipated in
any such forward-looking statements. The key elements in the Company's growth
strategy are as follows:
- - Retail Mortgage Lending. The Company expects to increase its Mortgage
Loan originations through the continued expansion of its retail
mortgage lending operations. The Company began its retail mortgage
lending operations with the opening of an office in Indianapolis, IN in
April 1996, and currently operates through this Indianapolis office, as
well as offices in Baton Rouge and New Orleans, LA, Atlanta, GA,
Greenville, SC, Jackson, MS, Jacksonville, FL, and Phoenix, AZ. The
Company expects that Mortgage Loan volume associated with its retail
lending operation will continue to experience growth in the future. In
addition, the Company's retail originations are generally more
profitable than wholesale originations through mortgage bankers because
the Company earns loan origination fees to cover its production costs,
and retains all of the gain on sale of the loans. The Company believes
that the combination of its retail and wholesale strategies will
increase the Company's penetration of the non-prime market.
- - Wholesale Mortgage Lending. The Company plans to increase its wholesale
mortgage lending originations by expanding its operations
geographically and by adding additional account executives and
independent Mortgage Bankers. Prior to 1994, the wholesale lending
operations were conducted exclusively in South Carolina. In 1994, the
Company launched its expansion strategy by entering the North Carolina
market, and since that time has expanded into approximately ten
additional states. The Company intends to continue
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this geographic expansion as well as further penetrate existing
markets. The Company plans to expand the number of account executives
and affiliated mortgage brokers during 1997.
- - New Strategic Alliances in the Mortgage Loan Division. The Company
plans to establish additional strategic alliances with Mortgage Bankers
during 1997. The Company offers additional services to these Strategic
Alliance Mortgage Bankers, such as providing capital through
arrangements similar to warehouse lending and additional MIS and
accounting services, which are designed to increase their loan
originations. The Company does not expect to have contractual
arrangements regarding future loan originations with any Mortgage
Bankers except for the Mortgage Bankers with whom the Company has
strategic alliance agreements. The Company has a minority equity
interest, generally ranging from 5% to 10%, in certain of the Strategic
Alliance Mortgage Bankers, which is designed to enhance the Company's
growth potential.
- - Small Business Lending. The Company plans to expand its Small Business
Loan operations by opening additional offices and by utilizing its
"Preferred Lender" status to minimize its response time and maximize
its loan production. The Company has been designated as a "Preferred
Lender" by the SBA, which gives the Company the authority to approve a
loan and to obligate the SBA to partially guarantee the loan without
submitting an application to the SBA for credit review. Preferred
Lender status also enables the Company to more easily enter additional
SBA districts. The Company also expects to increase its Small Business
Loan originations through expansion of its asset-based lending
operation, which began in April 1996. This asset-based lending
operation currently operates through offices in Atlanta, GA, Denver,
CO, and New Orleans, LA.
Additional Offices. The Company plans to increase its penetration of
existing markets and expand geographically by opening additional
offices. In 1996, the Company opened four Mortgage Loan offices, four
Small Business Loan offices, and one Auto Loan office. In the future,
the Company will continue to target for expansion areas which have
favorable demographics or where the Company has identified qualified
individuals who are available to effectively manage additional
locations. No new Auto Loan offices are planned for 1997.
The Company's ability to meet these growth projections could
also be adversely affected by one or more of the following, among other
factors: the termination or nonrenewal of strategic alliance agreements
with Mortgage Bankers or other significant Mortgage Banker
relationships; a general economic downturn, which could stunt loan
growth or result in increased delinquencies; the failure to open
additional offices as scheduled; the inability to procure employees to
staff additional offices; and restrictions in federal programs through
which it originates loans or other regulatory changes, which could
affect profitability or risk associated with certain loans.
The following table shows the Company's originations (based on
note amount of loans closed) for the periods indicated:
ORIGINATIONS BY LOAN TYPE
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mortgage Division Loans $ 29,146 $ 20,536 $ 99,373 $ 192,800 $ 328,649
Small Business Division Loans 25,376 37,867 43,123 39,560 68,210
Auto Division Loans 2,760 5,230 7,547 17,148 18,287
---------- ---------- ----------- ------------ -----------
Total $ 57,282 $ 63,633 $ 150,043 $ 249,508 $ 415,146
========== ========== =========== ============ ===========
</TABLE>
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The Company has funded the majority of its lending activities from the
cash flow generated from operations and through borrowings pursuant to its
existing credit facilities (the "Credit Facilities"), by selling senior
subordinated notes and subordinated debentures to residents of South Carolina
(the "Debentures") and by selling a substantial portion of the loans it
originates.
The Company has historically sold a substantial majority of its
Mortgage Loan production on a whole loan basis with servicing released,
non-recourse with customary representations and warranties, while it has
retained servicing for its Small Business Loans and Auto Loans. The following
table shows the Company's total serviced loans receivable at the end of each of
the last five years:
TOTAL SERVICED LOANS BY LOAN TYPE
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mortgage Division
Loans $42,459 $ 42,335 $ 60,151 $ 88,165 $146,231
Small Business
Division Loans 21,682 58,552 88,809 108,696 140,809
Auto Division Loans 4,348 6,011 8,483 17,673 22,033
------- -------- -------- -------- --------
Total $68,489 $106,898 $157,443 $214,534 $309,073
======= ======== ======== ======== ========
</TABLE>
MORTGAGE LOAN DIVISION
OVERVIEW
The Company's mortgage lending activities consist primarily of
originating, selling, and servicing Mortgage Loans which are secured by
owner-occupied, single-family residential properties. Substantially all of the
Company's Mortgage Loans are made to refinance existing mortgages and for debt
consolidation, home improvements, educational expenses and a variety of other
purposes. The Mortgage Loans generally are secured by a first lien, have
principal balances ranging from $25,000 to $100,000, and bear fixed interest
rates generally ranging in 1996 from 9% to 16% per annum. Most Mortgage Loans
provide for equal monthly payments over their terms, which generally range from
15 to 30 years.
Substantially all of the Mortgage Loans are made to non-prime
borrowers. These borrowers generally have limited access to credit or are
considered to be credit-impaired by conventional lenders such as thrift
institutions and commercial banks. These conventional lending sources generally
impose stringent and inflexible loan underwriting guidelines and generally
require a longer period of time, as compared to the Company, to approve and fund
loans. The Company believes that its customers require or seek a high degree of
personalized service and swift response to their loan applications. Furthermore,
the Company believes that its customers generally focus more on the amount of
the monthly payment, rather than the interest rate charged. Consequently, the
Company's customers many times are willing to pay higher interest rates,
assuming the amount of the monthly payment is otherwise acceptable. Furthermore,
because the Company's customers are generally credit-impaired for one or more
reasons, the customers are not in a position to obtain better rates from
traditional lending institutions.
The Mortgage Loan Division has experienced significant growth over the
past several years. For the years ended December 31, 1994, 1995, and 1996,
Mortgage Loan originations totaled $99.4 million, $192.8 million, and $328.6
million, respectively.
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In 1995, the Company diversified its Mortgage Loan products to include
high loan-to-value second mortgage loans ("HLTV Loans"), which have
loan-to-values in excess of 80%, but less than 125%. HLTV Loans typically have
principal amounts ranging from $5,000 to $75,000 and in 1996, had a weighted
average interest rate of approximately 15% per annum. The Company sells its HLTV
Loans on a nonrecourse basis in the secondary market with customary
representations and warranties. The Company's credit guidelines for this product
meet the underwriting criteria of the purchasing investor. During 1995 and 1996,
the Company originated $9.0 million and $36.6 million, respectively, of HLTV
Loans.
Industry
Although several different estimates exist regarding the size of the
non-prime mortgage industry, the Company believes that the non-prime mortgage
market is approximately $100 billion per year. The Company believes that the
non-prime mortgage industry is highly fragmented, with no single lender having a
significant portion of the market. However, many of the providers of financing
to the non-prime mortgage industry are publicly-traded specialty finance
companies.
Generally, non-prime borrowers may be considered credit-impaired
because their loan application is characterized by one or more of the following:
(1) inadequate collateral; (2) insufficient debt coverage; (3) problems with
employment history; (4) limited or unfavorable credit history; or (5)
self-employment.
Under the Company's underwriting guidelines, Mortgage Loans are
classified into five categories: AA, A, B, C and D. These categories are further
divided into subcategories, depending on various underwriting criteria. These
underwriting standards are under continual review and are subject to revision by
Company management. The majority of the Company's borrowers do not fit
exclusively into one category. Rather, such borrowers generally have some
characteristics of one or more classifications. Accordingly, there is a
significant degree of subjectivity in determining which rates and other loan
terms will be offered.
For the year ending December 31, 1996, approximately 53% of the
Company's Mortgage Loan originations were classified as "AA" or "A" loans, 33%
were "B" loans, 12% were "C" loans and 2% were "D" loans.
Mortgage Loan Origination
The Company originates Mortgage Loans both on a retail and wholesale
basis. Retail Mortgage Loans are originated by persons employed by the Company,
while wholesale Mortgage Loans are generally originated through Mortgage
Bankers.
The Company utilizes two principal strategies in the retail mortgage
lending area, one of 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 began its regional approach to retail mortgage lending in
April 1996 by hiring an experienced team of originators to establish its
Indianapolis, IN office under its tradename, "HomeGold." 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. The Company also opened retail
lending operations which utilize this strategy in Phoenix, AZ and Greenville, SC
during the
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fourth quarter of 1996 and the first quarter of 1997, respectively. From May
through December 1996, HomeGold originated $67.6 million in Mortgage Loans.
The second, decentralized origination approach is conducted through
Sterling Lending Corporation, an 80% owned indirect subsidiary of the Company,
which has offices in Baton Rouge and New Orleans, LA, Atlanta, GA, Jackson, MS,
and Jacksonville, FL. The Company's Baton Rouge office is a loan processing and
underwriting center for the loans originated through the other offices.
Prior to 1996, all of the Mortgage Loans were originated on a wholesale
basis by the Company through Mortgage Bankers. As a wholesale originator of
Mortgage Loans, the Company funds the Mortgage Loans at closing, although the
Mortgage Loans may 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, 1995, and 1996, the Company originated loans through
approximately 65, 120, and 330 Mortgage Bankers, respectively. Of the
approximately 120 and 330 Mortgage Bankers who were responsible for origination
of Mortgage Loans in 1995 and 1996, the Strategic Alliance Mortgage Bankers
accounted for approximately $145 million, or 75%, of the Company's Mortgage
Loans originated in 1995 and approximately $190.7 million, or 58%, of the
Company's Mortgage Loans originated in 1996. In December 1996, the Company's
largest Strategic Alliance Mortgage Banker accounted for 18.1% of the Company's
total Mortgage loan production for the month.
In July 1996, the former vice president and regional sales manager for
a national finance company assumed management of the Company's wholesale lending
operation. Monthly wholesale Mortgage Loan production has grown from $3.5
million in January 1996 to $12.5 million in December 1996 for total production
of $69.1 million for 1996.
In 1994, the Company began seeking to enter into strategic alliance
agreements with Mortgage Bankers that were believed by the Company to be able to
consistently generate large volumes of quality mortgage loans. These strategic
alliance agreements require that the Strategic Alliance Mortgage Bankers must
first offer the Company the right to purchase all of their loans which meet the
Company's underwriting criteria before offering such loans to other parties. The
Strategic Alliance Mortgage Bankers are accorded additional 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. At December
31, 1996 the Company had contracts with four Strategic Alliance Mortgage
Bankers, and has added two additional Strategic Alliance Mortgage Bankers in the
first quarter of 1997. The Company has a minority equity interest in certain of
the Strategic Alliance Mortgage Bankers, which is designed to enhance the
Company's growth potential.
On June 1, 1996, First Greensboro Home Equity, Inc. ("First
Greensboro") terminated its strategic alliance agreement with the Company in
connection with the pending purchase of First Greensboro by a third party
financial institution. In addition, AmeriFund Group, Inc. ("Amerifund")
terminated its strategic alliance agreement with the Company in October 1996. As
a result of the termination of these strategic alliance agreements, the
Company's Mortgage Loan originations were materially less than would otherwise
have been the case; however, the Company received termination fees of
approximately $7.3 million from these two companies in 1996. By the fourth
quarter of 1996, all of the monthly production from these two sources had been
replaced through alternate sources, including the Company's retail production
and the expansion of its wholesale operations.
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At December 31, 1996, the Company had Mortgage Loan commitments
outstanding of $83.8 million, of which 11% related to its retail loan
originations, 86% related to its wholesale loan originations and 3% related to
its loan originations through its Strategic Alliance Mortgage Bankers.
Application and Approval Process
In the application and approval process associated with the Company's
retail Mortgage Loan operations, a Company loan officer in a retail loan
origination office obtains an initial loan application, which is processed
throughout the underwriting department associated with the particular loan
origination office. The Company loan officer is responsible for securing all
necessary underwriting information associated with such application. The
underwriting department generally completes its review within one business day
after procurement of all necessary documentation. Upon approval by the
underwriting department, the loan is forwarded to an attorney or title company
for closing.
The application and approval process for wholesale Mortgage Loans
depends upon the specific Mortgage Bankers involved in the origination process.
Loans originated through the Strategic Alliance Mortgage Bankers are initially
evaluated and underwritten by the loan officers of the Strategic Alliance
Mortgage Bankers, who are required to follow the Company's underwriting
guidelines. After the Strategic Alliance Mortgage Bankers have gathered the
necessary underwriting information and evaluated and approved the application,
then the summary loan information and a funding request is forwarded to the
Company and the Strategic Alliance Mortgage Banker forwards the loan package to
an attorney or title company for closing. In the origination process, the
Strategic Alliance Mortgage Banker makes standard representations and warranties
with respect to the Mortgage Loan, as well as a representation that the Mortgage
Loan meets the Company's underwriting criteria. The loan package is reviewed by
the Company generally within two weeks of closing, and the Company may require
the Strategic Alliance Mortgage Banker to repurchase the loan if there is a
violation of the representations and warranties, or if the loan does not meet
the Company's underwriting criteria. With respect to loans originated through
Mortgage Bankers other than the Strategic Alliance Mortgage Bankers, the
necessary underwriting information is gathered by both the Mortgage Banker and
the Mortgage Loan Division's credit department. After review and evaluation, an
officer in the credit department makes the final credit decision before funding.
The Company attempts to grant approvals of loans quickly to borrowers
meeting the Company's underwriting criteria. Loan officers are trained to
structure loans that meet the applicant's needs, while satisfying the Company's
lending criteria. If an applicant does not meet the lending criteria, the loan
officer may offer to make a smaller loan, request additional collateral, or
request that the borrower obtain a co-borrower or a guarantor.
Mortgage Loans are generally originated in amounts ranging from $10,000
to $100,000. The maximum amount is $350,000, but loans generally do not exceed
$200,000. In limited instances, Mortgage Loans are made in excess of this limit,
but only upon senior management approval.
Creditworthiness is assessed through a variety of means, including
calculating standard debt to income ratios, examining the applicant's credit
history through standard credit reporting bureaus, verifying an applicant's
employment status and income, and checking the applicant's payment history with
respect to the first mortgage, if any, on the property.
In the case of owner-occupied property, the loan amount generally may
not exceed 90% of the appraised value of the property, less any balance
outstanding on any existing mortgages. In non-owner-occupied properties, the
loan amount generally may not exceed 75% of the appraised value of the property,
less any balance outstanding on any existing mortgages. The Company also makes
loans which have loan-to-value ratios greater than 90%. However, such loans are
generally made only to borrowers deemed by the
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<PAGE> 11
Company to have a higher degree of creditworthiness (e.g., superior credit
history, stable, high-income employment and low gross debt ratios), when
compared to its typical borrowers. It is the Company's current policy that such
loans do not exceed $350,000. Approximately 90% of the Company's Mortgage Loans
are secured by owner-occupied property.
The Company requires an independent appraisal on all loans. The Company
generally requires title insurance for all real estate loans. The Company
generally requires real estate improvements to be fully insured as to fire and
other commonly insured-against risks and regularly monitors its loans to ensure
that insurance is maintained for the period of the loan.
In connection with Mortgage Loans, the Company collects nonrefundable
underwriting fees, late charges and various other fees, depending on state law.
Other fees charged, where allowable, include those related to credit reports,
lien searches, title insurance and recordings, prepayment fees and appraisal
fees.
Sale of Mortgage Loans
The Company began selling Mortgage Loans in 1994 and for the years
ended December 31, 1995 and 1996, the Company sold $127.6 million and $284.8
million of Mortgage Loans, respectively. The Mortgage Loans to be sold are
generally packaged in whole loan pools of approximately $20 million and offered
to several potential purchasers for the purpose of obtaining bids. After
obtaining bids, the pool is generally sold to the highest bidder. Historically,
the Mortgage Loans have been sold servicing released and on a non-recourse
basis, with customary representation and warranties. The sale of these loans to
the secondary market as well as the product development and compliance with
underwriting standards is managed by the centralized secondary marketing
department in Greenville, SC.
In connection with the sale of Mortgage Loans, the Mortgage Loan
Division receives cash premiums generally ranging from 4% to 8% of the principal
amount of the Mortgage Loan being sold, depending on prevailing interest rates
and the term of the loan. During 1995 and 1996, the weighted average premiums on
the Mortgage Loans sold were 7.04% and 5.86%, respectively. For the years ended
December 31, 1995 and 1996, cash gains recognized by the Company in connection
with the sale of Mortgage Loans were $6.0 million and $18.3 million,
respectively. The amount for 1996 includes $7,337,000 in termination fees
relating to the termination of two of the Company's Strategic Alliance Mortgage
Bankers. The termination fees represent a recoupment of previously shared
premiums with those partners. Purchasers of Mortgage Loan pools are typically
large financial institutions, many of which purchase the Mortgage Loans for
inclusion in larger pools of loans, which, in turn, are sold to institutional
investors. The Company plans to begin securitizing the majority of its Mortgage
Loans in 1997, although no assurances exist that the Company can accomplish this
plan.
Mortgage Loan Servicing
The Company services the Mortgage Loans that are not sold, but
historically has not retained the servicing on Mortgage Loans sold. However, in
the future, the Company may retain servicing on Mortgage Loans sold and
securitized. Servicing includes collecting payments from borrowers, accounting
for principal and interest, contacting delinquent borrowers, ensuring that
insurance is in place, monitoring payment of real estate property taxes, and
supervising foreclosures and bankruptcies in the event of unremedied defaults.
The Company has increased its servicing capabilities and staffing significantly
during 1996 in anticipation of increased origination growth. A centralized
quality control department reviews each Mortgage Loan subsequent to funding to
maintain consistency and compliance with documentation and legal standards.
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<PAGE> 12
Delinquencies and Collections
Collection efforts generally begin when an account is over five days
past due. At that time, the Company attempts to contact the borrower to
determine the reason for the delinquency and obtain the payment from the
borrower. If the status of the account continues to deteriorate, the Company
undertakes an analysis to determine the appropriate action. In limited
circumstances, when a borrower is experiencing difficulty in making timely
payments, the Company may temporarily adjust the borrower's payment schedule
without changing the loan's delinquency status. Payment extensions or rollovers
are only permitted in limited instances with the approval of departmental
management. The determination of how to work out a delinquent loan is based upon
a number of factors, including the borrower's payment history and the reason for
the current inability to make timely payments.
When a loan is 90 days past due in accordance with its original terms,
it is placed on non-accrual status and foreclosure proceedings are generally
initiated. The amount of other real estate owned which was acquired through
foreclosure relating to the Mortgage Loan Division was $3.1 million and $3.0
million at December 31, 1995 and 1996, respectively. The value is determined
based upon the lower of carrying value or appraised value less estimated costs
to sell.
The following table illustrates the Company's delinquency and
charge-off experience with respect to Mortgage Loans:
MORTGAGE LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Serviced Mortgage Loan delinquencies:
30-59 days past due 8.09% 7.96% 7.75% 3.04%
60-89 days past due 2.05 2.87 1.80 1.05
Over 90 days past due 13.40 6.83 4.93 3.17
Serviced Mortgage Loans Charged-off,
net, as a % of average serviced
Mortgage Loans: 1.05 2.96 1.04 .81
Serviced Mortgage Loans charged-off, net $ 446 $ 1,518 $ 771 $ 792
Serviced Mortgage Loans 42,335 60,151 88,165 146,231
Average Serviced Mortgage Loans 42,397 51,243 74,158 97,281
Outstanding Mortgage Loans (Balance Sheet) 42,335 60,151 88,165 146,231
</TABLE>
SMALL BUSINESS LOAN DIVISION
Overview
The Company formed EBC in December 1991 for the purpose of acquiring
substantially all of the assets, including a license to originate loans
partially guaranteed by the SBA, of an inactive SBA lender. EBC is one of
approximately 12 non-bank entities in the United States possessing and actively
using a license to make SBA Loans. Substantially all of the Company's SBA Loans
are made under Section 7(a)
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<PAGE> 13
("Section 7(a) Loans") of the Small Business Act of 1953, as amended (the "Small
Business Act"). However, the Company, through a subsidiary, began originating
loans in 1995 pursuant to Section 504 ("Section 504 Loans") of the Small
Business Act (the "Section 504 Loan Program").
During 1994, 1995, 1996, the Company originated $43.1 million, $39.6
million and $68.2 million, respectively, in Small Business Loans, of which 100%,
92%, and 82%, respectively, were Section 7(a) Loans. Based on a recent trade
association report, management believes that during the SBA's fiscal year ended
September 30, 1996, the Company was the seventh largest SBA lender in the nation
based on principal amount of Section 7(a) Loans approved by the SBA.
During 1996, the Company originated no new Section 504 Loans, but
continued to fund $2.1 million of Section 504 Loans closed in 1995. The Company
expects to continue to focus its SBA lending efforts on Section 7(a) Loans,
although future regulatory changes could alter such decision.
The Small Business Loan Division operates through a total of eight
offices. The Company's SBA operations are divided into four regions: (1) the
Southeastern Region, which is headquartered in Greenville, SC; (2) the Gulf
Coast Region, which is headquartered in Panama City, FL; (3) the Rocky Mountain
Region, which is headquartered in Denver, CO; and (4) the Southwestern Region,
which is headquartered in Dallas, TX.
The Small Business Loan Division also originates asset-based loans to
small- to medium-sized businesses in the Southeastern United States
("Asset-based Small Business Loans"). These Asset-based Small Business Loans are
structured as revolving credit lines for working capital purposes and are
generally secured by a first lien on accounts receivable, inventory and
equipment. This asset-based lending operation was begun by the Company in April
1996 in Atlanta, GA, and it currently originates loans through offices in
Atlanta, GA, Denver, CO, and New Orleans, LA. In 1996, loans originated (based
on note amount of loans closed) by this asset-based lending operation totaled
approximately $12.6 million.
The Small Business Loan Division also serves as investment manager for
a venture capital fund, Palmetto Seed Capital Fund Limited Partnership
("Palmetto"), and a mezzanine level fund, Reedy River Ventures, L.P. ("RRV")
(the "Managed Funds"). Palmetto provides venture capital to start-up and early
stage companies headquartered within the state of South Carolina. RRV, a
licensed Small Business Investment Company under the Small Business Investment
Act of 1958, provides loans to later stage companies accompanied by warrants to
buy equity in the borrower at nominal prices. The Company has no capital
invested in Palmetto, and has a $1 million investment in RRV. The Company
receives fees for managing the two funds.
Small Business Loan Customers
The Company's Small Business Loan customers are commercial businesses
which are generally considered to be non-prime borrowers insofar as they
generally do not have access to traditional bank financing. Such financing may
be unavailable because of a variety of factors, including inadequate collateral,
insufficient debt coverage, lack of management experience or an unfavorable
credit history.
The Company's SBA Loans are made only to potential borrowers who meet
defined criteria of the SBA as to the definition of a "small business." These
criteria differ based upon the industry in which the potential borrower
operates. The portion of the loan guaranteed by the SBA, the term of the loan
and the range of interest rates charged are also defined by the SBA. The Company
underwrites SBA loans using these SBA criteria, as well as by assessing the
available collateral, personal guarantees, and earnings and cash flow of the
small business and other factors on a case by case basis.
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<PAGE> 14
SBA Loan Program Participation
Section 7(a) Loan Program. Section 7(a) Loans are term loans made to
commercial businesses which qualify under SBA regulations as "small businesses."
These loans are primarily for the acquisition or refinancing of property, plant
and equipment, working capital or debt consolidation.
The SBA administers three levels of lender participation in its Section
7(a) Loan program. Under the first level of lender participation, known as the
Guaranteed Participant Program, the lender gathers and processes data from
applicants and forwards it, along with its request for the SBA's guaranty, to
the local SBA office. The SBA then completes an independent analysis and makes
its decision on the loan applications. Under the second level of lender
participation, known as the Certified Lender Program, the lender (the "Certified
Lender") gathers and processes the application and makes its request to the SBA,
as in the Guaranteed Participant Program procedure. The SBA then performs a
review of the lender's credit analysis on an expedited basis, which review is
generally completed within three working days. The SBA requires that lenders
originate loans meeting certain portfolio quality and volume criteria before
authorizing lenders to participate as Certified Lenders. Authorization is
granted by the SBA on a district-by-district basis. Under the third level of
lender participation, known as the Preferred Lender Program, the lender has the
authority to approve a loan and to obligate the SBA to guarantee the loan
without submitting an application to the SBA for credit review. However, the
lender (the "Preferred Lender") is required to secure confirmation from the SBA
that the loan and applicant is eligible. Such confirmation generally takes less
than 24 hours. The standards established for participants in the Preferred
Lender Program, the SBA's highest designation, are more stringent than those for
participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements.
The Company has been designated a Preferred Lender by the SBA in 42 of
the 65 SBA districts. These districts are all of the SBA districts in which the
Company is deemed to be an "active" lender by the SBA. Virtually all of the
Company's SBA Loans are made in these districts. The SBA may suspend or revoke
Preferred Lender status for reasons such as loan performance unacceptable to the
SBA, failure to make the required number of loans under the expedited
procedures, or violations of applicable statutes, regulations or published SBA
policies and procedures. The SBA performs periodic audits of its non-bank
licensed lenders to ensure compliance with its policies and procedures.
Section 504 Program. The Section 504 Program differs from the Section
7(a) Loan program in both structure and size of loans. Section 504 loans
generally range in principal amount from $1.0 million to $2.5 million and are
made in connection with a state chartered Certified Development Corporation
("CDC"). Section 504 Loans are generally commercial development-related loans.
Upon complete funding of the loan, a significant portion of the total loan
(generally approximately 55%) is repaid by the CDC as the second lien holder.
This repayment is funded by the SBA through the purchase of a fixed rate
debenture issued by the CDC. This purchased portion of the loan is subordinated
to the first mortgage loan held by the Company. Consequently, the Company has a
loan which has a very favorable loan-to-value ratio. The approval process for
Section 504 Loans is similar to the first level of lender participation with
respect to the Section 7(a) Loan program except that the CDC presents the loan
to the SBA (after it has been approved by the Company and the CDC). Upon
presentation, the SBA completes its independent analysis of the loan and makes
its credit decision. SBA turnaround time on such applications can vary greatly,
depending on its backlog of loan applications.
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<PAGE> 15
SBA Guarantees
Under the Preferred Lender Program, the SBA guarantees up to 80% on
loans of $100,000 or less, and up to 75% on loans in excess of $100,000.
However, the SBA's maximum guaranty per borrower under most SBA Loans is
$750,000.
In the event of a default by a borrower on an SBA Loan, if the SBA
establishes that any resulting loss is attributable to a failure by the Company
to comply with the SBA policies and procedures in connection with the
origination, servicing, documentation or funding of the loan, the SBA may seek
recovery of funds from the Company. With respect to SBA Loan Participations
which have been sold, the SBA first will honor its guarantee and then seek
compensation from the Company in the event that a loss is deemed to be
attributable to such failure to comply with SBA policies and procedures. To
date, the SBA has notified the Company as to the potential for partial
impairment of guarantee on two of its loans. The Company believes it is
adequately reserved in relation to these potential impairments.
Small Business Loan Origination
In the past five years, the Company's SBA Loan origination offices have
made loans in 26 states and the District of Columbia. The Company's SBA Loans
generally range in size from $100,000 to $1.5 million. Average loan size for
originations during 1996 was $679,000. The SBA Loans generally have a variable
rate of interest which is limited to a maximum of 2.75% over the lowest prime
lending rate published in The Wall Street Journal adjusted on the first day of
each calendar quarter. The Company's Asset-based Small Business Loans have
variable rates of interest which range generally from 2.0% to 3.0% above the
prime lending rate. However, these Asset-based Small Business Loans also provide
for servicing and other processing fees, which cause the effective rate
associated with such loans to be approximately 26% for the loans originated to
date.
Although the Company originates Small Business Loans through direct
contact between its loan officers and potential borrowers, a substantial portion
of the Company's Small Business Loans are generated by loan referral sources,
such as commercial loan brokers who generally are paid referral fees. The
Company does not have any contractual agreements with any of these brokers
obligating them to refer loans to the Company. In 1996, the Company originated
Small Business Loans in connection with approximately 45 commercial loan
brokers, and no referral source accounted for more than 16% of the Company's
Small Business Loans. The Company attempts to maintain strong relationships with
commercial realtors, commercial loan brokers, commercial banks, attorneys,
accountants and other potential loan referral sources.
The majority of the Company's SBA Loan originations have been for the
acquisition or refinance of real property, plant and equipment, working capital
or debt consolidation. A number of SBA Loans were made to business franchises in
connection with the acquisition of national franchises. These loans are
generally secured by all assets of the borrower, including any real property.
The Asset-based Small Business Loans are generally secured by a first lien on
accounts receivable, inventory and equipment. In connection with the SBA Loans,
the Company obtains the personal guarantee of the primary principals involved in
the business, which is often secured by real property.
All SBA Loans originated by the Company are evidenced by variable rate
notes which adjust quarterly, require payment monthly and are scheduled to
amortize fully over their stated term. SBA Loans originated by the Company have
terms ranging from seven to 25 years depending upon the use of proceeds, with an
original weighted average term of approximately 18 years. Generally, loans are
made up to a seven year term for working capital, 10 year term for equipment and
25 year term for real estate.
15
<PAGE> 16
Applicants for SBA Loans are generally required to provide historical
financial statements for three years and/or projected statements of operations
for two years. They are also generally required to provide proof of equity,
personal guarantees and assignments of affiliated leases and life insurance.
Credit reports are generally obtained from independent credit reporting agencies
for all applicants. These reports are reviewed by the SBA lending operation's
credit officers. Independent appraisals are generally required on real estate
pledged as collateral.
Asset-based Small Business Loans are evidenced by variable-rate,
revolving credit notes, which are payable upon demand. However, the Company
generally commits to make the credit facility available for a period of one to
two years, provided that certain covenants and conditions are met. Applicants
for Asset-based Small Business Loans are generally required to provide cash flow
projections, and inventory and accounts receivable aging and turn-over
information. Such aging and turnover information is provided to the Company on a
daily basis.
All loans made by the Small Business Loan Division generally must be
approved by a designated regional officer and one other loan officer. All SBA
Loans in excess of the assigned regional authority and all of the loans in
excess of $1.0 million must be approved by the President and Executive Vice
President of the SBA lending operation. After approval of such officers, the
loan application is produced and forwarded to the appropriate SBA office. If an
SBA Loan is being made in a district where the Small Business Loan Division is
certified as a Preferred Lender, no prior credit approval of the SBA is required
before the loan transaction can be consummated. However, if the SBA Loan is
being made in a district where the Small Business Loan Division is not certified
as a Preferred Lender, the loan cannot be made until the SBA office approves the
loan, issues an authorization letter and assigns a loan number.
At December 31, 1996, the Company had Small Business Loan commitments
outstanding of $45.7 million, of which 73% related to Section 7(a) SBA Loans,
14% related to Section 504 SBA Loans, and 13% related to Asset-based Small
Business Loans.
Multiple Disbursements of Small Business Loans
The Company funds certain of its SBA Loans on a multiple disbursement
basis. In particular, when part of the use of proceeds of a loan is for the
construction or improvement of real property, the loan may require multiple
disbursements over a lengthy period of time. At December 31, 1996, the Company
had $16.7 million of outstanding SBA Loans in various stages of multiple
disbursements, of which $8.3 million had been disbursed. The length of time
necessary to complete the disbursement process for multiple disbursement loans
is generally six to twelve months.
The Asset-based Small Business Loans are revolving notes. Advances and
repayments are made daily based on the borrower's available cash position and
borrowing base of available collateral. At December 31, 1996, the Company had
asset-based notes receivable totaling $11.8 million, of which $6.8 million were
outstanding.
SBA Loan Sales
The Company sells participations representing the SBA-guaranteed
portion of its SBA Loans. Upon final disbursement of the proceeds of each SBA
Loan, the Company obtains bids in the secondary market for the SBA Loan
Participation associated with that SBA Loan. The SBA Loan Participation is
generally sold to the highest bidder. The Company retains the unguaranteed
portion of the loan and the servicing rights to the entire loan. The Small
Business Loan Division sells the SBA Loan Participations generally to financial
institutions or other institutional investors. Purchasers of the SBA Loan
Participations
16
<PAGE> 17
share ratably with the Small Business Loan Division (holding the unguaranteed
portion) with respect to all principal collected from the borrowers with respect
to the SBA Loans. SBA lenders are required to pay a fee of 50 basis points per
annum to the SBA on the outstanding balance of the guaranteed portion of all
loans.
During the years ended December 31, 1994, 1995 and 1996, Small Business
Loans sold (excluding securitized loans) totaled $31.2 million, $25.4 million
and $33.1 million, respectively.
In connection with the sale of SBA Loan Participations, the Small
Business Loan Division receives, in addition to excess servicing revenue, cash
premiums typically of approximately 10% of the guaranteed portion being sold.
During 1994, 1995, and 1996, the weighted average premiums on the SBA Loan
Participations sold, together with the additional servicing revenue, aggregated
11.79%, 13.75% and 14.17%, respectively, of the SBA Loan Participations sold.
For the years ended December 31, 1994, 1995 and 1996 gains recognized by the
Company in connection with the sale of SBA Loan Participations were $4.0
million, $3.9 million and $5.5 million, respectively.
In June 1995 and November 1996, the Company securitized $17,063,000 and
$17,500,000 respectively, of the unguaranteed portions of its SBA Loans. The
securitizations were effected through a grantor trust (the "Trust"), the
ownership of which was represented by Class A and Class B certificates. The
Class A certificates were purchased by investors, while the Company retained the
Class B certificates. These certificates give the holders thereof the right to
receive payments and other recoveries attributable to the unguaranteed portion
of the SBA Loans held by the Trust. The Class B Certificates issued in June 1995
and November 1996 represent 10% and 9%, respectively, of the principal amount of
the SBA Loans transferred in the securitization and are subordinate in payment
and all other respects to the Class A Certificates. Accordingly, in the event
that payments received by the Trust are not sufficient to pay certain expenses
of the Trust and the required principal and interest payments due on the Class A
Certificates, the Company, as holder of the Class B Certificates, would not be
entitled to receive principal or interest payments due thereon. The
securitization transaction completed in November 1996 included a pre-funding
account of $4,649,000, for which additional loans could be placed into the Trust
prior to January 31, 1997. On January 23, 1997, loans totaling $4,626,000 were
placed into the Trust, for which the Company received proceeds of $4,210,000 and
a retained interest in Class B certificates of $416,000.
The Company serves as master servicer for the Trust and, accordingly,
forwards payments received on account of the SBA Loans held by the Trust to the
trustee, which in turn, pays the holders of the certificates in accordance with
the terms of and priorities set forth in the securitization documents. The
transfer of the SBA Loans to the Trust constitutes a sale of the underlying SBA
Loans. However, the Company has the obligation to repurchase the SBA Loans from
the Trust in the event that certain representations made with respect to the
transferred SBA Loans are breached or in the event of certain defaults by the
Company, as master servicer. The Class A certificates issued in June 1995 and
November 1996 received a rating of Aaa and Aa2, respectively, from Moody's
Investors Service, Inc. The Class B Certificates were not rated for either
transaction. In connection with the securitizations, the SBA Loan Division
received funds substantially equal to the Class A certificates' percentage of
the total principal amount of the SBA Loans transferred to the Trust. The
Company intends to continue to pursue securitization transactions in the future.
Legislation is currently pending which will allow Banks to securitize SBA Loans
and may require a minimum level of retained interest to be held by SBA Lenders.
Loan Servicing
The Company services substantially all the Small Business Loans it
originates. Servicing includes collecting payments from borrowers and remitting
payments with respect to the SBA Loan
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<PAGE> 18
Participations to Colson Services, remitting payments to the trustee for
securitized SBA loans, preparing servicers certificates and remittance reports,
accounting for principal and interest, contacting delinquent borrowers and
supervising foreclosures.
Delinquency and Collection
When a Small Business Loan becomes delinquent, the Company contacts the
borrower to determine the circumstances of the delinquency and attempts to
maintain close contact with the borrower until the loan is brought current or is
liquidated. Depending on the circumstances, the Company may grant a deferral of
payments, typically up to 90 days, to assist the borrower if the Company
believes it will benefit the long-term viability of the borrower. When an SBA
Loan becomes 60 days past due, the Company is required to notify the SBA of such
delinquency. Generally, after a loan becomes 90 days delinquent, the Company
places the loan on non-accrual status, delivers a default notice and begins the
legal process of foreclosure and liquidation, upon notification to and approval
by the SBA. Any loss after foreclosure and liquidation is allocated pro rata
between the guaranteed and the unguaranteed portions of the SBA Loan.
The asset-based lending operation monitors its borrowers daily for
availability under the lines of credit. Loans are placed on a watch list if the
borrower is experiencing tight cash flow and poor profitability. Loans are
placed on non-accrual status if collection of the interest is deemed to be
doubtful. In the event of a default, the Company makes an assessment of the
borrower's financial condition and nature of the default to determine further
action. If repayment of the loan is considered doubtful, a demand letter is sent
and the Company begins the process to take control of the collateral.
None of the other real estate owned at December 31, 1995 and 1996,
which was acquired through foreclosure, related to the Small Business Loan
Division. The value is determined based on the lower of carrying value or
appraised value less estimated cost to sell.
The following table illustrates the Company's delinquency and
charge-off experience with respect to Small Business Loans:
SMALL BUSINESS LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Serviced Unguaranteed Small Business
Loan delinquencies:
30-59 days past due 1.10% 1.17% 2.97% 3.37%
60-89 days past due -- -- 4.47 .89
Over 90 days past due .09 -- 2.53 3.67
Serviced Unguaranteed Small Business
Loans charged off, net, as a % of
average Serviced Small Business Loans .05 .21 1.43 2.71
Serviced Unguaranteed Small Business
Loans charged off, net $ 4 $ 31 $ 311 $ 932
Serviced Unguaranteed Small Business Loans 11,238 18,771 24,867 44,017
Average Serviced Unguaranteed Small
Business Loans 7,635 15,004 21,819 34,442
Total Serviced Small Business Loans 58,552 88,809 108,696 140,809
Outstanding Small Business Loans (Balance Sheet) 17,933 26,764 20,620 29,386
</TABLE>
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<PAGE> 19
AUTO LOAN DIVISION
Overview
The Company's Auto Loan Division originates loans directly to non-prime
borrowers for the purchase of pre-owned automobiles. Substantially all of the
Auto Loans are made directly by the Company through referrals from dealers
located in South Carolina. Less than 25% of the Auto Loans originated in 1996
were "indirect" loans purchased from dealers, all of which were located in South
Carolina. Of the dealers which referred loans to the Company in 1996, the
Company estimates approximately half of such dealers were franchised dealers and
approximately half were independent dealers.
The non-prime consumer automobile market is comprised of borrowers who
generally do not have access to other conventional sources of automobile credit
because they do not meet the credit standards imposed by other lenders. As a
result of its borrowers' credit status, the Company charges relatively high
rates of interest to such consumers, which in 1996 ranged from 18% to 46% (with
a weighted average rate of 27.3%). By contrast, banks, thrift institutions, and
financing subsidiaries of manufacturers and retailers generally impose more
stringent, objective credit requirements and generally charge lower interest
rates based on the prevailing interest rate environments at the time of
origination. The Company began originating Auto Loans with its acquisition of
80% of the common stock of Loan Pro$ in 1991. At the time of acquisition, Loan
Pro$ had $1.8 million in loans outstanding and operated through one location.
The Company also acquired Premier in 1991. At the time of acquisition, Premier
had approximately $3 million in loans, which were principally personal property
loans, and operated through three locations. During 1993, the Company decided to
terminate Premier's unsecured personal property loan operation and focus its
lending efforts on secured automobile lending. The Company currently operates
its Auto Loan Division through eight locations, and at December 31, 1996, had a
total of $22.0 million of serviced Auto Loans outstanding, substantially all of
which were made in connection with the purchase of automobiles. During 1994,
1995 and 1996, the Auto Loan originations totaled $7.5 million, $17.1 million
and $18.3 million, respectively.
The Company does not utilize a category rating system with respect to
its Auto Loans. Rather, such loans are underwritten independently based on
criteria such as the age and wholesale value of the automobile, the borrower's
past credit history and the availability of cosigners and/or guarantors for the
loan. The interest rates charged on Auto Loans are determined by the loan
officer after reviewing the potential borrower's credit history.
Direct Auto Loans and Related Products
The majority of the Company's Auto Loans are made directly by the
Company to consumers in connection with purchases of preowned automobiles. This
is in contrast to "indirect lending," where lenders purchase loans from dealers
that have already been originated by such dealers.
The Auto Loans are generally fixed rate loans, with interest rates
ranging from 18% to 46% per annum, depending on the model year of the automobile
being financed and the creditworthiness of the borrower. At December 31, 1996,
the Auto Loans had a weighted average interest rate of 27.3%. The amount
financed on Auto Loans generally ranges from $3,000 to $10,000 (with an average
initial principal balance in 1996 of approximately $5,000), and the repayment
terms generally range from 24 to 48 months, depending upon the amount financed.
The maximum interest rate which may be charged by the Company is regulated by
state law. The age of the vehicles financed generally ranges from four to six
years. The Company's underwriting guidelines generally provide that the amount
of the Auto Loan may not exceed 110% of National Auto Dealers Association
("NADA") wholesale value of the vehicle being financed.
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In connection with its Auto Loans, the Company offers credit life and
accident and health insurance products for which it receives commissions. These
insurance products are sold by branch managers who are licensed representatives
of an unaffiliated insurance company. During 1996, insurance was sold in
connection with approximately 50% of the total number of Auto Loans originated.
During 1996, the Company recognized $217,000 in commissions in connection with
the sale of insurance products.
Relationships with Dealers
Substantially all of the Company's Auto Loans are originated by
referrals from dealers located in or around the localities served by the
Company. In a typical situation, the dealer will bring a customer who wishes to
purchase an automobile, along with the automobile, to an Auto Loan Division
branch location. In dealing with the Company, dealers become familiar with the
Company's lending policies and procedures and develop the ability to screen
potential applicants for credit who are unlikely to be approved by the Company.
The Company attempts to establish and maintain its relationships with dealers by
making prompt credit determinations and by offering quality, consistent and
dependable service. During 1996, the Company originated Auto Loans in connection
with approximately 200 dealers. In 1996, no single dealer accounted for a
material portion of the Company's Auto Loans. The Company has no formal
agreements with any dealers under its direct lending program.
Direct Auto Lending Procedures
The Company's credit review process requires the completion of a
standardized credit application with information on the applicant's background,
employment and credit history. The Company obtains a credit report on the
applicant from an independent reporting service and obtains verification of the
applicant's employment and wages from his or her employer. The Company does not
use a "scoring" system or other inflexible, standardized credit criteria.
Nevertheless, the Company estimates that approximately 50% of all applicants are
denied credit by the Company, generally because of their credit histories or
because their income levels will not, in the Company's judgment, support the
amount of credit sought.
The Company considers refinancing of its existing loans on a
case-by-case basis. The Company generally does not refinance delinquent loans
unless its determines that refinancing is not likely to increase the credit
risk.
Indirect Lending Operations
In 1995, the Company began an indirect automobile lending program.
Under this program, certain approved dealerships are provided underwriting
criteria and guidelines by the Company. The dealerships close and fund the loans
to the borrowers. The manager of the Company's local office is then given an
opportunity to purchase the loan from the dealer based on the office manger's
credit decision and verification procedures. Loans are purchased from the dealer
at a discount from the principal amount of the loan. This discount, which is not
refundable to the dealer, averaged 7% in 1996. Less than 25% of the Auto Loans
originated in 1996 were generated under this indirect lending program.
Auto Loan Sales
In March 1996, the Company securitized $16,107,000 of its Auto Loans.
The securitization was effected through a grantor trust (the "Trust"), the
ownership of which was represented by Class A and Class B certificates. The
Class A certificates were purchased by investors, while the Company retained the
Class B certificates. These certificates give the holders thereof the right to
receive payments and other recoveries attributable to the Auto Loans held by the
Trust. The Class B Certificates represent 10% of the principal amount of the
Auto Loans transferred in the securitization and are subordinate in payment and
all other respects to the Class A Certificates. Accordingly, in the event that
payments received by the Trust are not
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sufficient to pay certain expenses of the Trust and the required principal and
interest payments due on the Class A Certificates, the Company, as holder of the
Class B Certificates, would not be entitled to receive principal or interest
payments due thereon.
The Company serves as master servicer for the Trust and, accordingly,
forwards payments received on account of the Auto Loans held by the Trust to the
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 transfer of the Auto Loans to the Trust constitutes a sale of the underlying
Auto Loans, no liability is created on the Company's Consolidated Financial
Statements. However, the Company has the obligation to repurchase the Auto Loans
from the Trust in the event that certain representations made with respect to
the transferred Auto Loans are breached or in the event of certain defaults by
the Company, as master servicer. The Class A certificates received a rating of
Aaa and AAA from Moody's Investors Service, Inc. and Standard and Poor's,
respectively. The Class B certificates were not rated. In connection with the
securitizations, the Auto Loan Division received funds substantially equal to
the Class A certificates' percentage of the total principal amount of the Auto
Loans transferred to the Trust. The Company has no plans for another
securitization of its Auto Loans at this time.
Servicing, Collection and Delinquencies
The Company's borrowers are expected to remit their monthly payments
using the payment coupon book provided to them at the time the credit is
extended. Consequently, the Company does not issue monthly statements to
borrowers. If a payment is not received within five days after its due date, the
Company telephones the borrower, and attempts to maintain weekly contact
thereafter until the loan is brought current. If a payment is not received
within 11 days after its due date, the borrower is sent a right to cure letter.
In certain instances, the automobile is picked up and stored by the Company
after the right to cure letter has been received and the cure period has
expired. After 30 days, the branch manager contacts the borrower. After 45-60
days, at the discretion of the branch manager, the Company generally repossesses
the automobile. In certain instances, borrowers are permitted to recover their
repossessed vehicles if they cure defaults under their loan.
Repossessed automobiles are usually offered for sale by the Company
through independent dealers. If such efforts are unsuccessful, the automobiles
are sold at public auction. The time between repossession and public sale
generally ranges from one to six months. The amount of repossessed automobiles
held by the Company at December 31, 1995 and 1996 was $675,000 and $1,761,000,
respectively. The value is determined based on the lower of carrying value or
the NADA wholesale value.
The following table illustrates the Company's delinquency and
charge-off experience with respect to Auto Loans:
AUTO LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Serviced Auto Loan delinquencies:
30-59 days past due 2.80% 2.29% 9.39% 11.30%
60-89 days past due 1.02 .79 2.68 3.90
Over 90 days past due 5.69 .64 .77 1.90
Serviced Auto Loans charged off, net, as a % of
average serviced Auto Loans 5.03 2.53 3.68 9.65
Serviced Auto Loans charged off, net $ 260 $ 183 $ 481 $ 2,053
Serviced Auto Loans 6,011 8,483 17,673 22,033
Average serviced Auto Loans 5,179 7,247 13,078 21,277
Outstanding Auto Loans (Balance Sheet) 6,011 8,483 17,673 13,915
</TABLE>
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LOANS RECEIVABLE/LOAN SALES
The Company's loans receivable held for investment at December 31,
1994, 1995, and 1996 totaled $91.7 million, $103.9 million and $89.5 million,
respectively. Consistent with the Company's "high velocity" capital strategy,
the Company has sold a substantial majority of the loans it has originated
through whole Mortgage Loan sales, sales of SBA Loan participation's and through
the securitization of approximately $17.1 million and $17.5 million of the
unguaranteed portion of SBA Loans in June 1995 and November 1996, respectively,
and $16.1 million of Auto Loans in March 1996.
Mortgage Loans
The Company retains in its portfolio the Mortgage Loans originated in
South Carolina, which are originated pursuant to the same underwriting criteria
as the Company's other Mortgage Loans. The Company has historically retained
these Mortgage Loans in its portfolio for several reasons. The interest income
provided by these Mortgage Loans has created a positive interest margin when
matched against the interest expense associated with the Debentures (which are
short-term obligations constituting a low cost source of funds for the Company).
Furthermore, these Mortgage Loans provide a relatively stable, recurring source
of cash flow. Finally, these Mortgage Loans provide the Company with an existing
source of loans which may be sold should the Company determine that they were
needed to complete a pool of Mortgage Loans then being marketed for sale.
Beginning in 1994, the Company began selling its Mortgage Loans
originated outside of South Carolina. For the years ended December 31, 1995 and
1996, the Company sold $127.6 million and $284.8 million, respectively, of
Mortgage Loans. The Mortgage Loans which are sold are generally packaged in
pools of approximately $20 million and sold through a bidding process.
Purchasers of Mortgage Loan pools are typically large financial institutions.
See "Mortgage Loan Division-Sale of Mortgage Loans."
To date, the Company has not securitized Mortgage Loans, principally
because the Company was more familiar with the whole loan sale process, which
was a profitable and economical means of converting such loans to cash. However,
based on its experience with the securitizations of the Small Business and Auto
Loans, the Company believes that securitization of Mortgage Loans is potentially
more profitable than whole loan sales and expects to pursue Mortgage Loan
securitizations beginning in 1997.
Small Business Loans and Auto Loans
The Company sells all of its SBA Loan Participations in the secondary
market, and in connection with such sales, has received cash premiums, in
addition to servicing revenue, of approximately 10%. For the years ended
December 31, 1994, 1995 and 1996, SBA Loan Participations sold totaled $31.2
million, $25.4 million, and $33.1 million, respectively. Prior to June 1995, the
Company retained the unguaranteed portion of its SBA Loans in its loan
portfolio, principally because these loans were profitable investments and
because there was not a ready market into which these loans could be sold.
However, in June 1995 and in November 1996, the Company completed the
securitization of approximately $17.1 and $17.5 million of the unguaranteed
portion of SBA Loans. The Company expects to continue to pursue additional
securitizations of its Small Business Loans in the future.
Historically, the Company has also retained in its loan portfolio all
of its Auto Loans, principally because these loans were profitable investments
and because there was not a ready market into which these loans could be sold.
However, in March 1996, the Company completed the securitization of
approximately $16.1 million of Auto Loans. The Company may securitize additional
Auto Loans in the future if loan volume and market conditions are deemed
favorable, but currently has no plans to do so.
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The Company did not securitize Small Business or Auto Loans prior to
1995, principally because it did not have the critical volume of Small Business
Loans or Auto Loans necessary to comprise a profitable securitization.
COMPETITION
The financial services industry, including the markets in which the
Company operates, is highly competitive. Competition is based on the type of
loan, interest rates, and service. Traditional competitors in the financial
services industry include commercial banks, credit unions, thrift institutions,
credit card issuers, consumer and commercial finance companies, and leasing
companies, many of which have considerably greater financial and marketing
resources than the Company. Moreover, substantial national financial services
networks have been formed by major brokerage firms, insurance companies,
retailers and bank holding companies. The Company believes that it competes
effectively by providing competitive rates, and efficient, complete services.
The Company faces significant competition in connection with its
Mortgage Loan operation, principally from national companies which focus their
efforts on making mortgage loans to non-prime borrowers. These competitors
include The Money Store, Inc., Ford Consumer Finance Company, Associates First
Capital Corporation, Cityscape Financial Corp., Aames Financial Corporation,
Southern Pacific Funding Corporation, United Companies Financial Corporation,
and ContiFinancial Corporation. Each of these companies has considerably greater
financial and marketing resources than the Company. Although these large
national companies compete in the mortgage loan industry, the industry, as a
whole, is highly fragmented and no one company has a large percentage of the
total mortgage loan market. The Company attempts to maintain its competitiveness
by establishing strong relationships with Mortgage Bankers and establishment of
retail operations through direct mail marketing efforts. Although the Company
believes that it has been successful in this regard, in the event that the
Company's competitors are able to weaken the relationships between the Company
and its Mortgage Bankers, including the Strategic Alliance Mortgage Bankers, the
Company's operations would be materially and adversely affected.
The Company faces significant competition in all markets in which it
makes Small Business Loans. The Company's major competitors vary from region to
region. However, its primary competitors are small independent banks and large
companies such as The Money Store, AT&T Capital Corporation and Heller First
Capital. Because SBA Loan interest rates and terms offered by lenders are
relatively uniform, the Company believes that the principal source of
competition in making SBA Loans relates to the quality of service provided by
the lender and the relationships established with the borrower. In addition, the
Company believes that it is important to maintain good relations with the
commercial loan referral sources, who are a significant source of SBA Loan
originations.
The consumer finance business, and the Auto Loan business in
particular, is highly competitive. Because the Company's Auto Loan business is
limited to a particular area of the consumer finance industry and because the
Company's customer base consists of individuals who generally do not have access
to other traditional sources of consumer credit, the Company usually does not
compete directly with banks, savings and loan associations, financing
subsidiaries of manufacturers and retailers of automobiles, and other
traditional consumer financing sources with respect to Auto Loans. However, in
each market where the Company operates, there are generally a number of other
non-prime lenders that compete for the Auto Loans, including local finance
companies. Certain of these non-prime lenders are larger and have greater
resources than the Company. These companies include First Merchants Acceptance
Corporation and Regional Acceptance Corporation. Furthermore, the Company
believes that conventional lenders are increasingly seeking to operate in the
non-prime consumer market. Such additional competition could have a material
adverse effect on the Company and its ability to attract customers. The Company
believes that
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<PAGE> 24
the principal basis for competition in the Auto Loan business are the monthly
payment amount, the speed of the credit determination process and the general
level of service provided to the Dealers. Accordingly, the Company believes that
it is important that it maintain good relationships with its associated Dealers.
REGULATION
General
The Company's operations are subject to extensive local, state and
federal regulations including, but not limited to, the following federal
statutes and regulations promulgated thereunder: the Small Business Act, the
Small Business Investment Act of 1958, as amended (the "SIB"), Title 1 of the
Consumer Credit Protection Act of 1968, as amended (including certain provisions
thereof commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal
Credit Opportunity Act of 1974, as amended (the "ECOA"), the Fair Credit
Reporting Act of 1970, as amended (the "FCRA"), the Fair Debt Collection
Practices Act, as amended, the Real Estate Settlement Procedures Act (the
"RESPA") and the National Housing Act, as amended. In addition, the Company is
subject to state laws and regulations with respect to the amount of interest and
other charges which lenders can collect on loans (e.g. usury laws).
Although most states do not regulate commercial loans, a few states do
require licensing of lenders, limitations on interest rates and other charges,
adequate disclosure of certain contract terms and limitations on certain
collection practices and creditor remedies. Authorities in those states that
regulate the Company's SBA Loan activities may conduct audits of the books,
records and practices of the Company. The Company is licensed to do business in
each state in which it does business and in which such licensing is required and
believes it is in compliance in all material respects with these regulations.
The Company is also required to comply with certain portions of the ECOA which
are applicable to commercial loans, including SBA Loans.
In the opinion of management, existing statutes and regulations have
not had a materially adverse effect on the business done by the Company.
However, it is not possible to forecast the nature of future legislation,
regulations, judicial decisions, orders or interpretations, nor their impact
upon the future business, financial condition or prospects of the Company.
The Company believes that it is in substantial compliance with state
and federal laws and regulations governing its lending activities. However,
there can be no assurance that the Company will not inadvertently violate one or
more of such laws and regulations. Such violations may result in actions for
damages, claims for refunds of payments made, certain fines and penalties,
injunctions against certain practices, and the potential forfeiture of rights to
repayment of loans. Further, adverse changes in the laws or regulations to which
the Company's business is subject, or in the interpretation thereof, could have
a material adverse effect on the Company's business.
Mortgage Loans
Mortgage lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of loans,
adequate disclosure of certain contract terms and limitations on certain
collection practices and creditor remedies. Many states have usury laws which
limit interest rates, although the limits generally are considerably higher than
current interest rates being charged by the Company. State regulatory
authorities may conduct audits of the books, records and practices of the
Company's operations. The Company is licensed to do business in each state in
which it does business and in which such licensing is required and believes it
is in compliance in all material respects with these regulations.
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<PAGE> 25
The Company's Mortgage Loan origination activities are subject to TILA.
TILA contains disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including any refinanced mortgage or junior mortgage loan
on a consumer's primary residence. The Company believes that it is in
substantial compliance in all material respects with TILA.
The Company is also required to comply with the ECOA, which, in part,
prohibits creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status. ECOA restricts creditors from obtaining
certain types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants who are turned down for credit of the reasons therefor. In
instances where a loan applicant is denied credit or the rate or charge for a
loan is increased as a result of information obtained from a consumer credit
agency, another statute, the FCRA, requires the lender to supply the applicant
with the name and address of the reporting agency. Under RESPA, disclosures to
certain borrowers are required to be made within prescribed time frames. Good
faith estimates of applicable closing costs are also required. The Company
believes that it is in substantial compliance in all material respects with
ECOA.
Small Business Loans
The SBA Loans made by the Small Business Loan Division are governed by
federal statutes (the Small Business Act and SBA regulations) and may be subject
to regulation by certain states. These federal statutes and regulations specify
the types of loans and loan amounts which are eligible for the SBA's guaranty as
well as the servicing requirements imposed on the lender to maintain SBA
guarantees.
The Company is also required to comply with certain portions of ECOA
which are applicable to commercial loans, including SBA Loans. The Company must
comply with ECOA's prohibition against discrimination on the basis of race,
color, sex, age or marital status and with the portion of Regulation B under the
ECOA that requires lenders to advise loan applicants of the reasons their credit
request was declined or subject to other adverse action. The Company believes it
is in substantial compliance in all material respects with ECOA.
The SBA is proposing to modify its rules regarding the financing and
securitization of the unguaranteed portion of loans guaranteed under Section
7(a) of the Small Business Act. Present regulations provide these options only
to non-depository lenders. These proposed rules would permit both depository and
non-depository lenders to pledge or securitize the unguaranteed portions of SBA
Loans. Under the proposal, participating lenders which undertake securitizations
would be required to retain the equivalent of at least 5% interest in each loan.
The proposed rules would also increase the amount of required minimum equity for
Small Business Lending Companies by 8% of the retained tranche, unless the
lender puts up a 5% cash reserve. The proposed regulations will reduce the
economic benefits of securitization to the Company, and could also impact
liquidity of the Company and availability of funding. However, management
believes that securitization of its SBA Loans will still be economical, and that
it will have sufficient availability of funding. However, many uncertainties
could impact the outcome of this forward-looking statement, and no assurance can
be made that actual results will not differ materially.
The Company's Asset-based Small Business Loans are generally not
regulated except to the extent set forth above in "Regulation-General."
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Auto Loans
The Company's Auto Loan business is subject to extensive supervision
and regulation under state and federal laws and regulations, which, among other
things, require that the Company obtain and maintain certain licenses and
qualifications, regulate the interest rates, fees and other charges the Company
is allowed to charge, limit or prescribe certain other terms of the Company's
loans, require specified disclosures to consumers, govern the sale and terms of
insurance products offered by the Company and the insurers for which it acts as
agent, and define the Company's rights to repossess and sell collateral.
The Company's Auto Loan business is currently limited to South Carolina
and is therefore subject to certain South Carolina laws and regulations,
including the South Carolina Consumer Protection Code (the "SC Code"). With
respect to their direct lending activities, Premier and Loan Pro$ are each
licensed under the SC Code as a "supervised lender" (a lender making consumer
loans at interest rates in excess of 12% per annum), subject to regulation by
the Consumer Finance Division of the State Board of Financial Institutions and
by the South Carolina Department of Consumer Affairs. These state regulatory
agencies audit the Company's local offices from time to time, and each state
agency performs an annual compliance audit of the Company's operations.
The SC Code and the regulations thereunder generally do not limit the
finance charges that may be contracted for with respect to loans having a cash
advance exceeding $600, but require supervised lenders to file schedules showing
maximum finance charges for each category and amount of supervised loans. Such
schedules must express finance charges in terms of annual percentage rates
determined in accordance with TILA, and must be conspicuously posted in each
location where loans are originated in the format and with certain notices set
forth in regulations promulgated under the SC Code. The SC Code and regulations
thereunder also, among other things, limit or regulate closing costs, insurance
premiums, delinquency, deferral, refinancing, consolidation and conversion fees
and other additional charges which may by assessed in connection with consumer
loans, prescribe certain disclosures and notices to borrowers and cosigners,
prescribe maximum repayment terms for loans of $1,000 or less, define and limit
creditors' remedies on default, and prescribe certain record-keeping and
reporting procedures and requirements, and regulate other aspects of consumer
finance transactions, including permitted collateral, application of payments,
limits on scheduled balloon payments, rebates on repayments, certain terms,
disclosures and formalities in the loan contract, and other matters.
The SC Code contains provisions similar to the foregoing which are
applicable to consumer credit sale transactions in which a consumer's purchase
of goods or services is financed by the seller or by the seller's assignment of
the retail installment sale contract to another lender. These provisions are
applicable to the Company's indirect financing of automobile purchases. The SC
Code provides that the seller effecting the credit sales, and does not impose on
the assignee any obligation of the seller with respect to events occurring
before the assignment. However, upon the assignment, the Company is subject to
the provisions governing credit sales. The Company believes that it and the
dealers from which it accepts assignment of consumer loans are in substantial
compliance with the provisions of the SC Code governing credit sales.
The Company's Auto Loan business is also subject to extensive federal
regulations in connection with its consumer loans, including TILA, ECOA and FCRA
and the regulations thereunder, and certain rules of the Federal Trade
Commission. These laws and regulations are referenced above under " - Regulation
- - Mortgage Loans." The Company's Auto Loan business is also subject to the rules
of the Federal Trade Commission, which limit the types of property a creditor
may accept as collateral to secure a consumer loan and provide for the
preservation of the consumer's claims and defenses when a consumer obligation is
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<PAGE> 27
assigned to a subsequent holder. The Company believes that it is in substantial
compliance in all material respects with TILA, ECOA, FCRA and the Federal Trade
Commission rules.
EMPLOYEES
At December 31, 1996, the Company employed a total of 477 full-time
equivalent employees. The Company believes that its relations with its employees
are good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 15 South Main Street, Suite
750, Greenville, South Carolina and are leased. The Company owns three locations
and leases 23 locations. None of the leases or properties owned is believed to
be material to the Company's operations. The Company believes that its leased
and owned locations are suitable and adequate for their intended purposes. The
Company would expect to lease or purchase any properties necessary for any
expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to
various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or any of its subsidiaries that, if determined adversely, would have a
materially adverse effect on the operations, profitability or financial
condition of the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's 1996 fiscal year.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Information about the market for the Company's Common Stock and related
security holder matters on page 46 of the Company's Annual Report to the
Shareholders for the year ended December 31, 1996 is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data included on page 1 of the Company's Annual
Report to Shareholders for the year ended December 31, 1996 is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 9 through 18 in the Company's Annual Report to
the Shareholders for the year ended December 31, 1996, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated
financial statements of the Company and its subsidiaries included on pages 21
through 45 in the Company's Annual Report to the Shareholders for the year
ended December 31, 1996 are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 26, 1996, the Company decided to dismiss Elliott Davis &
Company, L.L.P. ("ED&C") and to engage KPMG Peat Marwick LLP ("KPMG") as the
Company's independent auditors for the 1996 fiscal year. ED&C has served as the
Company's principal accountants since 1993. The change in auditors resulted from
the Company's decision that it was in the Company's best interest to utilize a
national accounting firm, with its attendant size, experience, and expertise.
In connection with its audits for the past two fiscal years and for the
interim period through August 26, 1996, there have been no disagreements between
the Company and ED&C on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the auditors, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report. Moreover, ED&C reports as principal auditor of the
financial statements of the Company for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles.
The Audit Committee of the Board of Directors and the Board of
Directors of the Company have approved this change of accounting firms.
ED&C has furnished to the Company a letter addressed to the Commission
stating that it agrees with the above statements. A copy of that letter dated
September 5, 1996, is filed as Exhibit 16.1.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is included in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on May 27, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on May 27, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is included in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on May 27, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Company's
Definitive Proxy Statement for the Annual Meeting of the Shareholders scheduled
to be held May 27, 1997, and is incorporated herein by reference.
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<PAGE> 30
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
3.1-- Amended and Restated Articles of Incorporation dated September 20,
1978: Incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1, Commission File No. 2-62723 (the
"1978 Registration Statement").
3.2-- Articles of Amendment as filed with the Secretary of State of South
Carolina on June 5, 1984: Incorporated by reference to Item 6(a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1984, Commission File No. 0-8909.
3.3-- Articles of Amendment as filed with the Secretary of State of South
Carolina on December 27, 1985: Incorporated by reference to Current
Report on Form 8-K dated January 2, 1986, Commission File No. 0-8909.
3.4-- Articles of Amendment as filed with the Secretary of State of South
Carolina on August 23, 1991: Incorporated herein by reference to
Quarterly Report on Form 10-Q for the quarter ended September 30, 1991,
Commission File No. 0-8909.
3.5-- Restated by-laws: Incorporated by reference to Exhibit 3.2 of the 1978
Registration Statement.
3.6-- Amendment to Bylaws: Incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended September 30, 1991, Commission File No.
0-8909).
3.7-- Form of Warrant: Incorporated herein by reference to the Company's
Report on Form 10-K for the year ended December 31, 1985, File No.
0-8909.
3.8-- Articles of Amendment as filed with the Secretary of State of South
Carolina on April 19, 1996: Incorporated by reference to Exhibit 3.1 in
the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
Commission File No. 0-8909.
3.9-- Articles of Amendment as filed with the Secretary of State of South
Carolina on May 26, 1989: Incorporated by reference to Exhibit 4.8 of
the Company's registration statement on Form S-8, Commission File No.
333-07923.
3.10-- Articles of Amendment as filed with the Secretary of State of South
Carolina on June 14, 1995: Incorporated by reference to Exhibit 4.9 of
the Company's registration statement on Form S-8, Commission File No.
333-07923.
4.1-- See Exhibits 3.1 through 3.7.
10.1-- Emergent Group, Inc. Stock Option Plan: Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Commission File No. 333-01393.
10.2-- 1995 Officer and Employee Stock Option Plan: Incorporated by reference
to Exhibit 10.1 of the Company's 1995 Notice of Annual Meeting and
Proxy Statement, Commission File No. 0-8909.
10.3-- 1995 Director Stock Option Plan: Incorporated by reference to an
exhibit filed with the Company's 1995 Notice of Annual Meeting and
Proxy Statement.
10.4-- 1995 Restricted Stock Agreement Plan: Incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1,
Commission File No. 333-01393.
10.5-- Loan and Security Agreement dated December 19, 1995 between BankAmerica
Business Credit, Inc. and The Loan Pro$, Inc., and Premier Financial
Services, Inc.: Incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1, Commission File No.
333-01.
10.6-- Loan and Security Agreement, as amended by Amendment No. 1 dated April
10, 1995 between BankAmerica Business Credit, Inc. and Premier
Financial Services, Inc.: Incorporated by reference to Exhibit 10.6 of
the Company's Registration Statement on Form S-1, Commission File No.
333-01393.
10.7-- Loan and Security Agreement, as amended by Amendment Nos. 1, 2 and 3
dated December 29,1993 between NationsBank of Georgia and Emergent
Business Capital, as amended: Incorporated by reference to Exhibit 10.7
of the Company's Registration Statement on Form S-1, Commission File
No. 333-01393.
10.8-- Loan and Security Agreement dated October 10, 1995 between NationsBank
of Georgia and Emergent Commercial Mortgage, as amended: Incorporated
by reference to Exhibit 10.8 of the Company's Registration Statement on
Form S-1, Commission File No. 333-01393.
30
<PAGE> 31
10.9-- Mortgage Loan Warehousing Agreement dated November 22, 1994 between
First Union National Bank of North Carolina and Carolina Investors,
Inc. as amended by Amendments No. 1, 2, 3, and 4: Incorporated by
reference to Exhibit 10.9 of the Company's Registration Statement on
Form S-1, Commission File No. 333-01393.
10.10-- Mortgage Loan Warehousing Agreement dated March 6, 1996 between First
Union National Bank of North Carolina and Emergent Mortgage Corp., as
amended: Incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
Commission File No. 0-8909.
10.11-- The Pooling and Servicing Agreement dated as of June 29, 1995 between
Emergent Business Capital, nc. as Seller and Servicer, and First Union
National Bank of North Carolina, as Trustee: Incorporated by reference
to Exhibit 28.1 to the Company's Current Report on Form 8-K dated June
29, 1995, Commission File No. 0-8909.
10.12-- Certificate Purchase Agreement between the Placement Agent, as initial
purchaser, and the Company: Incorporated by reference to Exhibit 28.1
to the Company's Current Report on Form 8-K dated June 29, 1995,
Commission File No. 0-8909.
10.13-- Loan and Security Agreement dated May 31, 1996, between NationsBank,
N.A. (South) and Emergent Financial Corporation. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.
10.14-- Amendment No. 1 to Loan and Security agreement dated October 10, 1995,
between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage,
Inc. Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
10.15-- Amendment Number 4 to Loan and Security Agreement dated December 29,
1993, between NationsBank of Georgia and Emergent Business Capital,
Inc. Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
10.16-- Amendment No. 5 to Loan and Security Agreement dated December 29, 1993
between NationsBank of Georgia and Emergent Business Capital, Inc.
Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, Commission File No. 333-01393.
10.17-- Amendment No. 2 to Loan and Security Agreement dated October 10, 1995,
between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage,
Inc. Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Commission File No. 333-01393.
10.18-- Amendment Nos. 5, 6, and 7 to Mortgage Loan Warehousing Agreement dated
March 6, 1996 between First Union National Bank of North Carolina and
Carolina Investors, Inc. Incorporated by reference to Exhibit 10.18 to
the Company's Registration Statement on Form S-1, Commission File No.
333-01393.
10.19-- Amendent Nos. 3 and 4 to Mortgage Loan Warehousing Agreement dated
February 4, 1997, and March 5, 1997, respectively, between First Union
National Bank of North Carolina and Emergent Mortgage Corp.
10.20-- Interim Warehouse and Security Agreement dated March 4, 1997, between
Prudential Securities Credit Corporation and Emergent Mortgage Corp.
10.21-- Emergent Group, Inc. Employee Stock Purchase Plan: Incorporated by
reference to Exhibit 99.1 of the Company's registration statement on
Form S-8, Commission File No. 333-20179.
11.1-- Statement re. computation of earnings per share.
13.0-- The Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1996. (Only those portions specifically incorporated by
reference into this report shall be "filed" with the Securities and
Exchange Commission).
16.1-- Letter of Elliott, Davis & Company, L.L.P. dated September 5, 1996.
Incorporated by reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K dated August 26, 1996, Commission File No. 0-8909.
21.0-- Listing of subsidiaries.
23.1-- Report of Independent Auditors (Elliott, Davis & Company, L.L.P.) for
each of the two years in the period ended December 31, 1995.
23.2-- Consent of KPMG Peat Marwick LLP to include report of Independent
Auditors for the year ended December 31, 1996, in the: (1) Company's
registration statement on Form S-8 dated July 11, 1996, for the
Emergent Group, Inc. 1995 Employee and Officer Stock Option Plan,
Commission File No. 333- 07923; (2) Company's registration statement on
Form S-8 dated July 11, 1996, for the Emergent Group, Inc. Restricted
Stock Agreement Plan, Commission File No. 333-07927; (3) Company's
registration
31
<PAGE> 32
statement on Form S-8 dated July 11, 1996, for the Emergent Group, Inc.
1995 Director Stock Option Plan, Commission File No. 333-07925; and (4)
Company's registration statement on Form S-8 dated February 14, 1997,
for the Emergent Group, Inc. Employee Stock Purchase Plan, Commission
File No. 333-20179.
27.1-- Financial Data Schedule (For SEC Use Only).
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
None
32
<PAGE> 33
CORPORATE PROFILE
================================================================================
Emergent Group, Inc. is a diversified financial services company which
originates and services residential mortgage loans, small business loans, and
pre-owned automobile loans. During 1994, 1995 and 1996, loan originations were
$150 million, $250 million and $415 million respectively. Of the Company's loan
originations in 1996, $329 million were Mortgage Loans, $68 million were Small
Business Loans and $18 million were Auto Loans. For the years ended December 31,
1994, 1995 and 1996 pre-tax income from continuing operations was $2.4 million,
$4.9 million and $10.5 million respectively. Strategically the similarities of
our businesses are more important than their differences. Each business has the
ability to meet critical requirements in consumer and commercial markets. Key
components of the Company's business strategy include:
- Emphasis on Profitability Rather than Asset Growth
- High Velocity Asset Turnover
- Conservative Financial Structure
- Decentralized Operations
- Multi-Channel Loan Originations
- Corporate Financial Controls, Servicing
and Quality Monitoring
[CHART]
1996 BUSINESS MIX BY LOAN ORIGINATIONS
The Rhino acts as our corporate symbol. He reminds us to take charge
of our lives, and business. He is determined to find success, no matter how
difficult. Our corporate pledge is to serve our industry and customers with the
single mindedness and determination of the hard charging rhino.
33
<PAGE> 34
SELECTED FINANCIAL HIGHLIGHTS
EMERGENT GROUP, INC. AND SUBSIDIARIES
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1992 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 9,008 $ 12,046 $ 18,195 $ 26,278 $ 50,388
INCOME (LOSS)FROM CONTINUING
OPERATIONS (249) 824 1,792 4,581 10,095
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS 685 260 546 (3,924) --
NET INCOME 436 1,197 2,338 657 10,095
INCOME (LOSS)PER SHARE FROM
CONTINUING OPERATIONS (.04) .13 .27 .69 1.42
NET INCOME PER SHARE .08 .18 .35 .10 1.42
=====================================================================================================================
SHAREHOLDERS' EQUITY $ 5,057 $ 7,362 $ 9,700 $ 9,885 $ 46,635
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 70,359 $ 84,279 $ 109,448 $ 144,931 $ 224,149
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 65,302 $ 76,917 $ 99,748 $ 135,046 $ 177,514
(including minority interest)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
TO OUR SHAREHOLDERS
================================================================================
EMERGENT GROUP, INC.
Dear Fellow Shareholders:
This past year was a rewarding and exciting one for our Company. Pre-tax income
from continuing operations increased 116% from $4.9 million to $10.5 million.
Revenues increased 92%, to $50.4 million. Emergent's profits are driven
primarily by loan originations which went from $250 million in 1995 to $415
million in 1996, an increase of 66%.
[CHART] [CHART]
One highlight was the successful completion of a common stock offering in
November. As part of a 3,000,000 share offering, the Company sold 2,519,031
shares at $11.50 with the remainder being sold by existing shareholders, none
of which were sold by management. This raised $26.4 million (net of offering
expenses) for the Company. Our 1996 year-end shareholders' equity stands at
$46.6 million, with a year-end equity to assets ratio of 20.8%. The Company is
now well capitalized to implement its expansion plans for 1997.
To further management's focus on increasing shareholder value, we adopted a
financial planning and evaluation system, Economic Value Added ("EVA") EVA
accounts for the cost of equity capital used, thereby requiring management to
seek returns greater than this cost. By the end of 1997, we will have
implemented EVA throughout the Company's operations. This should help to ensure
better alignment of capital allocation and investment, business unit
evaluation, and incentive compensation to fundamental long-term changes in
shareholder value.
The Company's Management Information Systems area received significantly greater
attention during 1996. In 1997 we expect to complete additional upgrades of our
loan processing and servicing software.
The Mortgage Loan Division continued its rapid expansion. The Company initiated
retail loan originations in April with the opening of an Indianapolis, Indiana
office which operates under the name HomeGold(TM). Retail loan production
offices were also opened in Phoenix, Arizona and Greenville, South Carolina. A
second distinct retail operation was also initiated, operating under the name
Sterling Lending Corporation. It has a loan processing office in Baton Rouge,
Louisiana with origination offices in New Orleans, Louisiana; Atlanta, Georgia;
Jacksonville, Florida and Jackson, Mississippi. The Company has also continued
the expansion of its wholesale mortgage division through three regions. Total
mortgage loan originations were $329 million, a 70% increase over 1995
originations.
A new customer service program was added for our mortgage loan customers.
Non-prime borrowers have typically experienced debt payment problems usually
related to the excessive use of unsecured debt, primarily credit cards. The
Mortgage Loan Division's servicing department has a group dedicated to assisting
borrowers in improving their credit status which is done through helping to
educate them with better planning, spending discipline, and emphasis on reducing
the use of personal debt. This Real Rewards(TM) program includes interest rate
reduction rewards for borrowers who have maintained a good payment history. It
is hoped that this will be of value to our customers in reducing financial
stress, and also be of value to us as we anticipate reduced portfolio
delinquencies, lower foreclosure rates and the creation of a marketing
advantage.
35
<PAGE> 36
===============================================================================
The Small Business Loan Division added two new loan products to complement our
U.S. Small Business Administration 7(a) term loan program. One product provides
working capital for small businesses through a revolving line of credit secured
primarily by accounts receivable and inventory. The second product is mezzanine
loans which we began making in February 1996 through one of the funds we manage,
and in which we have a $1 million equity investment. These are subordinated term
loans to small businesses with warrants to purchase stock. The target borrowers
are small businesses which normally have positive cash flow from operations but
require capital to expand.
The Auto Loan Division had a disappointing year. Delinquencies increased which
required larger loan loss provisions. Expansion has been curtailed so that the
offices can concentrate on collection activity and asset quality rather than
origination growth.
OPERATIONS STRATEGY
Our operations strategy continues to include significant market expansion of our
two core divisions.
Mortgage Loan Division
1. Continued channels of diversified loan originations, including
wholesale and retail production. Wholesale includes loans which are
made through mortgage brokers and strategic alliance partners. In
selected cases, we obtain minority ownership positions with our
strategic alliance partners.
2. Regional underwriting backed by a centralized system of quality
control checks.
3. Rapid asset turnover through whole loan sales and securitizations.
4. Emphasis on loan servicing to maintain good collection experiences and
to counsel borrowers, as appropriate, on how to improve their
financial affairs.
Small Business Loan Division
1. Geographic expansion of office locations.
2. Consideration of additional product related opportunities.
3. Joint marketing of multiple products to a larger referral base.
FINANCIAL STRATEGY
Our financial strategy is focused on increasing shareholder value. Our primary
objective is to concentrate on products with significant margin and to maintain
an aggressive asset turnover rate, to minimize increasing the level of assets
while growing equity.
[CHART] [CHART]
36
<PAGE> 37
================================================================================
To better prepare for continued growth, the Company made three key management
changes in 1996. Robert Davis, formerly Chief Financial Officer, was elected
Vice President Administration with responsibilities for human resources and
shareholder relations. This was a critical appointment that will help ensure
both competitive employee programs and quality communication with our
shareholders. Kevin Mast was promoted to Vice President, Chief Financial Officer
and Treasurer. Kevin has been instrumental in developing our accounting and
financial control systems and is the driving force behind our loan
securitizations. Additionally, we have added Sam Couvillion as Chief Operating
Officer, Small Business Loan Division. Sam comes to us with a solid commercial
banking background which will be valuable as we continue the rapid expansion of
this division. We all share a common vision of profitable growth based on real
value service to our customers.
CLOSING
We are thankful to all our shareholders, associates and customers who make our
progress possible. Emergent has a wonderful "can do" culture with a high sense
of ethics. We pride ourselves on doing what we say we will do.
Our Board continues to be a great source of wisdom and guidance. As significant
shareholders, they have a focused view on management's responsibility to
shareholders.
Our friend and fellow director, Jake Martin, is retiring from the Board this
year. Jake made a special contribution to Emergent when we first started.
Jake was president of a company which was a significant shareholder in the
Company when we acquired control in 1991. He pledged to hold onto this stock and
support our efforts to give us time to get started. For that, and all of his
valued advise, we will always be thankful. At the request of the Board of
Directors, Mr. Martin has agreed to serve as Director Emeritus.
We are optimistic about 1997 and future years. The mortgage market is large,
growing and consolidating. We also have a great opportunity to increase market
share. The small business lending market is also dynamic. Continuing
consolidation of commercial banks creates opportunities for smaller, more
specialized lenders.
Thanks again to all our old and new shareholders for your support. We pledge our
best efforts to continually earn and retain your trust.
Sincerely,
John M. Sterling, Jr. Keith B. Giddens
Chairman of the Board President and Chief Operating Officer
and Chief Executive Officer
37
<PAGE> 38
EMERGENT GROUP TODAY
===============================================================================
EMERGENT GROUP, INC. AND SUBSIDIARIES
MORTGAGE LOAN DIVISION
The Mortgage Loan Division experienced excellent revenue growth in 1996, up over
130% from 1995. The primary contributor to the growth was an increase in loan
originations. Originations are derived from two distribution channels which
consist of retail (point of sale directly to the borrower) and wholesale (point
of sale to a mortgage broker along with Strategic Alliance having the point of
sale to a mortgage banker with delegated credit underwriting).
The sub-prime mortgage market exceeds $100 billion in annual originations. There
is significant competition; however, the market is highly fragmented and not
dominated by any one competitor.
Sub-prime borrowers are typically credit impaired and are unable to receive
loans from traditional mortgage lenders. In general, a large portion of the
borrowers have overextended themselves with unsecured debt. However, the equity
in their homes may be utilized to consolidate their debt and reduce their
monthly expenses with lower interest rates and extended terms.
At the retail level, originations are dominated by thousands of small local
brokers. Emergent therefore has approached this market with a multi-faceted
distribution strategy.
The two retail production channels operate under the names HomeGold(TM) and
Sterling Lending Corporation. They approach their market with a different
marketing and sales strategy. Retail loan production began in April with the
opening of the first HomeGold(TM) production office in Indianapolis, Indiana and
is currently operating out of three regional centers. Sterling Lending later
opened its first retail office in Baton Rouge, Louisiana and is currently
operating out of five offices. In the fourth quarter the retail channel
represented 43% of total Mortgage Loan Division originations. There are plans to
open additional loan offices for both retail production channels during 1997.
The wholesale loan distribution channel has expanded from two states at the
start of the year to twelve states at year end. The number of approved mortgage
brokers increased over the same time frame from 172 to 330. There are presently
three regions for the wholesale group with plans for an additional region to be
established later in 1997.
The strategic alliance part of the wholesale channel lost its largest loan
producer in 1996 due to that firm's sale to a commercial bank holding company.
However, the Company has expanded the channel coverage with two strategic
alliance partners signed in the fourth quarter of 1996, bringing the total
number of strategic alliance partners to five. Additional strategic alliance
partners are being added in 1997. The Company has minority ownership positions
in four of its strategic alliance partners.
The Mortgage Loan Division centralized its servicing and portfolio management
departments during the fourth quarter. These departments have also been expanded
nearly four-fold over the past year to meet the increased processing and
servicing requirements resulting from the increased loan originations.
Significant changes in the quality control and compliance related areas of the
Mortgage Loan Division have been made over the past year. Included among these
changes is a quality control secondary marketing group which reunderwrites
mortgage loan production and ensures the underwriting standards and policies of
the Company are properly administered. The Company is anticipating completion of
its first mortgage loan securitization during the first quarter of 1997.
Emergent has adopted the slogan "The Power to Be Debt Free" as a theme,
encouraging borrowers to become less dependent on high interest rate personal
and credit debt. Servicing and counseling departments have begun training and
assisting borrowers with their personal financial matters. This is a genuine
concern which the Company feels is unique within the market. Operating under
Real Rewards(TM) this part of servicing is believed by management to be a
competitive advantage.
MORTGAGE LOAN
PRODUCTION MIX
(IN MILLIONS
[GRAPH]
MORTGAGE LOANS ORIGINATED
(IN MILLIONS)
[GRAPH]
MORTGAGE LOANS SERVICED
(IN MILLIONS AT YEAR END)
[GRAPH]
38
<PAGE> 39
EMERGENT GROUP TODAY
================================================================================
EMERGENT GROUP, INC. AND SUBSIDIARIES
SMALL BUSINESS LOAN DIVISION
The Small Business Loan Division had an excellent year with substantially
increased operating results. Additionally, an asset-based lending group was
started which allows for a broader product offering and incremental business
opportunities.
The primary contributor of the strong operating results was increased volume of
originations under the U.S. Small Business Administration ("SBA") 7(a) term loan
program. Emergent Business Capital, Inc. ("EBC") is the Company's Small Business
Lending Company subsidiary. It has a grandfathered Small Business Lending
Company license which permits it, as a non-bank, to make SBA loans. Industry
sources reported that in terms of dollar volume of loan approvals, EBC was the
seventh largest SBA lender, as of the SBA fiscal year ended September 30, 1996.
Typically, loans up to $1,500,000 are made to small businesses with the Company
obtaining a guaranty from the SBA for the lower of 75% or $750,000. After
closing and full loan disbursement, the guaranteed portion of the loan is sold
into an active secondary market. The non-guaranteed portions are retained until
a critical mass is obtained at which time they are pooled and sold through a
loan securitization. In November, the Company completed its second SBA loan
securitization totalling $17.5 million. Only two other lenders have successfully
securitized the unguaranteed portion of SBA loans. Securitization permits the
Company to redeploy its capital while maintaining the profitable loan servicing.
SBA loans are generally long term floating rate obligations secured by fixed
assets of an eligible small business. The borrower base is a diversified mix of
businesses including industries such as hospitality, restaurant, convenience
stores, manufacturing, and distribution. Regional loan production offices are
located in Dallas, Texas; Panama City, Florida; Denver, Colorado; and
Greenville, South Carolina. Loan servicing functions have been centralized in
Greenville. New regions contemplated for 1997 include the Upper Midwest and New
Jersey/Pennsylvania markets.
In July, Emergent Financial Corp., an asset-based lending group, was started in
Atlanta, Georgia. Emergent Financial Corp. offers short-term working capital
loans for small businesses, usually secured by accounts receivable and
inventory. Loan sizes typically range from $100,000 to $1 million. Further
geographic and market expansion is planned for this unit.
The Small Business Loan Division also serves as investment manager for a venture
capital partnership; Palmetto Seed Capital Fund Limited Partnership ("Palmetto")
and a mezzanine level partnership fund, Reedy River Ventures, L.P. ("RRV").
Palmetto provides equity capital for early stage companies headquartered in
South Carolina. RRV provides loans to later stage companies accompanied by
warrants to purchase equity. The Company has no capital invested in Palmetto and
has a $1 million investment in RRV. The Company receives fees for managing the
two funds.
Each of the Small Business Loan Division's products are targeted to businesses
that have limited access to traditional sources of credit. This non-traditional
credit market is highly fragmented and growing. The Company has an outstanding
opportunity to profitably expand its commercial business by marketing all three
products to key referral sources and by taking advantage of the fragmented
nature of this industry.
SMALL BUSINESS LOANS
ORIGINATED
(IN MILLIONS)
[GRAPH]
SBA LOANS ORIGINATED
AND NET INCREASE IN ASSET-BASED LOANS
SMALL BUSINESS LOANS
SERVICED
(IN MILLIONS, AT YEAR-END)
[GRAPH]
(SBA AND ASSET-BASED
LOANS)
39
<PAGE> 40
EMERGENT GROUP TODAY
===============================================================================
EMERGENT GROUP, INC. AND SUBSIDIARIES
AUTO LOAN DIVISION
The Auto Loan Division finances pre-owned automobile purchases through eight
offices in South Carolina. Substantially all of the loans are made directly to
borrowers through dealer referrals. In March the Company securitized $16.1
million of auto loans.
This division experienced slower growth and higher than anticipated charge-offs
in 1996. This is generally reflective of the recent trends that have occurred
within the sub-prime automobile finance industry as a whole.
The Company has implemented changes in its underwriting standards, loan pricing
and corporate controls to better access risks and improve the asset quality. At
this time, the Company has no plans to expand the Auto Loan Division.
AUTO LOANS ORIGINATED
(IN MILLIONS
[GRAPH]
AUTO LOANS SERVICED
(IN MILLIONS, AT YEAR-END)
[GRAPH]
40
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EMERGENT GROUP, INC. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<PAGE> 42
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ........................................... 2
Audited Consolidated Financial Statements
Consolidated Balance Sheets ................................... 3
Consolidated Statements of Income ............................. 5
Consolidated Statements of Shareholders' Equity ............... 6
Consolidated Statements of Cash Flows ......................... 7
Notes to Consolidated Financial Statements .................... 9
</TABLE>
-1-
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
EMERGENT GROUP, INC. AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of EMERGENT
GROUP, INC. AND SUBSIDIARIES as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of EMERGENT GROUP, INC. AND SUBSIDIARIES as of and for the
two years ended December 31, 1995, were audited by other auditors whose report
dated January 31, 1996, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
January 30, 1997
-2-
<PAGE> 44
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,260 $ 1,276
Restricted cash 912 5,319
Loans receivable:
Loans receivable 103,865 89,469
Mortgage loans held for sale 22,593 100,063
---------- ----------
Total loans receivable 126,458 189,532
Less allowance for credit losses on loans (1,874) (3,084)
Less unearned discount, dealer reserves, and deferrals, net of
deferred loan costs (610) (1,419)
---------- ----------
Net loans receivable 123,974 185,029
Other receivables:
Excess servicing receivable, net of allowance for loss of
$848 in 1996 2,054 4,315
Accrued interest receivable 1,571 2,087
Other receivables 1,626 4,459
---------- ----------
Total other receivables 5,251 10,861
Investment in asset-backed securities, net of allowance for
loss of $773 in 1995 and $354 in 1996 865 3,581
Net property and equipment 3,370 7,177
Excess of cost over net assets of acquired
businesses, net of accumulated amortization
of $597 in 1995 and $781 in 1996 2,865 2,722
Real estate and personal property acquired through
foreclosure 3,742 4,720
Other assets 2,692 3,464
---------- ----------
TOTAL ASSETS $ 144,931 $ 224,149
========== ==========
</TABLE>
-3-
<PAGE> 45
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Liabilities:
Notes payable to banks $ 31,633 $ 55,494
Subordinated investor savings:
Notes payable to investors 82,132 97,987
Subordinated debentures 16,185 16,115
---------- ----------
Total subordinated investor savings 98,317 114,102
Accounts payable and accrued liabilities 3,090 3,958
Remittances payable 1,188 3,519
Accrued interest payable 622 597
---------- ----------
Total other liabilities 4,900 8,074
---------- ----------
Total liabilities 134,850 177,670
Minority interest 196 (156)
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 a share - authorized
4,000,000 shares in 1995 and 30,000,000 shares in 1996,
issued and outstanding 121,000 shares in 1995 and
9,141,131 shares in 1996 6 457
Class A common stock, par value $.05 a share - authorized
6,666,667 shares in 1995 and - 0 - in 1996;
issued and outstanding 6,276,474 shares in 1995 and
- 0 - shares in 1996 314 --
Capital in excess of par value 6,632 33,150
Retained earnings 2,933 13,028
---------- ----------
Total shareholders' equity 9,885 46,635
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 144,931 $ 224,149
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
-4-
<PAGE> 46
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Interest income $ 10,691 $ 15,193 $ 17,908
Servicing income 212 446 3,274
Gain on sale of loans 6,450 9,169 23,815
Management fees 320 570 514
Loan fee income 276 586 4,150
Other revenues 246 314 727
----------- ----------- -----------
Total revenues 18,195 26,278 50,388
----------- ----------- -----------
EXPENSES:
Interest 5,879 8,527 11,021
Provision for credit losses 2,510 2,480 5,416
Salaries, wages and employee benefits 4,001 5,691 13,663
Business development costs 626 653 1,603
Other general and administrative expense 2,732 4,075 8,224
----------- ----------- -----------
Total expenses 15,748 21,426 39,927
----------- ----------- -----------
Income from continuing operations before income
taxes and minority interest 2,447 4,852 10,461
Provision for income taxes 609 190 718
----------- ----------- -----------
Income from continuing operations before minority
interest 1,838 4,662 9,743
Minority interest in (earnings) loss of subsidiaries (46) (81) 352
----------- ----------- -----------
Income from continuing operations 1,792 4,581 10,095
Discontinued transportation and apparel manufacturing
segments:
Gain (loss) from operations, net of income tax (2,022) (1,573) --
Gain (loss) on disposal of segments, net of income tax 2,568 (2,351) --
----------- ----------- -----------
546 (3,924) --
----------- ----------- -----------
NET INCOME $ 2,338 $ 657 $ 10,095
=========== =========== ===========
Earnings (loss) per share of common stock:
Continuing operations $ 0.27 $ 0.69 $ 1.42
Discontinued operations 0.08 (0.59) --
----------- ----------- -----------
EARNINGS PER SHARE $ 0.35 $ 0.10 $ 1.42
=========== =========== ===========
Weighted average shares outstanding 6,688,734 6,668,192 7,099,874
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
-5-
<PAGE> 47
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock
------------------------- -------------------------
Shares Issued Amount Shares Issued Amount
------------- -------- ------------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Balance at December 31, 1993 200,575 $ 10 9,803,438 $ 490
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1994 200,575 10 9,803,438 490
Shares issued, formerly held by
subsidiary -- -- 24,700 1
Shares purchased through tender offer (19,377) (1) (467,288) (23)
Shares retired through reverse stock split (121,204) (6) (6,242,275) (312)
Shares issued on exercise of stock options 506 -- 19,662 1
Two for one stock split in the form of a
stock dividend 60,500 3 3,138,237 157
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1995 121,000 6 6,276,474 314
Shares issued on exercise of stock options 2,026 -- 110,668 5
Conversion of Class A Common Stock to
Common Stock 6,387,142 319 (6,387,142) (319)
Shares issued on exercise of stock warrants 111,932 6 -- --
Issuance of Common Stock 2,519,031 126 -- --
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 9,141,131 $ 457 -- $ --
========== ========== ========== ==========
<CAPTION>
Capital
in Excess of Retained
par Value Earnings Total
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1993 $ 6,924 $ (62) $ 7,362
Net income -- 2,338 2,338
---------- ---------- ----------
Balance at December 31, 1994 6,924 2,276 9,700
Shares issued, formerly held by
subsidiary 15 -- 16
Shares purchased through tender offer (535) -- (559)
Shares retired through reverse stock split 309 -- (9)
Shares issued on exercise of stock options 79 -- 80
Two for one stock split in the form of a
stock dividend (160) -- --
Net income -- 657 657
---------- ---------- ----------
Balance at December 31, 1995 6,632 2,933 9,885
Shares issued on exercise of stock options 156 -- 161
Conversion of Class A Common Stock to
Common Stock -- -- --
Shares issued on exercise of stock warrants 288 -- 294
Issuance of Common Stock 26,074 -- 26,200
Net income -- 10,095 10,095
---------- ---------- ----------
Balance at December 31, 1996 $ 33,150 $ 13,028 $ 46,635
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
-6-
<PAGE> 48
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,338 $ 657 $ 10,095
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 783 938 1,334
Provision for deferred income taxes 343 41 (141)
Provision for credit losses 2,510 2,480 5,416
Loss on sale of investments 66 -- --
Loss on disposal of property and equipment 5 44 26
Net (increase) decrease in deferred loan costs -- (171) 145
Net increase (decrease) in unearned discount and
other deferrals 453 (853) 665
Loans originated with intent to sell (73,709) (173,985) (368,650)
Principal proceeds from loans sold 85,693 144,861 271,858
Proceeds from securitization of loans -- 15,357 30,128
Payments to securitization certificate holders for
credit losses -- -- (1,155)
Minority interest in earnings (loss) of subsidiaries 7 81 (352)
Changes in operating assets and liabilities increasing (decreasing) cash:
Restricted cash -- (912) (4,407)
Excess servicing receivable (1,460) (183) (3,109)
Accrued interest receivable (193) (644) (516)
Other assets (101) (964) (4,114)
Remittance due loan participants 295 505 2,331
Accrued interest payable 30 103 (24)
Other liabilities 913 877 865
Net cash provided by (used in) operating activities of
discontinued operations (1,253) 1,592 77
----------- ----------- -----------
Net cash provided by (used in) operating activities $ 16,720 $ (10,176) $ (59,528)
----------- ----------- -----------
</TABLE>
-7-
<PAGE> 49
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
INVESTING ACTIVITIES:
<S> <C> <C> <C>
Loans originated for investment purposes $ (74,937) $ (74,363) $ (68,123)
Principal collections on loans not sold 31,786 50,329 61,868
Principal collections on asset-backed securities -- 177 933
Additional investment in subsidiary -- (359) --
Purchase of investments -- (1,000) (135)
Increase in note receivable from former subsidiary -- (200) --
Reduction in goodwill of subsidiary 85 -- --
Proceeds from sale of short-term investments 581 614 --
Proceeds from sale of real estate and personal
property acquired through foreclosure 1,128 3,401 3,383
Proceeds from sale of property and equipment -- -- 160
Purchase of property and equipment (479) (1,732) (4,894)
Rent received on real estate acquired through foreclosure 87 85 381
Improvements and related costs incurred on real
estate acquired through foreclosure (477) (205) (330)
Net cash provided by investing activities
of discontinued operations 806 31 --
----------- ----------- -----------
Net cash used in investing activities (41,420) (23,222) (6,757)
----------- ----------- -----------
FINANCING ACTIVITIES:
Advances on notes payable to banks 104,622 179,381 509,118
Payments on notes payable to banks (91,839) (164,989) (485,257)
Net increase in notes payable to investors 13,496 25,635 15,855
Net (decrease) in subordinated debentures (5,826) (4,812) (70)
Payments on long-term debt and capital leases (280) (279) --
Cash paid for stock purchased in tender offer -- (568) --
Proceeds from issuance of additional common stock -- 52 26,655
Other (155) (40) --
----------- ----------- -----------
Net cash provided by financing activities 20,018 34,380 66,301
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (4,682) 982 16
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 4,960 278 1,260
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 278 $ 1,260 $ 1,276
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements which are an integral
part of these statements.
-8-
<PAGE> 50
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, each of which is wholly-owned except The Loan Pro$, Inc.
("Loan Pro$") and Sterling Lending Corporation ("Sterling Lending") which are
each 80% owned. All significant intercompany items and transactions have been
eliminated in consolidation.
The Company and its subsidiaries are primarily engaged in the business of
originating, selling and servicing first and second residential mortgage loans,
commercial loans partially guaranteed by the United States Small Business
Administration ("SBA"), commercial loans collateralized by accounts receivable
and inventory, and loans collateralized by pre-owned automobiles. The funds for
these loans are obtained principally through the utilization of various lines of
credit with banks and the issuance of notes payable and subordinated debentures
to investors.
Substantially all of the Company's loans are made to non-prime borrowers. These
borrowers generally have limited access to credit or are otherwise considered to
be credit impaired by conventional lenders.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates. These estimates include, among other things,
anticipated prepayments on loans sold with servicing retained, valuation of real
estate owned, and determination of the allowance for credit losses.
Minority interest represents minority shareholders' proportionate share of the
equity and earnings of Loan Pro$ and Sterling Lending.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed principally
using the straight-line method over the estimated useful lives of the assets.
Estimated lives are 15 to 40 years for buildings and improvements, 3 to 7 years
for furniture, fixtures and equipment, and the lease period for leasehold
improvements. Additions to property and equipment and major replacements or
improvements are capitalized at cost. Maintenance, repairs and minor
replacements are expensed when incurred.
-9-
<PAGE> 51
AMORTIZATION
The excess of cost over related net assets of businesses acquired is amortized
using the straight-line method principally over 25 years. On a periodic basis,
the Company reviews goodwill for events or changes in circumstances that may
indicate that the carrying amount of goodwill may not be recoverable. The
Company utilizes estimated future cash flows of the purchased subsidiary in
determining any impairment on the excess of cost over the related net assets.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which requires accounting for income taxes using
the asset and liability method. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred income taxes arise
principally from depreciation, unrealized gains on loans held for sale,
amortization of intangibles and allowances for credit losses.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
The Company foreclosed on, or repossessed, property used to collateralize loans
receivable in the amount of $3,362,000 in 1994, $3,955,000 in 1995, and
$4,452,000 in 1996.
The Company sold real estate held for sale by issuing loans to the buyers in
the amount of $611,000 in 1994, $689,000 in 1995, and $40,000 in 1996.
The Company paid income taxes of $214,000 in 1994, $267,000 in 1995, and
$322,000 in 1996. The Company paid interest of $5,967,000 in 1994, $8,397,000 in
1995, and $11,046,000 in 1996.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's ongoing evaluation of
the serviced loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb inherent losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration numerous factors,
including current economic conditions, prior loan loss experience, the
composition of the serviced loan portfolio, and management's estimate of
anticipated credit losses, including obligations relating to loans securitized.
Loans, including those deemed impaired, are charged against the allowance at
such time as they are determined to be uncollectible. Subsequent recoveries are
credited to the allowance.
Management considers the year-end allowance appropriate and adequate to cover
possible losses in the serviced loan portfolio; however, management's judgment
is based upon a number of assumptions about future events, which are believed to
be reasonable. Actual results could differ from these estimates. Thus, there can
be no assurance that charge-offs in future periods will not exceed the allowance
for credit losses or that additional increases in the allowance for credit
losses will not be required.
-10-
<PAGE> 52
ACCOUNTING FOR IMPAIRED LOANS
When an impaired loan is identified by the portfolio management department of
the Company to have risk characteristics that are unique to an individual
borrower, the Company assesses a specific allowance on a loan-by-loan basis each
month. The general allowance is calculated on a monthly basis using historical
statistics.
Effective January 1, 1995, the Company adopted SFAS 114, Accounting by Creditors
for Impairment of a Loan. SFAS 114 requires that the allowance for credit losses
for impaired loans (as defined) be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The adoption of
SFAS 114 had no effect on net income or shareholders' equity.
The Company's policy is to evaluate impaired loans based on the fair value of
the collateral, since all loans originated by the Company are collateral
dependent. Interest income from impaired loans is recorded using the cash
collection method.
REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
Real estate and personal property acquired through foreclosure represent
properties foreclosed upon or repossessed in the normal course of business and
is valued at the lower of cost or fair value, less selling costs. Costs related
to the development and improvement of the properties are capitalized whereas
those costs relating to holding the properties are charged to expense.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held and used by the Company are
reviewed for impairment whenever management believes events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. No impairment loss was recognized for continuing operations in
1994, 1995, or 1996.
INTEREST INCOME
Interest income on loans receivable is recognized using the interest method.
Accrual of interest is discontinued when a loan is over 90 days past due and the
collateral is determined to be inadequate or when foreclosure proceedings begin.
Loan fees and insurance commissions are amortized into income over the life of
the loan, using the interest method for loans originated for investment
purposes. Loan fees and insurance commissions are recognized into income on the
note date for loans originated with intent to sell.
GAIN ON SALE OF LOANS
Mortgage loans consist principally of first and second residential mortgages and
are stated at the principal amount outstanding, if held for investment purposes.
Non-refundable loan fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Mortgage loans are sold servicing released and on a non-recourse basis,
with customary representations and warranties. In connection with the sale of
mortgage loans, the Company receives cash premiums generally ranging from 4% to
8% of the principal amount of the mortgage loan being sold.
-11-
<PAGE> 53
Under the terms of the Company's strategic alliance mortgage banker agreements,
the Company provides funding and secondary marketing activities for its
strategic alliance partners ("Strategic Alliance Partner"). In exchange, the
Strategic Alliance Partners agree to provide the Company with all of their
mortgage loan production that meets the Company's underwriting criteria. The
premiums earned on the secondary market are then split between the Company and
its Strategic Alliance Partner. The terms of these agreements range from 3 to 5
years. In the event the Strategic Alliance Partner terminates the agreement
early, the contract provides for a termination fee equal to, at a minimum, all
of the premium income shared by the Strategic Alliance Partner over the last
twelve months. This termination fee is considered to be a recoupment of
previously shared premiums, and accordingly is included in gain on sale of loans
in the Statements of Income. For the year ended December 31, 1996, two Strategic
Alliance Partners terminated their agreements early. Accordingly, the Company
has recognized $7,337,000 in gain on sale of loans in 1996 relating to these
terminations.
Loans sold through securitizations with servicing retained are sold at or near
par with the Company retaining a participation in the cash flows. Excess
servicing receivable is calculated using prepayments, default, and interest rate
assumptions that market participants would use for similar instruments.
The Company sells participations representing the SBA-guaranteed portion of all
of its SBA Loans (the "SBA Loan Participations") in the secondary market. In
connection with such sales, the Company receives excess servicing revenue and
typically receives a cash premium of approximately 10% related to the guaranteed
portion being sold. In accordance with Emerging Issues Task Force ("EITF")
88-11, a portion of the cash premium received from the sale of the guaranteed
portion of the SBA loan is deferred as an unearned discount against the
remaining unguaranteed portion of the loan based on the relative fair values of
those portions to the total loan and the remainder is recognized as income at
the time of the sale. The resulting unearned discount is accreted into interest
income over the life of the loan using the interest method.
The excess servicing receivable recognized at the time of sale does not exceed
that amount which would be received if it were sold in the marketplace. The
excess servicing receivable is written down to the present value of the
remaining estimated future cash flows exceeding normal servicing fees at each
balance sheet date using the same discount rate used in the original
calculation. The Company's normal servicing fees from its securitization
transactions are recognized over the life of the related transaction.
ADVERTISING EXPENSE
Advertising, promotional, and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place. External costs relating to
direct mailing costs are expensed in the period in which the direct mailings are
sent. Advertising, promotional, and other business development costs of
$626,000, $653,000, and $1,603,000 were included in the Company's results of
operations for 1994, 1995, and 1996, respectively.
STARTUP COSTS
One-time, non-recurring, and incremental out-of-pocket expenditures directly
related to and incurred during the startup phase of geographic expansions are
expensed as incurred rather than deferred and amortized over future periods.
Startup costs of $94,000, $250,000, and $3,017,000 were included in the
Company's results of operations for 1994, 1995, and 1996, respectively.
-12-
<PAGE> 54
REMITTANCES PAYABLE AND SERVICING FEE INCOME
The Company retains the servicing rights on SBA guaranteed loan participations
sold in the secondary market, for which it earns monthly a minimum of 1% of the
outstanding principal balance. The Company receives the payments from the
borrowers and records the portion relating to the sold participation as a
liability. The participation portion is remitted to Colson Services Corp., the
exclusive Fiscal and Transfer Agent for the guaranteed portion of SBA loans sold
in the secondary market, by the 3rd business day of the following month.
The Company also retains the servicing rights on its securitization
transactions. The Company receives the payments from the borrowers and records a
liability until the funds are remitted to the Trustee.
MANAGEMENT FEES
The Company serves as investment manager for a venture capital fund and a
mezzanine level fund for which it receives management fees. The Company
recognizes the management fees on the accrual basis.
EXCESS SERVICING RECEIVABLE
An excess servicing receivable is recognized on loan sales in which a servicing
fee in excess of the normal servicing fee is retained. The amount is determined
based on the difference between the actual sales price and the estimated sales
price that would have been obtained if a normal servicing fee rate had been
specified. The excess servicing receivable is amortized on a loan by loan basis
against servicing income over the life of the loan using the interest method.
(Note 4)
BORROWER COMMITMENT DEPOSITS
The Company generally receives a commitment deposit from its applicants for SBA
loans prior to closing. The commitment deposits are recorded as a liability when
received, and are reduced for any direct expenses incurred and paid to a third
party in making the loan. Any deposit in excess of these direct expenses is
refunded to the borrower at the time of, or subsequent to, the loan closing.
Borrower commitment deposits are included in accrued liabilities.
EARNINGS PER SHARE
The Company's shareholders approved a one-for-three reverse split of the
Company's Common and Class A Common Stock in June 1995. Effective January 29,
1996, the Company declared a two-for-one stock split effected in the form of a
100% stock dividend on the Common Stock and Class A Common Stock. The weighted
average number of shares of Common and Class A Common Stock have been restated
for all periods presented to reflect these stock splits.
In 1996, the Company's shareholders approved the conversion of all Class A
Common Stock to Common Stock on a one-for-one basis. Accordingly, at December
31, 1996, there was no Class A Common Stock outstanding.
Earnings per share are based on the weighted average number of common shares
outstanding during the year, adjusted for the assumed conversion of dilutive
stock options and warrants. In computing the per share effect of assumed
conversion, funds which would have been received from the exercise of options
and warrants are considered to have been used to purchase common shares at
current market prices, and the resulting net additional common shares are
included in the calculation of average common shares outstanding.
-13-
<PAGE> 55
Earnings per share is computed on the weighted average number of shares of
Common Stock and Class A Common Stock and common stock equivalents outstanding
during each year.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to current
year presentation. Such reclassifications had no effect on net income or
shareholders' equity.
2. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company maintains its primary checking accounts with three principal banks
and maintains overnight investments in reverse repurchase agreements with those
same banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31,
1995 and 1996, the amounts maintained in the overnight investments in reverse
repurchase agreements, which are not insured by the FDIC, totaled $791,000 and
$282,000, respectively. These investments were collateralized by U. S.
Government securities pledged by the banks. The Company also maintains cash
collateral and collection accounts with a trustee in connection with its
securitizations. These accounts are shown as restricted cash, and are invested
in overnight investments or short-term U.S. Treasury securities.
3. LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE
The following is a summary of loans receivable by type of loan, including
mortgage loans held for sale:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
---------- ----------
(in thousands)
<S> <C> <C>
Mortgage Loans:
First mortgage residential property $ 72,995 $ 107,246
Second mortgage residential property 6,683 28,090
Real estate loans on rental property 3,867 894
Construction loans 2,934 5,038
---------- ----------
Total mortgage loans 86,479 141,268
---------- ----------
Commercial Loans:
Guaranteed portion of SBA loans 11,045 9,662
Unguaranteed portion of SBA loans 7,110 10,503
Commercial loans secured by real estate 1,782 2,253
Asset-based commercial lending -- 6,967
---------- ----------
Total commercial loans 19,937 29,385
---------- ----------
Automobile loans 17,673 13,915
Other loans 2,369 4,964
---------- ----------
Total loans receivable $ 126,458 $ 189,532
========== ==========
</TABLE>
-14-
<PAGE> 56
Notes receivable from related parties of $363,000 and $1,069,000 at December 31,
1995 and 1996, respectively, are included in the above table. Notes receivable
from related parties included advances of $261,000 in 1995 and $736,000 in 1996
and repayments of $67,000 in 1995 and $30,000 in 1996.
First mortgage residential loans generally have contractual maturities of 12 to
360 months with an average interest rate at December 31, 1995 and 1996 of
approximately 12%. Second mortgage residential loans generally have contractual
maturities of 12 to 360 months with an average interest rate at December 31,
1995 and 1996 of approximately 15%. Construction loans generally have
contractual maturities of 12 months with an average interest rate at December
31, 1995 and 1996 of approximately 12%. SBA loans range in maturity from 7 years
to 25 years depending on the use of proceeds. Interest rates on SBA loans are
variable, adjusted on the first day of each calendar quarter and are generally
prime plus 2.75%. The average interest rate at December 31, 1995 and 1996 for
SBA loans was 10% and 10.5%, respectively. Asset-based commercial loans
generally are due on demand and have average interest rates of approximately
24%. Automobile loans have maturities generally not exceeding 60 months with
fixed interest rates averaging 28% in 1995 and 27% in 1996. At December 31, 1995
and 1996, approximately $3,950,000 (net of an allowance for impaired loans of
$73,000) and $3,334,000 (net of an allowance for impaired loans of $576,000),
respectively, of loans receivable were impaired. Impaired loans are considered
to be those loans for which it is probable that the Company will be unable to
collect all amounts due according to original contractual terms of the loan
agreement, based on current information and events.
Loans sold and serviced for others at December 31, 1995 and 1996 were
approximately $88,077,000 and $119,541,000, respectively, and are not included
in assets in the accompanying balance sheets. At December 31, 1995 and 1996,
mortgage loans totaling $9,890,000 and $56,901,000, respectively, had been sold
but not settled, and accordingly are included in the accompanying balance sheet
in mortgage loans held for sale. At December 31, 1995 and 1996, guaranteed
portions of SBA loans totaling $5,400,000 and $4,387,000, respectively, had been
sold but not settled, and accordingly are included in the accompanying balance
sheet in loans receivable.
The Company's portfolio of commercial loans receivable is diversified by
industry type. At December 31, 1996, the Company's serviced commercial loan
portfolio consisted of loans to small businesses in the following industries (in
thousands):
<TABLE>
<S> <C> <C>
Limited service lodging $ 40,861 29.02%
Retail trade 33,573 23.84%
Services 23,869 16.95%
Manufacturing 19,478 13.83%
Wholesale distribution 10,527 7.48%
Other 12,501 8.88%
======== ========
$140,809 100.00%
======== ========
</TABLE>
-15-
<PAGE> 57
The Company's serviced loan portfolio at December 31, 1996, consisted of loans
to borrowers in the following states (in thousands):
<TABLE>
<CAPTION>
Mortgage Commercial Auto Total Percent
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
South Carolina $ 64,763 $ 24,169 $ 21,480 $ 110,412 35.72%
North Carolina 29,279 5,399 195 34,873 11.28%
Florida 4,410 24,415 39 28,864 9.34%
Colorado 2,201 18,039 2 20,242 6.55%
Indiana 7,210 -- 4 7,214 2.33%
Louisiana 5,088 3,608 8 8,704 2.82%
Kansas -- 18,682 -- 18,682 6.04%
Georgia 8,217 18,040 129 26,386 8.54%
Texas 42 5,353 13 5,408 1.75%
Michigan 8,840 -- 2 8,842 2.86%
Tennessee 6,143 -- 34 6,177 2.00%
Other 10,038 23,104 127 33,269 10.77%
=========== =========== =========== =========== ===========
Total $ 146,231 $ 140,809 $ 22,033 $ 309,073 100.00%
=========== =========== =========== =========== ===========
</TABLE>
An analysis of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 952 $ 1,730 $ 2,647
Provision for credit losses 2,510 2,480 5,416
Net charge offs (1,732) (1,563) (3,777)
----------- ----------- -----------
Balance at end of year $ 1,730 $ 2,647 $ 4,286
=========== =========== ===========
</TABLE>
The total allowance for credit losses and recourse obligations as shown on the
balance sheet is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
---------- ----------
(in thousands)
<S> <C> <C>
Allowance for credit losses on loans 1,874 3,084
Allowance for losses on excess servicing receivable -- 848
Allowance for losses on asset-backed securities 773 354
---------- ----------
Total allowance for credit losses $ 2,647 $ 4,286
========== ==========
</TABLE>
As of December 31, 1994, 1995, and 1996, loans totaling $1,433,000, $5,145,000,
and $4,922,000, respectively, were on non-accrual status. The associated
interest income not recognized on these non-accrual loans was approximately
$45,000 during 1994, $164,000 during 1995, and $593,000 during 1996.
-16-
<PAGE> 58
4. EXCESS SERVICING RECEIVABLE
The activity in the excess servicing receivable is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross balance, beginning of year $ 412 $1,872 $2,054
Additional gain on sale of loans 1,942 1,095 4,770
Amortization against servicing revenues (482) (913) (1,661)
------ ------ ------
Gross balance, end of year 1,872 2,054 5,163
Less allowance for losses on excess
servicing receivable -- -- (848)
------ ----- ------
Excess servicing receivable, net $1,872 $2,054 $4,315
====== ====== ======
</TABLE>
The weighted average interest rate inherent in the carrying value of the excess
servicing receivable is 10% at December 31, 1996. During 1994, the Company
changed its estimated normal servicing rate for its SBA loans to more closely
reflect the industry standard in accordance with Emerging Issues Task Force
Consensus 94-9. The effect of this change was to increase 1994 income by
approximately $490,000.
The carrying value of the excess servicing receivable approximates fair value.
The allowance represents potential credit losses in the securitized pool which
may be incurred by the Company as a result of its investment being subordinate
to the interests of the Class A certificate holders.
5. INVESTMENT IN ASSET-BACKED SECURITIES
In June 1995 and November 1996, the Company securitized $17,063,000 and
$12,851,000, respectively, of the unguaranteed portions of its SBA loans. In
March of 1996, the Company securitized $16,107,000 of its auto loans. The
securitizations were effected through a grantor trust (the "Trust"), the
ownership of which was represented by Class A and Class B certificates. The
Class A certificates were purchased by investors, while the Company retained the
Class B certificates. The Company classifies its Class B certificates as trading
securities under SFAS 115, and they are carried at fair market value. These
certificates are carried on the balance sheet as asset-backed securities in the
net amount of $865,000 and $3,581,000 at December 31, 1995, and 1996,
respectively. This amount is net of an allowance for credit losses of $773,000
and $354,000 at December 31, 1995, and 1996, respectively. The allowance
represents potential credit losses in the securitized pool which may be incurred
by the Company as a result of its investment being subordinate to the interests
of the Class A certificate holders. These certificates give the holders thereof
the right to receive payments and other recoveries attributable to the
unguaranteed portion of SBA loans and auto loans held by the respective Trust.
The Class B certificates represent approximately 9% and 10%, respectively, of
the principal amount of the SBA and auto loans transferred in the
securitizations and are subordinate in payment and all other respects to the
Class A certificates. In the event that payments received by the Trusts are not
sufficient to pay certain expenses of the Trusts and the required principal and
interest payments due on the Class A certificates, the Company, as holder of the
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.
-17-
<PAGE> 59
The Company serves as master servicer for both of the Trusts and, accordingly,
forwards payments received on account of the SBA loans held by the Trust to the
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 individual
loans from the Trusts in the event that certain representations made with
respect to that transferred loan is 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 Trusts under this provision. The Class
A certificates for the first 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 Poor's ratings group, and were guaranteed by
Financial Security Assurance, Inc. The Class A certificates for the second SBA
loan securitization received a rating of Aa2 from Moody's Investors Service,
Inc. The Class B certificates were not rated for any of the securitization
transactions. In connection with the SBA and auto loan securitizations, the
Company received cash proceeds, net of securitization costs, of $15,357,000 and
$30,128,000 in 1995 and 1996, respectively. The 1996 SBA securitization
transaction included a prefunding account of approximately $4,649,000, for which
additional loans can be placed into the Trust prior to January 31, 1997. On
January 23, 1997, loans totaling $4,626,000 were placed into the Trust, for
which the Company received proceeds of $4,626,000 and a retained interest in
Class B certificates of $416,000.
6. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Land $ 228 $ 279
Buildings and leasehold improvements 1,162 1,279
Equipment 264 4,345
Furniture and fixtures 2,673 2,766
Vehicles -- 206
------ ------
Total property and equipment 4,327 8,875
Less accumulated depreciation (957) (1,698)
------ ------
Net property and equipment $3,370 $7,177
====== ======
</TABLE>
Depreciation expense was $694,000, $769,000, and $901,000 in 1994,
1995, and 1996, respectively.
7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
An analysis of real estate and personal property acquired through
foreclosure is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Balance at beginning of year $3,603 $3,742
Loan foreclosures and improvements 4,160 4,782
Dispositions, net (4,021) (3,804)
------ ------
Balance at end of year $3,742 $4,720
====== ======
</TABLE>
-18-
<PAGE> 60
8. NOTES PAYABLE TO BANKS
Notes payable to banks are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
A. Notes payable under revolving credit agreements,
with interest at the bank's prime rate (8.25% at
December 31, 1996) maturing March 31, 1997 $ 6,892 $46,774
B. Notes payable under lines of credit, with interest
at the bank's prime rate plus 3/4% ( 9.00% at
December 31, 1996) maturing in December 1997 9,911 --
C. Notes payable under lines of credit, with interest
at the bank's prime rate (8.25% at December 31, 1996)
maturing December 29, 1998 14,830 8,720
------- -------
$31,633 $55,494
======= =======
</TABLE>
A. Under the terms of revolving credit agreements, the mortgage lending
subsidiaries of the Company may borrow up to a maximum of $90,000,000 with
interest at the bank's prime rate payable monthly. The note is
collateralized by loans receivable. The agreements require, among other
matters, a specified debt to net worth ratio, a minimum tangible net worth
and limitations on the payment of dividends. Management believes the
Company is in substantial compliance with such restrictive covenants. The
revolving credit agreements mature on April 4, 1997. At December 31, 1996,
$14,232,000 was available under these lines of credit.
B. Under the terms of the lines of credit, the automobile lending
subsidiaries of the Company may borrow up to a maximum of $26,000,000
with interest at the bank's prime rate plus three-quarters of one
percent payable monthly. The notes are collateralized by loans
receivable. The terms of the agreements state that advances under the
lines of credit cannot exceed 85% of the aggregate unpaid principal
balance of outstanding notes receivable, which are no more than sixty
days past due. This advance rate is reduced based on delinquency and
loss levels exceeding certain target levels and at December 31, 1996,
the advance rate on the $20,000,000 line of credit for one of the
automobile lending subsidiaries was reduced to 71%, while the advance
rate remained 85% on the $6,000,000 line of credit for the other
automobile lending subsidiary.
The agreements require, among other matters, minimum debt to tangible net
worth ratios, minimum interest coverage ratios, minimum loss reserves,
maximum debt to borrowing base restrictions, and restrictions on the
payment of dividends. At December 31, 1996, one of the Company's automobile
lending subsidiaries exceeded the maximum delinquency levels permitted
under the $20,000,000 agreement. In addition the Company's automobile
lending subsidiaries were also in violation of the minimum interest
coverage ratio. The Bank has provided a waiver to the Company's automobile
lending subsidiaries for the above violations. At December 31, 1996, no
amounts were owed under these lines of credit, and $9,778,403 was available
under these lines of credit. These agreements mature in December 1997.
-19-
<PAGE> 61
C. Under the terms of the lines of credit, the commercial lending
subsidiaries of the Company may borrow up to a maximum of $40,000,000
with interest at the bank's prime rate. The lines are limited to 100%
of the outstanding balance of the guaranteed portion of SBA 7(a) loans,
80% of the outstanding balance of the unguaranteed portion of SBA 7(a)
loans, 80% of asset-based loans, and 50% of SBA 504 loans as defined in
the loan agreements. The agreements require, among other matters,
minimum tangible net worth ratios, maximum ratios of total liabilities to
tangible net worth, minimum interest coverage ratios, limitations on the
amount of capital expenditures in any fiscal year, and restrictions on the
payment of dividends. At December 31, 1996, management believes
these subsidiaries were in substantial compliance with such
restrictive covenants and $13,662,000 was available under these lines of
credit. These agreements mature in December, 1998.
Annual aggregate maturities of notes payable at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997 $46,774
1998 8,720
-------
$55,494
</TABLE>
9. SUBORDINATED INVESTOR SAVINGS
Subordinated investor savings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1995 1996
(in thousands)
<S> <C> <C>
A. Notes payable to investors $82,132 $ 97,987
B. Subordinated debentures 16,185 16,115
------- --------
$98,317 $114,102
======= ========
</TABLE>
A) Notes payable to investors are issued by a subsidiary company, Carolina
Investors, Inc. ("CII"), in any denomination greater than $10,000 and are
registered under the South Carolina Uniform Securities Act. The notes
mature from one to three years from date of issuance. Interest is payable
monthly, quarterly or at maturity at the option of the investors. Interest
rates on the notes are fixed until maturity and range from 7% to 9% at
December 31, 1995, and 5% to 9% at December 31, 1996. The notes are
subordinated to all bank debt, and are senior to the subordinated
debentures.
B) Subordinated debentures are issued by CII in any denomination greater than
$100 and are registered under the South Carolina Uniform Securities Act.
The subordinated debentures normally mature in one year from date of
issuance and have an interest rate ranging from 5% to 6% quarterly. The
debentures are subordinated to all bank debt and notes payable to
investors.
At December 31, 1995 and 1996, notes payable to investors and subordinated
debentures include an aggregate of approximately $17,080,000 and $21,039,000,
respectively, of individual investments exceeding $100,000.
-20-
<PAGE> 62
The investor savings at December 31, 1996 mature as follows:
<TABLE>
(in thousands)
--------------
<S> <C>
1997 $110,441
1998 3,648
1999 13
--------
$114,102
========
</TABLE>
10. LEASES
The Company leases various property and equipment, office space and automobiles
under operating leases.
The following is a schedule by year of future minimum rental payments for all
operating leases that have initial or remaining noncancellable terms in excess
of one year (in thousands):
<TABLE>
<CAPTION> <S> <C>
1997 $1,689
1998 1,433
1999 1,144
2000 892
2001 615
2002 15
-----
$5,788
======
</TABLE>
Total rental expense was approximately $974,000 in 1994, $901,000 in 1995 and
$843,000 in 1996.
11. MANAGEMENT AGREEMENTS
The Company manages a venture capital fund and a mezzanine level fund. The
Company receives management fees equal to two and one-half percent of the total
assets under management in each fund with a current aggregate minimum management
fee of $445,000 annually. The Company received management fees of $320,000,
$570,000, and $514,000 from the managed funds during 1994, 1995, and 1996
respectively. The Company may also receive incentive management fees of 15% and
20%, respectively, from the managed funds of the net portfolio profits of each
managed fund, as defined.
The Company is a General Partner of one of the Venture Funds and, during 1995,
made a $1,000,000 investment into the partnership. This partnership has
significant common principals with the Company.
12. SHAREHOLDERS' EQUITY
The Company has one class of capital stock: Common Stock.
On May 21, 1981, the shareholders approved a stock option plan and on May 22,
1984, the shareholders approved an increase in the number of shares of common
stock which may be granted from 250,000 to 500,000. Under the terms of the plan,
the Company may grant options to key employees and directors to purchase up to a
total of 500,000 shares of its $.05 par value common stock. The option price is
the fair market value at date of grant. The options expire five years from date
of grant, are not transferable other than on death, and are exercisable 20% on
the date of grant and 20% per year on a cumulative basis for each year
subsequent to the date of grant. No shares are available for grant under this
stock option plan, and there are 89,342 unexercised options outstanding at
December 31, 1996, of which 8,672 are exercisable.
-21-
<PAGE> 63
On June 9, 1995, the shareholders approved a stock option plan under which the
Board of Directors may issue 566,668 shares of common stock. Under the terms of
the plan, the Company may grant options to key employees to purchase up to a
total of 566,668 shares of its $.05 par value common stock. The option price is
the fair market value at date of grant. Prices for incentive stock options
granted to employees who own 10% or more of the Company's stock are at 110% of
market value at date of grant. The options expire five to ten years from date of
grant, are not transferable other than on death, and are exercisable 20% on the
date of grant and 20% per year on a cumulative basis for each year subsequent to
the date of grant. The remaining options available for grant under the plan
consist of 152,667 common stock options at December 31, 1996, and there are
391,636 unexercised options outstanding at December 31, 1996, of which 88,303
are exercisable.
Also on June 9, 1995, the shareholders approved a stock option plan under which
each non-employee member of the Board of Directors receives options to purchase
666 shares of common stock each December 31 beginning in 1995 through 1999.
Under the terms of the plan, the Company may grant options totaling 33,333. The
terms of the plan are identical to the employee stock option plan approved on
June 9, 1995. The remaining options available for grant under this plan consist
of 26,673 common stock options at December 31, 1996, and there are 6,660
unexercised options outstanding at December 31, 1996, of which 1,998 are
exercisable.
On April 18, 1996, the shareholders approved a restricted stock agreement plan
to provide additional incentives to members of the Board of Directors of the
Company who are not employees of the Company. Shares which may be issued
pursuant to the Restricted Stock Agreements under the Plan shall not exceed
50,000 shares in the aggregate. The Plan provides that, on each grant date, each
eligible director will automatically receive from the Company an Agreement to
purchase for $.05 per share that number of shares having a fair market value
equal to $12,000. For purposes of the Plan, the grant date is January 31 of each
calendar year commencing with the 1996 calendar year. At December 31, 1996,
there were 10,500 options granted under this plan. Shares subject to a
Restricted Stock Agreement are initially non-transferable and subject to
forfeiture. Shares granted to a recipient become freely transferable and no
longer subject to forfeiture at a rate of 20% of the total number of shares
covered by such agreement on each of the five anniversaries of the grant date,
beginning with the first anniversary of such grant.
The Company offered to buy from the shareholders up to 1,000,000 shares of
common stock for the period March 31, through May 8, 1995 at a price of $1.15
per share. As a result of this offer, the Company purchased 486,665.34 shares of
common stock at an aggregate cost of approximately $560,000.
On June 9, 1995 the shareholders of the Company approved a one-for-three reverse
split of the Common Stock. The certificates for previously issued common stock
were canceled and were forfeited by the holder in order for the holder to
receive replacement certificates for the after reverse split shares. The
shareholders also authorized the increase of post reverse split authorized
shares of common stock to 4,000,000 shares. The Company issued to all
shareholders certificates for one-third of their common shares as of June 9,
1995, upon the shareholder presenting their existing shares. No fractional
shares were issued as a result of the one-for-three reverse stock split. All
fractional shares were redeemed at an equivalent price of $1.25 per share.
The Articles of Incorporation of the Company were amended by vote of the
shareholders at the Annual Meeting of Shareholders on April 18, 1996. The Class
A Common Stock, $0.05 par value, was converted to common stock on a one-for-one
basis effective April 19, 1996. All authorized but unissued shares of Class A
Common Stock were canceled. The number of authorized shares of common stock was
increased from 4,000,000 to 30,000,000 shares.
-22-
<PAGE> 64
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." On
December 11, 1996, the underwriters of the public offering exercised the option
to purchase an additional 400,000 shares of common stock in accordance with the
terms of the registration statements. Total gross proceeds of approximately
$28,969,000 were raised as a result of the issuance of stock, which was offset
by approximately $2,769,000 in costs and expenses relating to the transaction.
Activity in stock options is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 133,333 140,000 339,000
Issued at: Date of Grant
$1.0825 per share 2-17-94 40,000 -- --
$l.32 per share 1-13-95 -- 80,006 --
$4.625 per share 10-31-95 -- 124,000 --
$5.09 per share 10-31-95 -- 32,000 --
$9.435 per share 12-18-95 -- 2,664 --
$10.38 per share 12-18-95 -- 666 --
$12.25 per share 11-11-96 -- -- 258,000
$11.25 per share 12-15-96 -- -- 3,330
------ ------ ------
Total Granted 40,000 239,336 261,330
Exercised:
Expired or canceled (33,333) -- --
$1.0825 per share -- (29,800) (74,197)
$1.32 per share -- (1,336) (29,335)
$4.625 per share -- (3,200) (9,160)
$5.09 per share -- (6,000) --
------- ------- -------
Total exercised, expired or cancelled (33,333) 40,336 112,692
------- ------- -------
Options outstanding, end of year 140,000 339,000 487,638
======= ======= =======
Exercisable, end of year 56,000 83,532 98,973
======= ======= =======
Available for grant, end of year 82,667 440,671 179,340
======= ======= =======
</TABLE>
At December 31, 1995, 121,742 warrants were outstanding; 111,932 of these
warrants were exercised during 1996 for $2.625 per share. The remaining warrants
expired as of December 31, 1996. No warrants are outstanding at December 31,
1996.
-23-
<PAGE> 65
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1995 and 1996 consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-----------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Net income - as reported $657 $10,095
Net income - pro forma 616 9,875
Earnings per share - as reported 0.10 1.42
Earnings per share - pro forma .09 1.39
</TABLE>
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes valuation model with the following weighted average assumptions:
dividend yield of 0%, expected volatility of 45.0%; risk-free interest rate of
approximately 6.3%, and expected lives of 3 years. The proforma amounts
disclosed above may not be representative of the effects on reported net income
for future periods.
The Company plans to implement an Employee Stock Purchase Plan ("ESPP") in 1997.
The ESPP will allow eligible employees the right to purchase common stock on a
semi-annual basis at 85% of the lower of the market price at the beginning or
ending of each six-month offering period. The ESPP will operate on a calendar
basis beginning February 1, 1997. A liability will be recorded for ESPP
withholdings not yet applied towards the purchase of common stock. The Company's
Board of Directors has approved the reservation of 200,000 shares to be issued
under the ESPP, subject to shareholder approval at the Company's annual meeting
on May 22, 1997.
13. SALE OF SUBSIDIARY
In connection with the Company's strategic plan to focus its business efforts on
financial services, the Company divested its apparel segment operations, which
was comprised solely of the operations of Young Generations, Inc. ("YGI"). On
September 30, 1995, the Company sold all of the outstanding stock (the "stock
sale") of YGI to fifteen individuals (the "Buyers"), who were members of YGI's
management team. As a result, the loss on the sale of the stock and operating
results of the apparel segment have been classified as discontinued operations.
The results of operations for 1994 have been restated to exclude the Apparel
Manufacturing segment from continuing operations.
The Company sold the stock for $600,000 under a non-recourse promissory note
from the buyers. As a result of the sale, the Company wrote-off all amounts due
from YGI resulting in a charge of $3,580,300, net of income taxes of $67,700,
reported as a loss from discontinued operations. The Company remains
contingently liable for the guaranty of certain bank loans and trade accounts
payable which existed prior to the stock sale which do not exceed $396,000.
Management does not anticipate any significant charges to future earnings as a
result of these guarantees.
-24-
<PAGE> 66
The apparel segment, which consists solely of the operations of YGI, had net
losses of $31,000 in 1994 and $1.3 million for the nine months ended September
30, 1995. The net loss in 1994 was decreased by the receipt of $1.25 million in
life insurance proceeds due to the death of YGI's president. YGI had revenues of
$12.2 million in 1994 and $7.3 million for the nine months ended September 30,
1995.
14. DISCONTINUED OPERATIONS
The Company's operations in the Apparel and Transportation segments were
discontinued during 1995. The sale of the apparel segment is discussed further
in Note 13. In July 1994 the Company sold an operating railroad for $940,000. In
connection with this sale, the Company received $20,000 cash, and a note
receivable of $920,000, payable in semi-annual payments over five years, with an
interest rate of 10%. In November 1994, the Company assigned the rights to
boxcars in a lease with a Class I railroad for $1,174,000 cash. The Company sold
additional railcars in June 1995 for $111,000 cash.
At December 31, 1995, the Company had remaining net assets in the transportation
segment of $77,000, the majority of which the Company sold during 1996.
The results of operations for 1994 have been restated to exclude these segments
from continuing operations.
Revenues applicable to the discontinued operations were:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Apparel manufacturing $12,140 $7,263 $--
Transportation 1,407 390 --
</TABLE>
Income from operations and gain (loss) on disposal attributable to the
discontinued segments is reported net of income tax expense of:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Apparel manufacturing $(158) $ (22) $--
Transportation 306 (53) --
</TABLE>
Net assets of discontinued operations were comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Assets:
Property and equipment, net $153 $ --
Other assets 80 --
---- ----
233 --
Liabilities:
Other liabilities 156 --
---- ----
Net assets of discontinued operations $ 77 $ --
</TABLE>
-25-
<PAGE> 67
Gain (loss) from operations, net of income tax,
consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Apparel manufacturing segment $(1,949) $(1,253) $ --
Transportation segment (73) (320) --
------- ------- ----
$(2,022) $(1,573) $ --
======= ======= ====
</TABLE>
Gain (loss) on disposal of segments, net of
income taxes, consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Apparel manufacturing segment $ -- $(2,324) $ --
Transportation segment 2,568 (27) --
------ ------- ----
$2,568 $(2,351) $ --
====== ======= ====
</TABLE>
15. INCOME TAXES
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income from continuing operations $609 $ 190 $718
Discontinued operations 148 (75) --
---- ----- ----
$757 $(115) $718
==== ===== ====
</TABLE>
A reconciliation of the provision for Federal and state income taxes and the
amount computed by applying the statutory Federal income tax rate to income
before income taxes and minority interest are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Statutory Federal rate of 34% applied to pre-tax income
from continuing operations before minority interest $832 $1,650 $ 3,557
State income taxes, net of federal income tax benefit 311 3 350
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense (630) (1,566) (3,229)
Alternative Minimum Tax on proceeds from life insurance 25 -- --
Nondeductible expenses 3 5 17
Amortization of excess cost over net assets of acquired
businesses 69 62 64
Other, net (1) 36 (41)
---- ------ -------
$609 $ 190 $ 718
==== ====== =======
</TABLE>
-26-
<PAGE> 68
Provision (benefit) for income taxes from continuing operations is comprised of
the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current
Federal $117 $100 $199
State and local 149 49 660
---- ---- ----
266 149 859
Deferred
Federal 242 27 (11)
State and local 101 14 (130)
---- ---- ----
343 41 (141)
Total
Federal 359 127 188
State and local 250 63 530
---- ---- ----
$609 $190 $718
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's net
deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1995 1996
---- ----
Deferred tax liabilities: (in thousands)
<S> <C> <C>
Differences between book and tax basis of property $ (269) $ (372)
------- ------
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles 165 205
Allowance for credit losses 1,202 1,672
Write-off of notes receivable 1,386 --
AMT credit carryforward 367 568
Operating loss carryforward 7,700 4,590
Unrealized gain on loans to be sold 382 1,182
------- ------
Total gross deferred tax assets 11,202 8,217
Less valuation allowance (10,737) (7,508)
------- ------
Net deferred tax asset $ 196 $ 337
======= ======
</TABLE>
-27-
<PAGE> 69
The valuation allowance consists of Alternative Minimum Tax Credit
carryforwards, net operating loss carryforwards, and deductible temporary
differences primarily for Federal income tax purposes.
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize net deferred tax
assets.
As of December 31, 1996, the Company has available Federal net operating loss
("NOL") carryforwards of approximately $13,500,000 expiring in 1997 through
2001.
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Company or its subsidiaries.
16. OPERATIONS AND INDUSTRY SEGMENTS
The Financial Services segment was active in 1994, 1995 and 1996 in originating
selling and servicing first and second mortgage loans, commercial loans, and
pre-owned automobile loans.
The Apparel Manufacturing segment was active in 1994 in the design, manufacture
and marketing of dresses for children. The Company sold YGI, the sole component
of the segment as of September 30, 1995 and as a result, the Apparel
Manufacturing segment is shown on the statements of income as discontinued
operations.
The Transportation segment was active in 1994 in boxcar leasing, short-line
railroad operations and railcar repair shop operations. The Company sold
Peninsula Terminal Company in July 1994 and assigned the rights to boxcars in
the lease with a Class I railroad in November 1994. The Company sold additional
railcars in 1995 and as a result, the Transportation segment is shown on the
statements of income as discontinued operations.
The Company's customers include investors within the State of South Carolina,
first and second residential mortgage borrowers throughout the United States,
commercial borrowers throughout the United States and preowned automobile
borrowers principally in South Carolina.
-28-
<PAGE> 70
17. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
-------------- ----------------- ------------------ -----------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 4,324 $ 4,051 $ 4,219 $ 5,314
Servicing income 536 1,027 924 787
Gain on sale of loans 3,018 4,450 7,870 8,478
Loan fee and other income 404 498 1,557 2,931
--------------- ----------------- ---------------- --------------
Total Revenues 8,282 10,026 14,570 17,510
EXPENSES:
Interest 2,741 2,837 2,603 2,840
Provision for credit losses 911 621 1,569 2,315
General and administrative 3,227 4,395 6,058 9,811
--------------- ----------------- ---------------- --------------
Total expenses 6,879 7,853 10,230 14,966
--------------- ----------------- ---------------- --------------
Income before income taxes 1,403 2,173 4,340 2,544
Provision for income taxes (42) (77) (129) (470)
Minority interest in earnings of subsidiaries (12) (10) 90 285
--------------- ----------------- ---------------- --------------
Net income $ 1,349 $ 2,086 $ 4,301 $ 2,359
=============== ================= ================ ==============
Earnings per share $ .20 $ .31 $ .63 $ .29
=============== ================= ================ ==============
Weighted average shares outstanding 6,735,996 6,785,457 6,777,439 8,100,302
=============== ================= ================ ==============
</TABLE>
The quarterly results of operations for the year ended December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------------- ------------- ------------------ --- -----------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest and servicing income $ 3,368 $ 3,939 $ 3,909 $ 4,423
Gain on sale of loans 1,220 3,135 2,224 2,590
Loan fee and other income 234 458 526 252
--------------- ----------------- ---------------- --------------
Total revenues 4,822 7,532 6,659 7,265
EXPENSES:
Interest 1,727 2,053 2,161 2,586
Provision for credit losses 489 751 380 860
General and administrative 2,109 2,405 2,620 3,285
--------------- ----------------- ---------------- --------------
Total expenses 4,325 5,209 5,161 6,731
--------------- ----------------- ---------------- --------------
Income before income taxes 497 2,323 1,498 534
Provision for income taxes (4) (89) (87) (10)
Minority interest in earnings of subsidiaries (8) (23) (35) (15)
--------------- ----------------- ---------------- --------------
Income from continuing operations 485 2,211 1,376 509
Discontinued transportation and apparel
manufacturing segments (316) (435) (2,728) (445)
--------------- ----------------- ---------------- --------------
Net income (loss) $ 169 $ 1,776 $ (1,352) $ 64
=============== ================= ================ ==============
Earnings (loss) per share:
Continuing operations $ .07 $ .33 $ .21 $ .08
Discontinued operations (.05) (.06) (.41) (.07)
--------------- ----------------- ---------------- --------------
Earnings (loss) per share $ .02 $ .27 $ (.20) $ .01
=============== ================= ================ ==============
Weighted average shares outstanding 6,699,266 6,690,608 6,705,140 6,705,140
=============== ================= ================ ==============
</TABLE>
-29-
<PAGE> 71
18. TRANSACTIONS WITH RELATED PARTIES
The Company engaged in the following related party transactions:
The Company obtains legal services from a firm, certain members of which, when
considered in the aggregate, may be deemed to beneficially own 596,351 shares of
the Company's capital stock. Total charges for these services were $118,000 in
1994, $234,000 in 1995, and $756,000 in 1996. Approximately $17,000 in 1994, $0
in 1995 and $47,000 in 1996 of accounts payable are payable to this law firm.
The Company provided management services to a mezzanine level small business
investment company partnership fund with significant common shareholders for
which it received fees of $35,000 in 1994, $250,000 in 1995, and $175,000 in
1996.
Notes payable to investors and subordinated debentures include amounts due to
officers, directors and key employees of approximately $791,000, $873,000, and
$694,000 at December 31, 1994, 1995, and 1996, respectively. The Company also
has notes receivable from related parties. (Note 3)
19. EMPLOYEE RETIREMENT PLAN
The Company has a matched savings plan under Section 401(k) of the Internal
Revenue Code covering employees meeting certain eligibility requirements. The
plan provides for employee and Company contributions, subject to certain
limitations. Company matching contributions are 35% of employee contributions to
a maximum of 6% of compensation for each employee. The Company plans to increase
its matching contribution to 50% in 1997. The Company's contributions under the
plan totaled approximately $95,000 in 1994, $76,000 in 1995, and $60,000 in
1996. In 1997, the plan was amended to allow employees who have completed 30
days of service to participate in the plan, and the matching contribution was
changed to 50%.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." FASB's objective is to
develop consistent accounting standards for those transactions, including
determining when financial assets should be considered sold and derecognized
from the statement of financial position and when related revenues and expenses
should be recognized. The approach focuses on analyzing the components of
financial asset transfers and requires each party to a transfer to recognize the
financial assets it controls and liabilities it has incurred and derecognize
assets when control over them has been relinquished. The statement is not
expected to have a significant impact on the accounting practices of the Company
and is generally effective for transactions entered into after December 31,
1996. The Company will apply the new rules prospectively to transactions
beginning in the first quarter of 1997.
21. CONTINGENCIES AND LOAN COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Company to credit risk in excess of the amount
recognized in the balance sheet.
-30-
<PAGE> 72
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at December 31,
1996 related to these items is summarized below:
<TABLE>
<CAPTION>
Contract
Amount
-----------------
(in thousands)
<S> <C>
Loan commitments:
Approved loan commitments $ 111,361
Unadvanced portion of loans 18,070
-----------------
Total loan commitments $ 129,431
=================
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held is primarily residential property. Interest rates
on loan commitments are a combination of fixed and variable.
Commitments outstanding at December 31, 1996 consist of adjustable rate
commercial loans and fixed rate residential mortgage loans of $45,680,000 and
$83,751,000, respectively, at rates ranging from 8% to 18%. Commitments to
originate loans generally expire within 30 days to 60 days.
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business. The
Company believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely, would have a material
effect on the business, financial condition, results of operations or cash flows
of the Company taken as a whole.
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. At December 31, 1996, the Company had no outstanding
forward commitment contracts.
The Company has accrued $51,000 for a former operating location to record the
potential liability for environmental contamination at this site. The Company
believes that the total cost for this environmental liability will not exceed
the amount accrued.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information whether or not recognized in the balance
sheet, when it is practicable to estimate the fair value. SFAS 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity or
contractual obligations which require the exchange of cash or financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock, property and equipment and
other assets and liabilities.
-31-
<PAGE> 73
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 AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
RECEIVABLES
For residential mortgage loans, commercial loans and automobile loans fair value
is estimated using the market prices received on recent sales or securitizations
of these loans in the secondary market.
MORTGAGE LOANS HELD FOR SALE
Fair value for mortgage loans held for sale is determined using the anticipated
price to be derived from the sale of the mortgage loans in the secondary market.
EXCESS SERVICING RECEIVABLE
Fair value of the excess servicing receivable is determined based on the
discounted present value of the remaining excess estimated future cash flows
using estimated prepayment and default rates and discount rates anticipated in
similar instruments.
INVESTMENT IN ASSET-BACKED SECURITIES
Fair value of the investment in asset-backed securities approximates the
carrying amount. Fair value is determined based on the discounted present value
of the remaining estimated future cash flows attributable to the related
investment in asset-backed securities using estimated prepayment and default
rates and discount rates anticipated in similar instruments.
INVESTOR SAVINGS
Due to their short-term maturity, usually one year, the fair value of the notes
due investors and subordinated debentures is the current carrying amount.
NOTES PAYABLE TO BANKS AND OTHER
The fair value of notes payable to banks and other approximates the carrying
amount. Rates with similar terms and maturities currently available to the
Company are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is determined by using the
anticipated market prices that the loans will generate in the secondary market.
-32-
<PAGE> 74
COMMON STOCK
===============================================================================
EMERGENT GROUP, INC. AND SUBSIDIARIES
Traded --
The Company's Common stock is traded on the NASDAQ National Market.
The Company is included in the National Association of Securities Dealers, Inc.
(NASD) Automated Quotation System. At March 14, 1997, the closing price was
$14.50 for the Company's Common Stock. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not necessarily
reflect actual transactions.
<TABLE>
<CAPTION>
HIGH AND LOW BID PRICES
- -------------------------------------------------------------------------------
COMMON BID COMMON BID
----------- ----------
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW
- ----------------------- --------- ------ ------------------- ------ ------
<S> <C> <C> <C> <C> <C>
First Quarter 1995 $1.13 $0.56 First Quarter 1996 $9.00 $4.00
Second Quarter 1995 $1.88 $0.75 Second Quarter 1996 $12.50 $9.00
Third Quarter 1995 $5.50 $1.75 Third Quarter 1996 $12.00 $7.50
Fourth Quarter 1995 $6.50 $2.00 Fourth Quarter 1996 $14.50 $10.50
</TABLE>
OUTSTANDING - 9,144,430 shares Common as of March 14, 1997
SHAREHOLDERS
OF RECORD - 860 Common as of March 14, 1997
DIVIDENDS - No dividends were paid or declared during 1996 or 1995
No cash dividends are expected to be paid on the Common Stock
for the forseeable future
TRANSFER AGENT AND REGISTRAR:
First Union Bank of North Carolina
301 South Tryon Street, M-12
Charlotte, North Carolina 28288
34
<PAGE> 75
GENERAL INFORMATION
=============================================================================
EMERGENT GROUP, INC.
BOARD OF DIRECTORS
JOHN M. STERLING, JR. - Chief Executive Officer and Chairman of the Board of
Emergent Group, Inc.
KEITH B. GIDDENS - President and Chief Operating Officer of Emergent Group,
Inc.
ROBERT S. DAVIS - Vice President -Administration of Emergent Group, Inc.
CLARENCE B. BAUKNIGHT - Chairman of the Board of Enterprise Computer Systems,
Inc.
TECUMSEH HOOPER, JR. - President, Mid-South Region of IKON Office Solutions,
Inc.
JACOB H. MARTIN - Retired, former Chairman of Standard Car Truck Company
BUCK MICKEL - Chairman of the Board and Chief Executive Officer of RSI Holdings,
Inc.
PORTER B. ROSE - President of Liberty Insurance Services, Inc. and Liberty
Investment Group, Inc.; Chairman of Liberty
Capital Advisors, Inc. and Liberty Properties Group, Inc.
SEC FORM 10-K
Upon written request the Company will provide, without charge, a copy of its
1996 Annual Report to Shareholders on Form 10-K as filed with the Securities and
Exchange Commission (including financial statements and schedules but excluding
exhibits). Requests for this document should be directed to Robert S. Davis,
Vice President - Administration, Emergent Group, Inc., P.O. Box 17526,
Greenville, SC 29606.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Greenville, South Carolina
GENERAL COUNSEL
Wyche, Burgess, Freeman & Parham, P.A.
Greenville, South Carolina
35
<PAGE> 76
ANNUAL MEETING
===============================================================================
EMERGENT GROUP, INC.
ANNUAL MEETING
The 1997 meeting of holders of Emergent Group, Inc. Common Stock is scheduled to
be held on Tuesday, May 27, 1997 at 9:00 a.m. at the Hyatt Regency Hotel, 220
North Main Street, Greenville South Carolina.
EXECUTIVE OFFICERS
John M. Sterling, Jr. Chairman and Chief Executive Officer
Keith B. Giddens President and Chief Operating Officer
Kevin J. Mast Vice President, Chief Financial Officer and Treasurer
Robert S. Davis Vice President - Administration
C. Thomas Wyche Secretary
DIVISIONAL OFFICERS
Dennis W. Canupp Chief Operating Officer, Mortgage Loan Division
Samuel J. Couvillion Chief Operating Officer, Small Business Loan Division
36
<PAGE> 77
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1995 1996
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------- --------------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 1,260 $ 1,260 $ 1,276 $ 1,276
Restricted cash 912 912 5,319 5,319
Loans receivable, net 103,865 107,520 84,966 89,493
Mortgage loans held for sale 22,593 23,526 100,063 104,066
Excess servicing receivable, net 2,054 2,054 4,315 4,700
Investment in asset-backed securities, net 865 865 3,581 3,935
Financial Liabilities:
Notes payable to banks and other $ 31,633 $ 31,633 $ 55,494 $ 55,494
Notes due to investors 82,132 82,132 97,987 97,987
Subordinated debentures 16,185 16,185 16,115 16,115
Commitments to extend credit 84,157 89,711 129,431 136,628
</TABLE>
-33-
<PAGE> 78
ANNUAL REPORT ON FORM 10-K
LIST OF FINANCIAL STATEMENTS
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1996
EMERGENT GROUP, INC.
GREENVILLE, SOUTH CAROLINA
35
<PAGE> 79
Form 10-K
Emergent Group, Inc. and Subsidiaries
List of Financial Statements
The following consolidated financial statements of Registration and subsidiaries
included in the Company's Annual Report to the Shareholders for the year ended
December 31, 1996 are incorporated herein by reference in item 8:
Consolidated Financial Statements of Emergent Group, Inc., and subsidiaries:
Report of Independent Auditors for the year ended December 31, 1996
Report of Independent Auditors for each of the two years in the period ended
December 31, 1995
Consolidated Balance Sheets - December 31, 1995 and 1996
Consolidated Statement of Income - Years ended December 31, 1994, 1995, and
1996
Consolidated Statement of Shareholders' Equity - Years ended December 31, 1994,
1995 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1995,
and 1996
Notes to Consolidated Financial Statements
36
<PAGE> 80
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.
EMERGENT GROUP, INC.
-------------------------------------
Registrant
March 24, 1997 \s\ John M. Sterling, Jr.
- ----------------------------- --------------------------------------
(Date) John M. Sterling, Jr.
Board of Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ Robert S. Davis \s\ Tecumseh Hooper, Jr.
- ---------------------------------- -------------------------------------
Robert S. Davis Tecumseh Hooper, Jr.
Vice President-Administration Director
Director
\s\ John M. Sterling, Jr. \s\ Clarence B. Bauknight
- ---------------------------------- -------------------------------------
John M. Sterling, Jr. Clarence B. Bauknight
Chairman of the Board of Directors Director
and Chief Executive Officer
\s\ Buck Mickel \s\ Porter B. Rose
- ---------------------------------- -------------------------------------
Buck Mickel Porter B. Rose
Director Director
\s\ Jacob H. Martin \s\ Keith B. Giddens
- ---------------------------------- -------------------------------------
Jacob H. Martin Keith B. Giddens
Director President and Chief Operating Officer
Director
March 24, 1997 \s\ Kevin J. Mast
- --------------------------------- -------------------------------------
(Date) Kevin J. Mast
Vice President, Chief Financial Officer
and Treasurer
37
<PAGE> 1
EXHIBIT 10.19
THIRD AMENDMENT TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
THIRD AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"),
dated as of February 4, 1997 by and among EMERGENT MORTGAGE CORP.
("Borrower"), CAROLINA INVESTORS, INC. and EMERGENT GROUP, INC. (each, jointly
and severally, a "Guarantor" and, collectively, the "Guarantors"), FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, COMERICA BANK, FIRST NATIONAL BANK OF BOSTON,
BANK UNITED and BANK ONE TEXAS, N.A. (collectively, the "Lenders"); and FIRST
UNION NATIONAL BANK OF NORTH CAROLINA, as administrative agent for the Lenders
(in such capacity, the "Administrative Agent").
STATEMENT OF PURPOSE
WHEREAS, the Borrower, the Lenders and the Administrative Agent are
parties to a Mortgage Loan Warehousing Agreement dated as of March 6, 1996, as
amended by that certain First Amendment to Mortgage Loan Warehousing Agreement
dated as of April 3, 1996 and by that certain Second Amendment to Mortgage Loan
Warehousing Agreement dated as of September 11, 1996 and as modified by that
certain letter agreement dated as of November 30, 1996 (as so amended and
modified, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as set
forth below; and
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Lenders and the Administrative Agent are willing to continue to make
available to the Borrower the credit facilities provided for in the Credit
Agreement; and
WHEREAS, a specific condition to the willingness of the Lenders and the
Administrative Agent to continue to make available to the Borrower the credit
facilities provided for in the Credit Agreement, is the reaffirmation by each
of the Guarantors of the Guaranty to which such Guarantor is a party; and
WHEREAS, each of the Guarantors will derive a material benefit from the
continued availability to the Borrower of the credit facilities provided for in
the Credit Agreement and therefore each of the Guarantors is willing to
reaffirm the Guaranty to which such Guarantor is a party;
NOW, THEREFORE, in consideration of the premises and agreements contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are acknowledged by the parties hereto, the parties hereto hereby agree
as follows:
1. All capitalized terms used herein and not otherwise defined shall have
the respective meanings provided to such terms in the Credit Agreement, as
amended hereby.
<PAGE> 2
2. Amendment to the Credit Agreement.
a. The definition of the term "Maturity Date" contained in Paragraph 11 of
the Credit Agreement is hereby amended by deleting the phrase "the 364th day
following the date of this Agreement" therefrom and substituting the date
"April 4, 1997" in lieu thereof.
3. This Amendment shall become effective as of the date hereof, provided
that the Administrative Agent shall have received by such date the following
items:
a. A copy of this Amendment executed by the Borrower, each of
the Guarantors, each of the Lenders, and the Administrative Agent
(whether such parties shall have signed the same or different
copies);
b. A certificate of even date herewith signed by the
President or any Vice President of the Borrower and attested to by
the Secretary or any Assistant Secretary of the Borrower
certifying that (i) the Articles, Bylaws and resolutions of the
Borrower previously delivered to the Administrative Agent remain
in full force and effect except as provided therein, (ii) the
Borrower remains in good standing, (iii) all representations and
warranties of the Borrower previously made to the Lenders remain
true, complete and accurate, and (iv) no Event of Default or
Potential Default has occurred and is continuing; and
c. Resolutions of the Borrower and of each of the Guarantors
authorizing the execution of this Amendment.
4. This Amendment is limited and, except as set forth herein, shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement, or any other document or instrument entered into in
connection therewith.
5. This Amendment may be executed in any number of counterparts by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which together
shall constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Administrative Agent.
6. This Amendment and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina.
7. From and after the date hereof, all references in the Credit Agreement,
and any other document or instrument entered into in connection therewith, to
the Credit Agreement shall be deemed to be references to the Credit Agreement
as amended hereby.
8. The Guarantors join in the execution and delivery of this Amendment to
acknowledge and consent to the terms hereof and hereby reaffirm their
obligations under the
<PAGE> 3
Guaranties and agree that the Guaranties shall remain in full force and effect
with respect to the Obligations.
9. THE LENDERS, THE ADMINISTRATIVE AGENT, THE GUARANTORS AND THE BORROWER
EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS AND THE ADMINISTRATIVE
AGENT TO ENTER INTO THIS AMENDMENT.
<PAGE> 4
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
EMERGENT MORTGAGE CORP., a South Carolina
corporation
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President & Treasurer
--------------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association, as Administrative
Agent and as a Lender
By: /s/ R. Steven Hall
-----------------------------------------------
Name: R. Steven Hall
---------------------------------------------
Title: Vice President
--------------------------------------------
COMERICA BANK, a Michigan banking corporation
By: /s/ N. Donald Heath
-----------------------------------------------
Name: N. Donald Heath
---------------------------------------------
Title: Vice President
--------------------------------------------
FIRST NATIONAL BANK OF BOSTON, a national banking
association
By: /s/ Gunther Fritze
-----------------------------------------------
Name: Gunther Fritze
---------------------------------------------
Title: Vice President
--------------------------------------------
BANK UNITED, a federal savings bank
By: /s/ John D. West
-----------------------------------------------
Name: John D. West
---------------------------------------------
Title: Regional Director
--------------------------------------------
<PAGE> 5
BANK ONE TEXAS, N.A., a national banking
association
By: /s/ Mark L. Freeman
-----------------------------------------------
Name: Mark L. Freeman
---------------------------------------------
Title: Vice President
--------------------------------------------
CAROLINA INVESTORS, INC., a South Carolina
corporation, as a Guarantor
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President & Treasurer
--------------------------------------------
EMERGENT GROUP, INC., a South Carolina
corporation, as a Guarantor
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President, Treasurer & CFO
--------------------------------------------
<PAGE> 6
FOURTH AMENDMENT TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
FOURTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"),
dated as of March 5, 1997 by and among EMERGENT MORTGAGE CORP.
("Borrower"), CAROLINA INVESTORS, INC. and EMERGENT GROUP, INC. (each, jointly
and severally, a "Guarantor" and, collectively, the "Guarantors"), FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, COMERICA BANK, FIRST NATIONAL BANK OF BOSTON,
BANK UNITED and BANK ONE TEXAS, N.A. (collectively, the "Lenders"); and FIRST
UNION NATIONAL BANK OF NORTH CAROLINA, as administrative agent for the Lenders
(in such capacity, the "Administrative Agent").
STATEMENT OF PURPOSE
WHEREAS, the Borrower, the Lenders and the Administrative Agent are
parties to a Mortgage Loan Warehousing Agreement dated as of March 6, 1996, as
amended by that certain First Amendment to Mortgage Loan Warehousing Agreement
dated as of April 3, 1996 and by that certain Second Amendment to Mortgage Loan
Warehousing Agreement dated as of September 11, 1996, as modified by that
certain letter agreement dated as of November 30, 1996, and as amended by that
certain Third Amendment to Mortgage Loan Warehousing Agreement dated as of
February 4, 1997 (as so amended and modified, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as set
forth below; and
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Lenders and the Administrative Agent are willing to continue to make
available to the Borrower the credit facilities provided for in the Credit
Agreement; and
WHEREAS, a specific condition to the willingness of the Lenders and the
Administrative Agent to continue to make available to the Borrower the credit
facilities provided for in the Credit Agreement, is the reaffirmation by each
of the Guarantors of the Guaranty to which such Guarantor is a party; and
WHEREAS, each of the Guarantors will derive a material benefit from the
continued availability to the Borrower of the credit facilities provided for in
the Credit Agreement and therefore each of the Guarantors is willing to
reaffirm the Guaranty to which such Guarantor is a party;
NOW, THEREFORE, in consideration of the premises and agreements contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are acknowledged by the parties hereto, the parties hereto hereby agree
as follows:
<PAGE> 7
1. All capitalized terms used herein and not otherwise defined shall have
the respective meanings provided to such terms in the Credit Agreement, as
amended hereby.
2. Amendment to the Credit Agreement.
a. The definition of the term "Aggregate Facility Commitment" contained in
Paragraph 11 of the Credit Agreement is hereby amended by deleting the amount
"$70,000,000" therefrom and substituting the amount "$120,000,000" in lieu
thereof.
b. The Commitment Schedule attached as Schedule III to the Credit
Agreement is hereby deleted in its entirety and the Commitment Schedule
attached as EXHIBIT A hereto is hereby substituted in lieu thereof.
3. The Borrower hereby represents and warrants as of the date hereof that
(i) its parent corporation, Emergent Group, Inc., contributed $5,000,000 in
paid-in-capital to the Borrower during the month of February 1997; (ii) as of
the date hereof, said paid-in-capital has not been withdrawn or distributed and
has been retained in full; and (iii) no portion of said paid-in-capital shall
be withdrawn, distributed or otherwise disbursed so long as any Obligations
remain outstanding.
4. This Amendment shall become effective as of the date hereof, provided
that the Administrative Agent shall have received by such date the following
items:
a. A copy of this Amendment executed by the Borrower, each of
the Guarantors, each of the Lenders, and the Administrative Agent
(whether such parties shall have signed the same or different
copies);
b. A certificate of even date herewith signed by the
President or any Vice President of the Borrower and attested to by
the Secretary or any Assistant Secretary of the Borrower
certifying that (i) the Articles, Bylaws and resolutions of the
Borrower previously delivered to the Administrative Agent remain
in full force and effect except as provided therein, (ii) the
Borrower remains in good standing, (iii) all representations and
warranties of the Borrower previously made to the Lenders remain
true, complete and accurate, and (iv) no Event of Default or
Potential Default has occurred and is continuing; and
c. Resolutions of the Borrower and of each of the Guarantors
authorizing the execution of this Amendment.
5. This Amendment is limited and, except as set forth herein, shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement, or any other document or instrument entered into in
connection therewith.
<PAGE> 8
6. This Amendment may be executed in any number of counterparts by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which together
shall constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Administrative Agent.
7. This Amendment and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina.
8. From and after the date hereof, all references in the Credit Agreement,
and any other document or instrument entered into in connection therewith, to
the Credit Agreement shall be deemed to be references to the Credit Agreement
as amended hereby.
9. The Guarantors join in the execution and delivery of this Amendment to
acknowledge and consent to the terms hereof and hereby reaffirm their
obligations under the Guaranties and agree that the Guaranties shall remain in
full force and effect with respect to the Obligations.
10. THE LENDERS, THE ADMINISTRATIVE AGENT, THE GUARANTORS AND THE BORROWER
EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN
CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS AND THE ADMINISTRATIVE
AGENT TO ENTER INTO THIS AMENDMENT.
<PAGE> 9
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
EMERGENT MORTGAGE CORP., a South Carolina
corporation
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President & Treasurer
--------------------------------------------
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association, as Administrative
Agent and as a Lender
By: /s/ R. Steven Hall
-----------------------------------------------
Name: R. Steven Hall
---------------------------------------------
Title: Vice President
--------------------------------------------
COMERICA BANK, a Michigan banking corporation
By: /s/ N. Donald Heath
-----------------------------------------------
Name: N. Donald Heath
---------------------------------------------
Title: Vice President
--------------------------------------------
FIRST NATIONAL BANK OF BOSTON, a national banking
association
By: /s/ Paul Chemelinski
-----------------------------------------------
Name: Paul Chemelinski
---------------------------------------------
Title: Vice President
--------------------------------------------
BANK UNITED, a federal savings bank
By: /s/ John D. West
-----------------------------------------------
Name: John D. West
---------------------------------------------
Title: Regional Director
--------------------------------------------
<PAGE> 10
BANK ONE TEXAS, N.A., a national banking
association
By: /s/ Mark Freeman
-----------------------------------------------
Name: Mark Freeman
---------------------------------------------
Title: Vice President
--------------------------------------------
CAROLINA INVESTORS, INC., a South Carolina
corporation, as a Guarantor
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President & Treasurer
--------------------------------------------
EMERGENT GROUP, INC., a South Carolina
corporation, as a Guarantor
By: /s/ Kevin J. Mast
-----------------------------------------------
Name: Kevin J. Mast
---------------------------------------------
Title: Vice President, CFO & Treasurer
--------------------------------------------
<PAGE> 11
EXHIBIT A
T0
FOURTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT
DATED AS OF MARCH 5, 1997
LISTING
EMERGENT MORTGAGE CORP.
AS BORROWER
COMMITMENT SCHEDULE
-------------------
<TABLE>
<CAPTION>
Lender Maximum Commitment Percentage Share
- ------ ------------------ ----------------
<S> <C> <C>
First Union National Bank
of North Carolina $ 28,000,000 23.34%
Comerica Bank $ 17,000,000 14.17%
First National Bank of
Boston $ 25,000,000 20.83%
Bank United $ 25,000,000 20.83%
Bank One Texas, N.A. $ 25,000,000 20.83%
- ----------------------------------------------------------------------------------------------
AGGREGATE
FACILITY COMMITMENT $120,000,000 100%
</TABLE>
<PAGE> 1
EXHIBIT 10.20
EXECUTION COPY
================================================================================
INTERIM WAREHOUSE AND
SECURITY AGREEMENT
by and between
PRUDENTIAL SECURITIES CREDIT
CORPORATION,
as Lender
EMERGENT MORTGAGE CORP.,
as Borrower
and
EMERGENT GROUP, INC.,
as Guarantor
Dated as of March 4, 1997
================================================================================
<PAGE> 2
INTERIM WAREHOUSE AND SECURITY AGREEMENT
INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of March 4,
1997 (as amended or otherwise modified from time to time, this "Agreement")
among PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation, having
an office at 1220 N. Market Street, Wilmington, Delaware 19801 (the "Lender"),
EMERGENT MORTGAGE CORP., a South Carolina corporation, having its principal
office at 50 Datastream Plaza, Suite 201, Greenville, South Carolina 29605 (the
"Borrower") and EMERGENT GROUP, INC., a South Carolina corporation, having its
principal office at 15 South Main Street, Suite 750, Greenville, South Carolina
29606 (the "Guarantor").
WHEREAS, the Lender intends to lend and the Borrower intends
to borrow up to a maximum of $50,000,000 (fifty million dollars) to fund the
purchase or origination by the Borrower of fixed rate, first- and second-lien,
1-4 family mortgage loans;
WHEREAS, the Guarantor owns 100% of the common stock of the
Borrower and has agreed to guarantee repayment of the Loan and any interest on
the terms specified herein to the Lender in the event that the Borrower does
not repay the Loan; and
WHEREAS, the Lender's affiliate, Prudential Securities
Incorporated ("PSI") will act as the sole or lead manager on the
mortgage-backed securities issuance (the "Securitization") to be sponsored by
the Borrower (or by an affiliate thereof) and collateralized by the Pledged
Mortgage Loans.
An index to the location of the definitions of the defined
terms used herein is set forth as Appendix I hereto.
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the parties hereto hereby agree as follows:
1. The Loan and the Guarantee.
A. Subject to the terms of this Agreement:
1. The Lender agrees to lend to the Borrower up to a
maximum of $50,000,000 (such borrowing, the "Loan") to be made in one
or more advances (each, an "Advance") (as any such amount may be
increased, in the Lender's sole and unreviewable discretion, by means
of a Credit Increase Confirmation and Note Amendment in the form of
Exhibit C attached hereto (a " Credit Increase Confirmation")). Each
Advance hereunder shall be made by the Lender in an amount not less
than $500,000 and in the event the Borrower
<PAGE> 3
requests more than 2 Advances in any calendar week, the borrower shall
pay to the Lender a $1,000 advance fee for each subsequent Advance
hereunder. The Borrower agrees that the Loan shall be used to
warehouse fixed rate, first- and second-lien, 1-4 family residential
mortgage loans that are to be included in the Securitization (the "
Mortgage Loans"), as such Mortgage Loans are identified to the Lender
in writing and in electronic form from time to time. All Mortgage
Loans financed hereunder shall be closed loans; i.e., this facility
shall not be used for "wet" or "table" fundings. The Lender may
refuse to lend against any Mortgage Loan(s) which the Lender
reasonably believes will not be eligible for inclusion in the
securitized pool either (x) due to the characteristics of such
Mortgage Loan or (y) due to the expected aggregate characteristics of
the Mortgage Loans.
2. Each Advance shall be made on a date prior to the
Maturity Date referred to below (each such date, a " Funding Date");
provided that:
(i) not later than two business days
prior to the proposed Funding Date for an Advance, the Borrower shall
deliver to the Lender (i) a written notice in the form of Exhibit D
hereto and (ii) an electronic disk or tape, in form satisfactory to
the Lender, detailing certain specified characteristics of the
Mortgage Loans proposed to be pledged in connection with such Advance
(each such schedule, a " Mortgage Loan Schedule");
(ii) the representations, warranties and
covenants of the Borrower set forth in this Agreement hereof shall be
true and correct on and as of such Funding Date as if made on and as
of such date;
(iii) no Event of Default shall have
occurred and be continuing or would exist after the making of the
Advance on such Funding Date;
(iv) the Borrower shall have delivered to
the Custodian the Mortgage Files with respect to each Mortgage Loan
being pledged on such Funding Date;
(v) the Lender shall have received in
connection with each Advance, a certificate from the Custodian to the
effect that it has reviewed the Mortgage Files relating to the
Mortgage Loans being pledged in connection with the Advance being made
on such Funding Date and has found no material deficiencies in such
Mortgage Files;
(vi) the Lender shall have received,
prior to the initial Advance, a legal opinion from counsel (which may
be in-house counsel) to the Borrower in the form of Exhibit B attached
hereto;
(vii) to the extent described in Section
5(D) hereof, no notice described in said Section 5(D) shall have been
received by the Lender or PSI;
(viii) the Lender shall have completed, to
its satisfaction, due diligence of the Borrower and the Mortgage
Loans;
2
<PAGE> 4
(ix) the Borrower shall have taken all
necessary steps to grant the Lender a first priority security interest
in the Collateral; and
(x) all documentation relating to the
Loan shall have been completed and be satisfactory in form and
substance to the Lender, including this Agreement, the Custodial
Agreement and the Secured Note.
3. The Loan shall accrue interest daily on its
outstanding principal amount (determined by the Lender as of each
Funding Date after having taken into account all Advances made as of
such date), with interest calculated for the actual number of days
elapsed, based on a 360-day year. The interest rate shall be (except
as otherwise provided in Section 1(F) or Section 11(D) hereof) LIBOR
plus 1.55%, and shall be reset on each business day. With respect to
each Advance, interest shall initially accrue from the Funding Date to
and including the last day of the calendar month in which such Funding
Date occurs (or, if earlier, the day preceding the Maturity Date) and
shall thereafter accrue from the first day of each successive calendar
month to and including the last day of such calendar month (or, if
earlier, the day preceding the Maturity Date) (each such period, an "
Accrual Period"). Interest which accrues during each Accrual Period
shall be payable in arrears on the first business day of the following
month, with any outstanding interest due and payable in its entirety
on the date of termination of this Agreement (including the Maturity
Date).
"LIBOR" shall mean, for each day, a fluctuating interest rate
per annum equal to the London interbank offered rate for one-month
U.S. dollar deposits that appear on the Telerate Screen LIBOR Page
3750 as of 11:00 a.m., London time.
Any amounts pre-paid under this Agreement prior to the
Maturity Date may be re-borrowed, subject to the terms and conditions
of this Agreement, until the Maturity Date.
B. The amount of each Advance shall not exceed the
lesser of (such lesser amount, the "Advance Amount"):
1. 100% of the aggregate outstanding principal balance of the
Mortgage Loans (calculated as of the related Cut-Off Date or, if the
Borrower is using the proceeds of the Advance to purchase the related
Mortgage Loans at their aggregate outstanding principal balance as of
the settlement date for the purchase, then their aggregate outstanding
principal balance as of such settlement date) proposed to be pledged
to the Lender in connection with such Advance, minus, in the event
that A Collateral Deficiency Situation exists as of the date of such
Advance, the Restoration Amount as of the date of such Advance; and
2. the product of (x) the Market Value of the Mortgage Loans
proposed to be pledged to the Lender in connection with such Advance
and (y) .95,
3
<PAGE> 5
minus, in the event that A Collateral Deficiency Situation exists as
of the date of such Advance, the Restoration Amount as of the date of
such Advance.
For purposes of this Agreement:
A Collateral Deficiency Situation means the situation existing
as of any day on which (i) the outstanding principal amount of the
Loan as of such day exceeds (ii) the lesser of (a) the product of (x)
the Market Value of the Pledged Mortgage Loans (disregarding the
Market Value of any Mortgage Loans proposed to be pledged to the
Lender on such day and Mortgage Loans which are 31 or more days past
due) and (y) 95% and (b) the outstanding principal balance of the
Pledged Mortgage Loans (disregarding the outstanding principal balance
of any Mortgage Loans to be pledged to the Lender on such date and
Mortgage Loans which are 31 or more days past due).
Cut-Off Date means, as of any date, the close of business on
the date set forth in the related Mortgage Loan Schedule (as defined
in the Custodial Agreement). In no event shall the Cut-Off Date
precede by more than two weeks the date on which the related Mortgage
Loan Schedule is delivered.
Market Value means, as of any date and with respect to any
Mortgage Loans, the whole-loan servicing- retained fair market value
of such Mortgage Loans as of such date as determined by the Lender (or
an affiliate thereof) in its sole discretion.
Maturity Date means the earlier of (a) March 31, 1997 and (b)
the date on which the Securitization occurs. The Maturity Date may be
extended by the Lender, in the Lender's sole and unreviewable
discretion, on any date by the execution and delivery of a Credit
Increase Confirmation.
Pledged Mortgage Loans means, as of any date of determination,
any mortgage loans then held by the Custodian on behalf of the Lender
to secure the Loan.
Restoration Amount means, as of any date of determination, the
amount, if any, by which (i) the outstanding principal amount of the
Loan as of such date (including accrued interest) exceeds (ii) the
lesser of (a) the product of (x) the Market Value of the Pledged
Mortgage Loans (disregarding the Market Value of any Mortgage Loans
proposed to be pledged to the Lender on such date and Mortgage Loans
which are 31 or more days past due) and (y) .95 and (b) the
outstanding principal balance of the Pledged Mortgage Loans
(disregarding the outstanding principal balance of any Mortgage Loans
to be pledged to the Lender on such date and Mortgage Loans which are
31 or more days past due).
C. The Loan evidenced hereby shall mature on the Maturity
Date and all amounts outstanding hereunder shall be due and payable on the
Maturity Date.
4
<PAGE> 6
D. The Loan is pre-payable at any time without premium or
penalty, in whole or in part; provided, that Pledged Mortgage Loans may not be
removed from this facility (including in connection with any prepayment of the
Loan in part) with the result that, in the Lender's sole reasonable
determination, the remaining Pledged Mortgage Loans, are, in the aggregate,
materially inferior as collateral as compared to the pool of Pledged Mortgage
Loans immediately prior to such removal. In addition, no Pledged Mortgage
Loans may be removed from this facility with the result that A Collateral
Deficiency Situation would then exist. Notwithstanding the foregoing, however,
a Pledged Mortgage Loan, may in any event be removed from this facility if such
Pledged Mortgage Loan has been paid in full by the mortgagor. If any Pledged
Mortgage Loans are removed from this facility for reasons other than as
contemplated herein, the Borrower shall pay to the Lender on the first business
date following such removal a fee equal to .50% of the outstanding principal
balance of such removed Pledged Mortgage Loan(s). If the Borrower intends to
repay the Loan in whole or in substantial part from a source other than the
proceeds of the Securitization, the Borrower shall give 2 business days'
written notice to the Lender.
E. If the Loan is not extended by means of a Credit Increase
Confirmation, the Loan shall immediately and automatically become due and
payable without any further action by the Lender on the then scheduled Maturity
Date, and in the event of non-payment in full on such Maturity Date the Lender
may exercise all rights and remedies available to it as the holder of a first
perfected security interest under the Uniform Commercial Code of the State of
New York (the "New York UCC").
F. If the Borrower awards a Securitization or whole-loan
trade involving any Pledged Mortgage Loans to a group of managers (or to an
investment banking house, agent, broker, or underwriter) which in PSI's
reasonable determination does not give PSI a fair allotment of the securities
issued in such Securitization, then the interest rate on the Loan shall
increase to LIBOR plus 3.50%, which higher rate shall retroactively be applied
as of the related Funding Date for all prior Advances or Pledged Mortgage Loans
so involved.
G. The Loan shall be evidenced by the secured promissory note
of the Borrower in the form attached hereto as Exhibit A (the "Secured Note").
H. Upon the occurrence and continuance of an Event of Default
and/or in the event that the Loan is extended beyond its then scheduled
Maturity Date by means of a Credit Increase Confirmation, the factors set forth
in the definitions of "Advance Amount," "A Collateral Deficiency Situation" and
"Restoration Amount" may be revised downward, at the time of such extension in
the case of a Credit Increase Confirmation, by the Lender in its sole
discretion.
I. The Guarantor, pursuant to the guarantee to be executed by
the Guarantor in the form of Exhibit E attached hereto (the "Guarantee"), shall
guaranty, at the time of A Collateral Deficiency Situation or upon the
occurrence and continuance of an Event of Default, payment of one hundred
percent (100%) of the Secured Obligations outstanding at such time (the
"Guarantee Amount") and in furtherance thereof but subject to the Guarantee
Amount, the Guarantor shall be obligated to pay (i) following the occurrence of
A Collateral Deficiency Situation, the
5
<PAGE> 7
Restoration Amount, if any, then due to the Lender and (ii) following the
occurrence of an Event of Default, principal and interest outstanding on the
Loan after the Lender has liquidated the Collateral. The Guarantee shall
survive the termination of this Agreement and shall remain in full force and
effect until the Guarantee Amount shall have been reduced to zero.
2. Reimbursement of Costs and Expenses.
The Borrower shall reimburse the Lender for any of the
Lender's reasonable out-of-pocket costs, including due diligence review costs
and reasonable attorney's fees, incurred by the Lender in connection with the
negotiation, execution and enforcement of this Agreement and the transactions
contemplated hereby. The Borrower's agreement in this Section 2 shall survive
the payment in full of the Note and the expiration or termination, as
applicable, of this Agreement.
3. Mortgage Files and Custodian. The Borrower shall
deliver to Bankers Trust Company of California, N.A. as custodian (the
"Custodian") on behalf of the Lender, the documents and instruments listed in
Section 2 of that certain Custodial Agreement dated as of March 4, 1997 (the
"Custodial Agreement") among the Borrower and the Custodian. Such documents
and instruments evidencing and relating to the Mortgage Loans (the "Mortgage
Loan Files"), and all the Borrower's right, title and interest in, to and under
such Mortgage Loans together with any proceeds thereof are hereinafter referred
to as the "Collateral". The Borrower hereby pledges all of its right, title
and interest in, to and under the Collateral to the Lender to secure the
repayment of principal of and interest on the Loan and all other amounts owing
by the Borrower or its Affiliates to the Lender hereunder or under any other
agreement or arrangement (collectively, the "Secured Obligations").
4. Representations, Warranties and Covenants. A. Each
of the Borrower and the Guarantor (each, a "Party") represents, warrants and
covenants to the Lender that:
1. It has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of South
Carolina.
2. It is duly licensed as a "Licensee" or is otherwise
qualified in each state in which it transacts business and is not in
default of such state's applicable laws, rules and regulations. The
Borrower has the requisite power and authority and legal right to own
and grant a lien on all of its right, title and interest in and to the
Collateral. Such Party has the requisite power and authority to
execute and deliver, engage in the transactions contemplated by, and
perform and observe the terms and conditions of, this Agreement, the
Secured Note and the Guarantee, to the extent that it is a party to
such documents.
3. At all times after the Custodian has received a
Mortgage Loan from the Borrower and until payment in full of
the Loan, such Party shall not knowingly and intentionally commit any
act in violation of applicable laws, or regulations promulgated with
respect thereto.
6
<PAGE> 8
4. Such Party is solvent and is not in default under any
material mortgage, borrowing agreement or other instrument or
agreement pertaining to indebtedness for borrowed money, and neither
the execution, delivery nor performance by such Party of this
Agreement, the Guarantee or the Secured Note, to the extent it is a
party to such documents, conflicts with any term or provision of the
certificate of incorporation or by- laws of such Party or any law,
rule, regulation, order, judgment, writ, injunction or decree
applicable to such Party of any court, regulatory body, administrative
agency or governmental body having jurisdiction over such Party and
will not result in any violation of any such mortgage, instrument or
agreement.
5. All financial statements and certificates of such
Party, any Affiliate of such Party or any of its officers furnished to
the Lender are true and complete and do not omit to disclose any
material liabilities or other facts relevant to such Party's or such
Affiliate's condition. As used in this Agreement, "Affiliate" means
any person directly or indirectly controlling, controlled by, or under
common control (within the definition of "control" set forth in the
Securities and Exchange Act of 1934, as amended) with, the Borrower or
the Guarantor. All such financial statements have been prepared in
accordance with GAAP. No financial statement or other financial
information as of a date later than that supplied to the Lender, has
been furnished by such Party or any of its Affiliates to another
lender of such Party or any of its Affiliates that has not been
furnished to the Lender.
6. No consent, approval, authorization or order of,
registration or filing with, or notice to any governmental authority
or court is required under applicable law in connection with the
execution, delivery and performance by such Party of this Agreement,
the Guarantee and the Secured Note, to the extent it is a party to
such documents.
7. There is no action, proceeding or investigation
pending with respect to which such Party has received service of
process or, to the best of such Party's knowledge threatened against
it before any court, administrative agency or other tribunal (A)
asserting the invalidity of this Agreement, the Guarantee or the
Secured Note, (B) seeking to prevent the consummation of any of the
transactions contemplated by this Agreement, the Guarantee or the
Secured Note, or (C) which might materially and adversely affect the
validity or collectibility of the Mortgage Loans or the performance by
it of its obligations under, or the validity or enforceability of,
this Agreement, the Guarantee or the Secured Note.
8. There has been no material adverse change in the
business, operations, financial condition, assets, properties or
prospects of such Party or any Affiliate since the date set forth in
the financial statements supplied to the Lender.
9. This Agreement, the Guarantee and the Secured Note
have been duly authorized, executed and delivered by such Party, to
the extent it is a
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<PAGE> 9
party to such documents, all requisite corporate action having been
taken, and each is valid, legal, binding and enforceable against such
Party, to the extent it is a party to such documents, in accordance
with its terms except as such enforcement may be affected by
bankruptcy, by other insolvency laws or by general principles of
equity.
B. With respect to every Mortgage Loan delivered to the
Custodian and pledged to the Lender hereunder, the Borrower represents and
warrants to the Lender that:
1. Such Mortgage Loan and all accompanying documents
are complete and authentic and all signatures thereon are genuine.
2. Such Mortgage Loan arose from a bona fide loan,
complying in all material respects with all applicable State and
Federal laws and regulations, to persons having legal capacity to
contract and is not subject to any defense, set-off or counterclaim.
3. All amounts represented to be payable on such
Mortgage Loan are, in fact, payable in accordance with the provisions
of such Mortgage Loan.
4. No default has occurred in any provisions of such
Mortgage Loan.
5. Any property subject to any security interest
given in connection with such Mortgage Loan is not subject to any
encumbrance other than a stated first mortgage.
6. The Borrower holds good and indefeasible title
to, and is the sole owner of, such Mortgage Loan subject to no liens,
charges, mortgages, participations, encumbrances or rights of others
except, in the case of certain Mortgage Loans, a stated first
mortgage.
7. Each Mortgage Loan conforms to the description
thereof as set forth on the related Mortgage Loan Schedule delivered
to the Custodian and the Lender.
8. All disclosures required by the Real Estate
Settlement Procedures Act, by Regulation X promulgated thereunder and
by Regulation Z of the Board of Governors of the Federal Reserve
System promulgated pursuant to the statute commonly known as the
Truth-in-Lending Act and the Notice of the Right of Recision required
by said statute and regulation have been properly made and given.
9. The Mortgage Loans have characteristics which are
substantially similar to those of other mortgage loans financed by the
Borrower during the twelve-month period preceding the initial Funding
Date and
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<PAGE> 10
mortgage loans included in securitizations involving credit enhancers
of the type contemplated by the Securitization.
10. Each Mortgage Loan will be eligible for
inclusion in a pool to be securitized and insured by a credit
enhancer; the Lender may refuse to lend against any Mortgage Loan(s)
which the Lender reasonably believes will not be eligible for
inclusion in such a securitized, insured pool either (x) due to the
characteristics of such Mortgage Loan or (y) due to the expected
aggregate characteristics of the Mortgage Loans.
11. Each Mortgage Loan was originated or acquired
pursuant to the Borrower's written underwriting guidelines (including
any amendments thereto) heretofore provided to, and approved by, the
Lender.
12. No Mortgage Loans are more than 31 days
delinquent, no Mortgage Loans have experienced delinquencies of more
than 31 days on two or more occasions and no Mortgage Loan has
incurred a first payment delinquency beyond any contractual grace
period.
C. The Borrower hereby covenants with the Lender that at
all times during the term of this facility:
1. The Borrower's stated net worth minus intangible
assets and the amount of any receivable from any of its shareholders
or Affiliates ("Tangible Net Worth") shall not be less than
$10,000,000.
2. The Borrower's Tangible Net Worth plus subordinated
debt maturing 180 days or more from the Maturity Date ("Subordinated
Debt") shall not be less than $40,000,000.
3. The Borrower's leverage ratio shall not exceed 6:1,
such ratio being the ratio of (x) the Borrower's total liabilities
less Subordinated Debt to (y) the Borrower's Tangible Net Worth minus
Subordinated Debt.
4. The Borrower will continue to maintain, for it and
its subsidiaries, insurance coverage with respect to employee
dishonesty, forgery or alteration, theft, disappearance and
destruction, robbery and safe burglary, property (other than money and
securities) and computer fraud in an aggregate amount of at least
$1,000,000, which insurance shall name the Lender as a loss payee.
5. All subordinated debt of the Borrower must be
subordinate to all obligations, including unsecured obligations, owed
to the Lender or PSI.
D. The Guarantor hereby covenants with the Lender that
at all times during the term of this facility the Guarantor's Tangible Net
Worth shall not be less than $40,000,000.
5. Mandatory Prepayment of Loan.
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<PAGE> 11
A. Upon discovery by the Borrower, the Guarantor or the
Lender of any breach of any of the representations, warranties or covenants set
forth herein, the party discovering such breach shall promptly give notice of
such discovery to the others.
B. The Lender has the right to require, in its
unreviewable discretion, the Borrower to repay the Loan in part with respect to
any Mortgage Loan (i) which breaches one or more of the representations and
warranties listed in Section 4(B) preceding or (ii) which is determined by the
Lender to be unacceptable for inclusion in such Securitization.
C. If any Mortgage Loan, as indicated on any
Supplemental Mortgage Loan Schedule delivered pursuant to Section 9(A) hereof,
becomes more than 31 days delinquent, the Lender shall require the Borrower to
prepay the Loan in the amount advanced with respect to such Mortgage Loan, or,
with the Lender's consent, deliver a qualifying substitute mortgage loan in its
place, having an aggregate principal balance equal to or greater than the
delinquent Mortgage Loan.
D. If the Borrower awards the Securitization or any
whole-loan trade involving any Pledged Mortgage Loans to an investment banking
house, agent or underwriter other than PSI, or to a group of managers which in
PSI's reasonable determination does not give PSI a fair allotment of the
securities issued in such Securitization then (x) the Lender may demand that
the Borrower repay any portion of the Loan evidenced hereby relating to the
dollar amount of the Mortgage Loans to be included in such Securitization or
whole loan trade, in which PSI has not been selected for participation, for
payment within five business days of the demand for repayment, (y) the Lender
may refuse to make further Advances hereunder if such Advances would relate to
Mortgage Loans to be included in such Securitization or whole-loan trade in
which PSI has not been selected for participation and (z) the interest rate on
the Loan shall increase as set forth in Section 1(F) hereof. The Borrower
shall give immediate notice, by facsimile transmission, to the attention of
Elizabeth Castagna at the Lender and Glen Stein at PSI (fax 212-778-7401) of
any decision to award the lead manager role or to name any group of managers
for any Securitization or whole-loan trade involving any Pledged Mortgage
Loans.
E. If, on any date other than a Funding Date, the Lender
determines that A Collateral Deficiency Situation exists, the Lender shall so
notify the Borrower, and the Borrower, within one business day, shall either
(i) pay to the Lender the Restoration Amount or (ii) deliver to the Custodian
on behalf of the Lender additional Mortgage Loans having an aggregate Market
Value at least equal to the Restoration Amount. The provisions of Section 1(B)
shall govern with regard to A Collateral Deficiency Situation as of a Funding
Date.
6. Release of Mortgage Files following Payment of Loan.
At the written request of the Borrower, the Lender agrees to cause the Mortgage
Files to be released from the lien hereof upon payment in full of the Loan, or,
if a partial payment of the Loan occurs, subject to the restrictions set forth
in Section 1(D), the documents relating to a pro rata portion of the Pledged
Mortgage Loans.
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<PAGE> 12
7. Servicing. The Borrower shall service the Mortgage
Loans with the degree of skill and care consistent with that which the Borrower
customarily exercises with respect to similar mortgage loans owned, managed, or
serviced by it and all applicable industry standards. The Borrower shall (i)
comply with all applicable Federal and State laws and regulations, (ii)
maintain all State and Federal licenses and franchises necessary for it to
perform its servicing responsibilities hereunder and (iii) not impair the
rights of the Lender in any Mortgage Loans or for payment thereunder. The
related annual servicing fee shall be 50 b.p.s. of the then outstanding
balances of the Pledged Mortgage Loans.
8. No Oral Modifications; Successors and Assigns;
Assignment of Collateral. No provisions of this Agreement shall be waived or
modified except by a writing duly signed by the authorized agents of the
Lender, the Guarantor and the Borrower. This Agreement shall be binding upon
the successors and assigns of the parties hereto. The Borrower acknowledges
and agrees that the Lender may re-pledge, enter into repurchase transactions,
and otherwise re- hypothecate (including the granting of participation
interests therein) the Collateral for the Loan, provided that no such act shall
in any way (x) affect the Borrower's rights to the Collateral, (y) change the
location of the Mortgage Loan documents, which shall remain with the Custodian
or (z) grant to any other person any direct rights against the underlying
mortgagors.
9. Reports. A. The Borrower shall provide the
Lender with an electronic disk or tape (each, a "Supplemental Mortgage Loan
Schedule") (i) on the date any additional Mortgage Loans are delivered pursuant
to Section 5(E) and at the earliest of (a) two business days before each
Funding Date or (b) one week (or with respect to the information required by
clause (c) of the next sentence, one month) following the date that the last
such schedule was provided and (ii) within two business days following any
request by the Lender or any affiliate thereof for such a schedule. Such
Supplemental Mortgage Loan Schedule shall be cumulative and will contain
information concerning (a) the Mortgage Loans then held in the warehouse
facility, (b) any Mortgage Loans proposed to be delivered to the facility on
the next Funding Date or in connection with Collateral maintenance pursuant to
Section 5(E) hereof and (c) the portfolio performance data with respect to all
such Mortgage Loans, including, without limitation, any outstanding
delinquencies, prepayments in whole or in part and any repurchases by the
Borrower, and shall be in a format as may be agreed upon by the Borrower and
the Lender from time to time. Each Supplemental Mortgage Loan Schedule shall
contain the following information with respect to each Pledged Mortgage Loan:
(i) the loan number and name of the Mortgagor; (ii) the address and zip code of
the mortgaged property; (iii) the property type; (iv) the loan purpose; (v) the
date of origination (date indicated on mortgage note) and the name of the
originator if different from the Borrower; (vi) the original stated maturity
date; (vii) the remaining term to maturity; (viii) the principal balance at
origination; (ix) the first payment date; (x) the monthly payment in effect as
of the Cut-off Date; (xi) the principal balance as of the Cut-off Date as used
in determining the Cut-off Date principal balance; (xii) the loan-to-value
ratio at origination and currently; (xiii) the combined loan-to-value ratio if
the Mortgage Loan is a second mortgage; (xiv) the interest rate; (xv) the
occupancy status; (xvi) the appraised value of the Mortgage
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<PAGE> 13
Property at origination and a more current appraised value, if any; (xvii) if
such Mortgage Loan is a "balloon loan," the amortization terms; (xiii) the lien
priority; (xix) the credit rating given such Mortgage Loan by the Borrower;
(xx) the last scheduled payment made; (xxi) the servicing fee; (xxii) the
escrow balance; (xxiii) the escrow payment; (xxiv) the number of 30, 60 and 90
day delinquencies in the past twelve months and (xxv) the debt-to-income ratio.
A. Each of the Borrower and the Guarantor shall furnish
to Lender (i) promptly, copies of any material and adverse notices (including,
without limitation, notices of defaults, breaches, potential defaults or
potential breaches) given to or received from its other lenders, and, in the
event any such default or breach has been cured or waived, notice of such cure
or waiver and (ii) immediately, notice of the occurrence of any "Event of
Default" hereunder or of any situation which the Borrower, with the passage of
time, reasonably expects to develop into an "Event of Default" hereunder. The
Borrower shall further furnish to the Lender the following:
(a) consolidated audited financial statements of the
Borrower and its Affiliates, within 120 days of the Borrower's
fiscal year end;
(b) consolidated unaudited financial statements of
the Borrower and its Affiliates for each of the Borrower's
first three quarters of each fiscal year, within 45 days after
quarter end;
(c) unaudited monthly financial statements of the
Borrower;
(d) quarterly and annual consolidated financial
statements of the Borrower and its Affiliates reflecting
material intercompany adjustments within 5 business days of
their completion;
(e) copies of all SEC filings by the Borrower and
its Affiliates, within five business days of their filing with
the SEC; and
(f) within three business days of the end of each
calendar month a summary schedule of any Pledged Mortgage
Loans experiencing delinquencies.
B. The Guarantor shall furnish to Lender the following:
(a) quarterly and annual consolidated financial
statements of the Guarantor reflecting material intercompany
adjustments within 5 business days of their completion; and
(b) copies of all SEC filings by the Guarantor
within five business days of their filing with the SEC;
provided, however, that the Guarantor shall provide a copy of
the annual SEC Form 10-K no later than 90 days of the
Guarantor's fiscal year end and a copy of the quarterly SEC
Form 10-Q no later than 45 days after quarter end.
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<PAGE> 14
All required financial statements, information and reports
shall be prepared in accordance with U.S. GAAP, or, if applicable to SEC
filings, SEC accounting regulations.
C. In conjunction with the delivery of each of the
financial statements to be delivered by the Borrower pursuant to Section 9(B),
the Borrower shall deliver to the Lender an officer's certificate of the
Borrower certifying that, as of the date of delivery of such financial
statements, the Borrower is in compliance with all the terms of this Agreement
including, without limitation, each of the covenants set forth in Section 4(C).
D. The Borrower shall also provide to the Lender within
10 days of the end of each month as requested by the Lender, a breakdown of
Mortgage Loans held by (x) Emergent Mortgage Corp. and (y) Carolina Investors
Inc.
10. Events of Default. Each of the following shall
constitute an "Event of Default" hereunder:
A. Failure of the Borrower or the Guarantor to (i) make
any payment of interest or principal or any other sum which has become due,
whether by acceleration or otherwise, under the terms of the Secured Note, this
Agreement, the Guarantee, any warehouse and security agreement or any other
document evidencing or securing indebtedness of the Borrower to the Lender or
to any affiliate of the Lender, or (ii) pay or deliver any Restoration Amount.
B. Any "event of default" by the Borrower under any
agreement relating to any indebtedness of the Borrower to any other lender.
C. Assignment or attempted assignment by the Borrower or
the Guarantor of this Agreement, the Secured Note or the Guarantee or any
rights hereunder, without first obtaining the specific written consent of
Lender, or the granting by the Borrower of any security interest, lien or other
encumbrance on any Collateral to other than the Lender.
D. The filing by the Borrower or the Guarantor of a
petition for liquidation, reorganization, arrangement or adjudication as a
bankrupt or similar relief under the bankruptcy, insolvency or similar laws of
the United States or any state or territory thereof or of any foreign
jurisdiction; the failure of the Borrower or the Guarantor to secure dismissal
of any such petition filed against it within thirty (30) days of such filing;
the making of any general assignment by the Borrower or the Guarantor for the
benefit of creditors; the appointment of a receiver or trustee for the Borrower
or the Guarantor, or for any part of the Borrower's or the Guarantor's assets;
the institution by the Borrower or the Guarantor of any other type of
insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal
or informal proceeding, for the dissolution or liquidation of, settlement of
claims against, or winding up of the affairs of, the Borrower or the Guarantor;
the institution of any such proceeding against the Borrower or the Guarantor if
the Borrower or the Guarantor shall fail to secure dismissal thereof within
thirty (30) days thereafter; the consent by the Borrower or the Guarantor to
any type of insolvency proceeding
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<PAGE> 15
against the Borrower or the Guarantor (under the Bankruptcy Code or otherwise);
the occurrence of any event or existence of any condition which could be the
ground, basis or cause for any proceeding or petition described in this Section
10.
E. Any materially adverse change in the financial
condition of the Borrower or the Guarantor or any of its Affiliates or the
existence of any other condition which, in the Lender's sole determination,
constitutes an impairment of the Borrower's or the Guarantor's ability to
perform its obligations under this Agreement, the Guarantee or the Secured Note
or the validity or collectibility of the Collateral.
F. Failure by the Borrower to service the Mortgage Loans
in substantial compliance with the servicing requirements set forth in Section
7 hereof.
G. A breach by the Borrower or the Guarantor of any
representation, warranty or covenant set forth herein or a use by the Borrower
of the proceeds of the Loan for a purpose other than as set forth in Section
1(A) hereof.
H. A "default" or other event under the terms of any
agreement relating to any material indebtedness of the Borrower to any other
lender of the Borrower which default or event causes or is reasonably likely to
cause the acceleration of indebtedness under such other agreement or cause or
permit any such other lender to terminate its commitment to lend to the
Borrower.
11. Remedies Upon Default. A. Upon the happening of one
or more Events of Default, the Lender may (x) refuse to make further Advances
hereunder and (y) immediately declare the principal of the Secured Note then
outstanding to be immediately due and payable, together with all interest
thereon and fees and expenses accruing under this Agreement; provided that,
upon the occurrence of the Event of Default referred to in Section 10(D), such
amounts shall immediately and automatically become due and payable without any
further action by any person or entity. Upon such declaration or such
automatic acceleration, the balance then outstanding on the Secured Note shall
become immediately due and payable without presentation, demand or further
notice of any kind to the Borrower.
A. Upon the happening of one or more Events of Default,
the Lender shall have the right to obtain physical possession, and to commence
an action to obtain physical possession, of all files of the Borrower relating
to the Collateral and all documents relating to the Collateral which are then
or may thereafter come in to the possession of the Borrower or any third party
acting for the Borrower. The Lender shall be entitled to specific performance
of all agreements of the Borrower and the Guarantor contained in this
Agreement, the Secured Note or the Guarantee. The Borrower and the Lender
hereby acknowledge that the Lender's right to obtain physical possession of the
Collateral is deemed for all purposes to be equivalent to the rights of
"seizure of property or maintenance or continuation of perfection of an
interest in property" as specified under Bankruptcy Code Sections 362(b) and
546(b)(2).
B. Upon the happening of one or more Events of Default,
the Lender shall have the right to direct all servicers then servicing any
Pledged Mortgage
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<PAGE> 16
Loans to remit all collections on the Pledged Mortgage Loans to the Lender, and
if any such payments are received by the Borrower, the Borrower shall not
commingle the amounts received with other funds of the Borrower and shall
promptly pay them over to the Lender. The Lender shall also have the right to
terminate the servicer and assign such servicing responsibilities to an
established mortgage loan servicing institution. In addition, the Lender shall
have the right to dispose of the Collateral as provided herein, or as provided
in the other documents executed in connection herewith, or in any commercially
reasonable manner, or as provided by law. Such disposition may be on either a
servicing-released or a servicing-retained basis. The Lender shall be entitled
to place the Mortgage Loans which it recovers after any default in a pool for
issuance of mortgage-backed securities at the then-prevailing price for such
securities and to sell such securities for such prevailing price in the open
market as a commercially reasonable disposition of Collateral, subject to the
applicable requirements of the New York UCC. The Lender shall also be entitled
to sell any or all of such Mortgage Loans individually for the prevailing price
as a commercially reasonable disposition of Collateral subject to the
applicable requirements of the New York UCC. The specification in this Section
of manners of disposition of collateral as being commercially reasonable shall
not preclude the use of other commercially reasonable methods (as contemplated
by the New York UCC) at the option of the Lender.
C. Following the occurrence and during the continuance
of an Event of Default, interest shall accrue on the Loan at a default interest
rate of LIBOR plus 5%.
12. Indemnification. The Borrower agrees to hold the
Lender harmless from and indemnifies 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 relating to or arising out of
this Agreement, the Secured Note, any Securitization Agreement or any
transaction contemplated hereby or thereby resulting from anything other than
the Lender's gross negligence or willful misconduct. The Borrower also agrees
to reimburse the Lender for all reasonable costs and expenses incurred in
connection with (i) the preparation, negotiation and enforcement of this
Agreement, the Secured Note and the Guarantee, including, without limitation,
the reasonable fees and disbursements of counsel, and (ii) the Lender's due
diligence in connection herewith. The Borrower's agreements in this Section
shall survive the payment in full of the Secured Note and the expiration or
termination of this Agreement. The Borrower hereby acknowledges that,
notwithstanding the fact that the Secured Note is secured by the Collateral,
the obligations of the Borrower under the Secured Note are recourse obligations
of the Borrower.
13. Power of Attorney. The Borrower hereby authorizes
the Lender, at the Borrower's expense, to file such financing statement or
statements relating to the Collateral without the Borrower's signature thereon
as the Lender at its option may deem appropriate, and appoints the Lender as
the Borrower's attorney-in-fact to execute any such financing statement or
statements in the Borrower's name and to perform all other acts which the
Lender deems appropriate to perfect and continue the security interest granted
hereby and to protect, preserve and realize upon the Collateral, including, but
not limited to, the right to endorse notes, complete blanks in
15
<PAGE> 17
documents, transfer servicing, and sign assignments on behalf of the Borrower
as its attorney-in-fact. This power of attorney is coupled with an interest
and is irrevocable without the Lender's consent. Notwithstanding the
foregoing, the power of attorney hereby granted may be exercised only during
the occurrence and continuance of any Event of Default hereunder.
14. Governing Law; Agreement Constitutes Security
Agreement; Jurisdiction. This Agreement is intended by the parties hereto to
be governed by the laws of the State of New York, and to constitute a security
agreement within the meaning of the New York UCC. THE PARTIES HERETO AGREE
THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS
AGREEMENT OR THE SECURED NOTE SHALL BE COMMENCED IN THE SUPREME COURT OF THE
STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE
SOUTHERN DISTRICT OF NEW YORK.
15. Lender May Act Through Affiliates. The Lender may,
from time to time, designate one or more affiliates for the purpose of
performing any action hereunder.
16. Notices. All demands, notices and communications
relating to this Agreement shall be in writing and shall be deemed to have been
duly given if mailed, by registered or certified mail, return receipt
requested, or by overnight courier, or, if by other means, when received by the
other party or parties at the address shown below, or such other address as may
hereafter be furnished to the other party or parties by like notice. Any such
demand, notice or communication hereunder shall be deemed to have been
received on the date delivered to or received at the premises of the addressee
(as evidenced, in the case of registered or certified mail, by the date noted
on the return receipt).
If to the Borrower:
Emergent Mortgage Corp.
15 South Main Street, Suite 750
Greenville, South Carolina 29606
Attention: Mr. Wade Hall
Phone Number: 864-232-6197
Fax Number: 864-271-8374
with a copy to:
William P. Crawford, Esq.
Wyche, Burgess, Freeman & Parham, P.A.
44 E. Camperdown Way
P.O. Box 728
Greenville, SC 29602
Phone Number: 864-242-8265
Fax Number: 864-242-8324
If to the Guarantor:
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<PAGE> 18
Emergent Group, Inc.
15 South Main Street, Suite 750
Greenville, South Carolina 29606
Attention: Mr. Kevin J. Mast
Phone Number: 864-232-6197
Fax Number: 864-271-8374
If to the Lender:
Prudential Securities Credit
Corporation
One Seaport Plaza, 27th Floor
Treasury Department
New York, New York 10292
Attention: Ms. Elizabeth Castagna
Phone Number: 212-214-7772
Fax Number: 212-214-7572
with a copy to:
Prudential Securities Incorporated
One New York Plaza, 17th Floor
New York, New York 10292
Attention: Mr. Glen Stein
Phone Number: 212-778-2012
Fax Number: 212-778-7401
17. Severability. Any provision of this Agreement which
is prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization, without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
18. Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, and all
such counterparts shall together constitute one and the same instrument.
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<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
EMERGENT MORTGAGE CORP.
By: /s/ Kevin J. Mast
-------------------------------------
Name: Kevin J. Mast
Title: Vice President & Treasurer
EMERGENT GROUP, INC.,
as Guarantor
By: /s/ Kevin J. Mast
-------------------------------------
Name: Kevin J. Mast
Title: Vice President, CFO & Treasurer
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ George Morgan
-------------------------------------
Name: George Morgan
Title: Vice President
<PAGE> 20
Appendix I
The following capitalized terms are defined in the
corresponding sections of the Agreement specified below:
"Accrual Period" - Section 1(A)(3).
"Advance" - Section 1(A)(1).
"Advance Amount" - Section 1(B).
"Affiliate" - Section 4(A)(5).
"Agreement" - Introductory Clause.
"Borrower" - Introductory Clause.
"Collateral" - Section 3.
"Collateral Deficiency Situation" - Section 1(B)(2).
"Credit Increase Confirmation" - Section 1(A)(1).
"Custodian" - Section 3.
"Custodial Agreement" - Section 3.
"Cut-Off Date" - Section 1(B)(2).
"Designated Pooling and Servicing Agreement" - Section
4(B)(10).
"Event of Default" - Section 10.
"Funding Date" - Section 1(A)(2).
"Guarantor" - Introductory Clause.
"Lender" - Introductory Clause.
"LIBOR" - Section 1(A)(3).
"Loan" - Section 1(A)(1).
"Market Value" - Section 1(B)(2).
"Maturity Date" - Section 1(B)(2).
"Mortgage Files" - Section 3.
I-1
<PAGE> 21
"Mortgage Loans" - Section 1(A)(1).
"Mortgage Loan Schedule" - Section 1(A)(2).
"New York UCC" - Section 1(E)(1).
"Party" - Section 4(A).
"Pledged Mortgage Loans" - Section 1(B)(2).
"PSI" - Recitals.
"Restoration Amount" - Section 1(B)(2).
"Secured Note" - Section 1(G).
"Secured Obligations" - Section 3.
"Securitization" - Recitals.
"Subordinated Debt" - Section 4(C).
"Supplemental Mortgage Loan Schedule" - Section 9(A).
"Tangible Net Worth" - Section 4(C).
I-2
<PAGE> 22
Exhibit A
FORM OF
SECURED NOTE
Dated as of ____________, 199_
FOR VALUE RECEIVED, the undersigned, [BORROWER], a
[corporation] organized under the laws of the State of __________, whose
address is ________________________________ (the "Borrower"), promises to pay
to the order of PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware
corporation, whose address is One New York Plaza, New York, New York 10292 (the
"Lender") on or before the Maturity Date the amount then outstanding (including
accrued interest) under that certain Interim Warehouse and Security Agreement
dated as of March __, 1997 (the "Agreement"). Initially, the maximum principal
amount which may be outstanding is $______________ (as such amount may be
amended, in the Lender's sole discretion, from time to time, by a Credit
Increase Confirmation). Capitalized terms used herein and not defined herein
shall have their respective meanings as set forth in the Agreement.
The holder of this Note is authorized to record the date and
amount of each Advance and the date and amount of each repayment of principal
thereof on the schedule to be maintained by the Lender (which schedule may be
obtained upon Borrower's request), and any such recordation shall constitute
prima facie evidence of the accuracy of the amount so recorded; provided that
the failure of the holder hereof to make such recordation (or any error in such
recordation) shall not affect the obligations of the Borrower hereunder or
under the Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of
interest herein shall never exceed the maximum rate, if any, which may be
legally charged on the Loan evidenced by this Note ("Maximum Rate"), and if the
provisions for interest contained in this Note would result in a rate higher
than the Maximum Rate, interest shall nevertheless be limited to the Maximum
Rate and any amounts which may be paid toward interest in excess of the Maximum
Rate shall be applied to the reduction of principal, or, at the option of the
Lender, returned to the Borrower.
DUE DATE: The Loan evidenced hereby not paid before the
Maturity Date shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all
notices to the Lender required or authorized hereby shall be given, at the
office of the Lender at the address designated in the heading of this Note, or
to such other place as the Lender may from time to time direct by written
notice to the Borrower.
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable
hereunder are payable by wire transfer in immediately available funds to the
account number specified by the Lender, in lawful money of the United States.
Payments
A-1
<PAGE> 23
remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York
City time shall be deemed to be received on the next business day. The
Borrower agrees to pay all costs of collection when incurred, including,
without limiting the generality of the foregoing, reasonable attorneys' fees
through appellate proceedings, and to perform and comply with each of the
covenants, conditions, provisions and agreements contained in every instrument
now evidencing or securing said indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and
is secured by a pledge of the Collateral described therein. Notwithstanding
the pledge of the Collateral, the Borrower hereby acknowledges, admits and
agrees that the Borrower's obligations under this Note are recourse obligations
of the Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default (as
defined in the Agreement), the Lender shall have all rights and remedies set
forth in the Agreement.
The failure to exercise any of the rights and remedies set
forth in the Agreement shall not constitute a waiver of the right to exercise
the same or any other option at any subsequent time in respect of the same
event or any other event. The acceptance by the Lender of any payment
hereunder which is less than payment in full of all amounts due and payable at
the time of such payment shall not constitute a waiver of the right to exercise
any of the foregoing rights and remedies at that time or at any subsequent time
or nullify any prior exercise of any such rights and remedies without the
express consent of Lender, except as and to the extent otherwise provided by
law.
WAIVERS: The Borrower waives diligence, presentment, protest
and demand and also notice of protest, demand, dishonor and nonpayments of this
Note, and expressly agrees that this Note, or any payment hereunder, may be
extended from time to time, and consents 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 that it will not be necessary
for the Lender, in order to enforce payment of this Note, to first institute or
exhaust Lender's remedies against the Borrower or any other party liable hereon
or against any collateral for this Note. None of the foregoing shall affect
the liability of the Borrower. No extension of time for the payment of this
Note, or an 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 Borrower, even if the Borrower is not a party
to such agreement; provided, however, the Lender and the Borrower, by written
agreement between them, may affect the liability of the Borrower.
TERMINOLOGY: If more than one party joins in the execution of
this Note, the covenants and agreements herein contained shall be the joint and
several obligation of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of
A-2
<PAGE> 24
masculine or neuter import shall be read as if written in the neuter or
masculine or feminine when appropriate.
AGREEMENT: Reference is made to the Agreement for provisions
as to Advances, rates of interest, mandatory principal repayments, collateral
and acceleration. If there is any conflict between the terms of this Note and
the terms of the Agreement, the terms of the Agreement shall control.
APPLICABLE LAW; JURISDICTION: This Note shall be governed by
and construed under the laws of the State of New York, the laws of which the
Borrower hereby expressly elects to apply to this Note. THE BORROWER AGREES
THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE
SHALL BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE
DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK.
[BORROWER]
By
-------------------------------
Name:
Title:
A-3
<PAGE> 25
Exhibit B
_____________, 199_
[Custodian]
[Address]
Prudential Securities Credit Corporation
One New York Plaza
New York, NY 10292-2015
Re: Interim Funding Arrangement for Mortgage Loans
Gentlemen:
I am the counsel to [Borrower], a _________ [corporation] (the
"Borrower") and [Guarantor], a _________ [corporation] (the "Guarantor"). I
have represented the Borrower and the Guarantor in connection with the
execution and delivery of the following documents:
A. Interim Warehouse and Security Agreement, dated as of
___________, 199_ (the "Interim Warehouse and Security Agreement"),
between the Borrower, Guarantor and Prudential Securities Credit
Corporation (the "Lender");
B. Secured Note executed as of ______________, 199_ by the
Borrower in favor of the Lender (the "Note");
C. Guarantee executed as of ___________, 199__ (the
"Guarantee") by the Guarantor; and
D. Custodial Agreement, dated as of ______________, 199_ (the
"Custodial Agreement"), among the Borrower and [Custodian] (the
"Custodian").
Capitalized terms used herein, but not defined herein, shall
have the meanings assigned to them in the Interim Warehouse and Security
Agreement.
B-1
<PAGE> 26
I have examined executed copies of the Interim Warehouse and
Security Agreement, the Note, the Guarantee and the Custodial Agreement. I
have also examined originals or photostatic or certified copies of all such
corporate records of the Borrower and the Guarantor and such certificates of
public officials, certificates of corporate officers, and other documents, and
such questions of law, as I have deemed appropriate and necessary as a basis
for the opinions hereinafter expressed. In making my examination and rendering
the opinions herein expressed, I have made the following assumptions: i) each
party to each of the Interim Warehouse and Security Agreement and the Custodial
Agreement (other than the Borrower and the Guarantor) has the power to enter
into and perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Interim Warehouse and Security Agreement
and the Custodial Agreement by all parties thereto (other than the Borrower and
the Guarantor), and (iii) the validity and binding effect on all parties
thereto (other than the Borrower and the Guarantor) of each of the Interim
Warehouse and Security Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
19 The effect of bankruptcy, insolvency, reorganization,
moratorium, conservatorship, receivership, or other similar laws relating to or
affecting the rights of creditors generally in the event of insolvency,
reorganization, moratorium or receivership.
20 The application of general principles of equity,
including, but not limited to, the right of specific performance (regardless of
whether enforceability is considered in a proceeding in equity or at law).
21 The unenforceability of provisions to the effect that
failure to exercise or delay in exercising rights or remedies will not operate
as a waiver of any such rights or remedies, or to the effect that provisions
therein may only be waived in writing to the extent that an oral agreement has
been entered into modifying such provisions.
I am licensed to practice law in the State of New York, and,
each opinion hereinafter set forth is an opinion concerning only the law of the
State of New York. All opinions expressed herein are based on laws,
regulations and policy guidelines currently enforced and may be affected by
future changes in law. Furthermore, no opinion is expressed herein regarding
the applicable state Blue Sky, legal investment or real estate syndication
laws.
Based upon the foregoing, and subject to the last paragraph
hereof, I am of the opinion that:
1. The Interim Warehouse and Security Agreement, the
Note, the Guarantee and the Custodial Agreement each constitutes the
valid, legal and binding agreement of the Borrower, and each is
enforceable against the Borrower and the Guarantor, to the extent it
is a party thereto, in accordance with its terms.
B-2
<PAGE> 27
2. The Borrower is licensed as a "Licensee" or is
otherwise qualified to do business in each state in which it transacts
business.
3. No consent, approval, authorization or order of,
registration or filing with, or notice to, any governmental authority
or court is required under federal laws or the laws of the State of
New York [or the State of __________] for the execution, delivery and
performance of the Interim Warehouse and Security Agreement, the Note,
the Guarantee or the Custodial Agreement as applicable, by the
Borrower and the Guarantor, except such of which as have been
obtained.
4. The execution, delivery and performance by the
Borrower and the Guarantor of the Interim Warehouse and Security
Agreement, the Note, the Guarantee and the Custodial Agreement to the
extent each is a party thereto, does not conflict with or result in a
breach of, or constitute a default under (a) the Borrower's or the
Guarantor's, respectively, articles of incorporation or bylaws or (b)
any law, rule or regulation of the federal government or of the State
of New York [or the State of _________].
5. The execution, delivery and performance by the
Borrower and the Guarantor of the Interim Warehouse and Security
Agreement, the Note, the Guarantee and the Custodial Agreement to the
extent each is a party thereto will not result in a default under any
mortgage, borrowing agreement, or other instrument or agreement
pertaining to indebtedness for borrowed money to which the Borrower or
the Guarantor, respectively, is a party.
6. Upon the execution of the Interim Warehouse and
Security Agreement, a valid security interest in the Mortgage Loans
and the proceeds thereof is granted to the Lender, which security
interest would be a valid, first-priority, perfected security interest
with respect to such Mortgage Loans and the proceeds thereof upon
delivery of the Mortgage Files to the Custodian.
This Opinion is furnished by me as counsel to the Borrower and
the Guarantor and is solely for the benefit of the addressees hereof; except
that this Opinion may be relied upon by any holder in due course of the Note.
Yours truly,
B-3
<PAGE> 28
Exhibit C
FORM OF
CREDIT INCREASE CONFIRMATION AND
NOTE AMENDMENT
Dated ________________
Reference is made to (x) the Interim Warehouse and Security
Agreement, dated as of ______________, 199_ (the "Interim Warehouse Agreement")
between Prudential Securities Credit Corporation (the "Lender"), [Borrower]
(the "Borrower") and [Guarantor] (the "Guarantor"), (y) the Secured Note dated
as of ____________, 199_ (the "Note") from the Borrower to the Lender and (z)
the Guarantee dated as of ________, 199__ (the "Guarantee") by the Guarantor in
favor of the Lender. Capitalized terms used and not otherwise defined herein
shall have their respective meanings set forth in the Interim Warehouse
Agreement.
Section 1.
- The maximum amount of the Loan referenced in
the Interim Warehouse Agreement and in the Note and
Guarantee shall be ___________________________.
- The "Maturity Date" referenced in the Interim
Warehouse Agreement and in the Note and Guarantee
shall be ___________________________.
- [Any other changes.]
Section 2.
As amended by Section 1 hereof all provisions of the Interim
Warehouse Agreement, the Note and the Guarantee are reconfirmed as of the date
hereof. Each of the Borrower and the Guarantor, in addition, hereby reconfirms
and remakes as of the date hereof each and every of its representations,
warranties and covenants set forth in the Interim Warehouse Agreement, the Note
and the Guarantee.
C-1
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment on the day and year first above written.
[BORROWER]
By:
----------------------------------------
Name:
Title:
[GUARANTOR]
By:
----------------------------------------
Name:
Title:
PRUDENTIAL SECURITIES CREDIT CORPORATION
By:
----------------------------------------
Name:
Title:
C-2
<PAGE> 30
Approval as to Legality
I, _____________, counsel to the Borrower and the Guarantor
hereby confirm that:
- I delivered, on _________, 199_, the opinion
letter, a copy of which is attached hereto (the
"Opinion Letter") relating to the Interim Warehouse
Agreement, the Note and the Guarantee.
- I have represented the Borrower and the
Guarantor in connection with its execution and
delivery of the Credit Increase Confirmation and Note
Amendment (the "Confirmation") to which this Approval
as to Legality is attached.
- I hereby extend, as of the date hereof, the
opinions set forth in the Opinion Letter to cover
both the Confirmation itself as well as the
transactions described on the Confirmation and
confirm, as of the date hereof, and subject to any
and all assumptions and qualifications set forth
therein, the opinions set forth in the Opinion
Letter.
Yours truly,
----------------------------------------
[NAME]
Dated: ___________, 199_
C-3
<PAGE> 31
Exhibit D
FORM OF
FUNDING NOTICE
--------------
______________, 199_
Prudential Securities Credit
Corporation
One New York Plaza
New York, NY 10292
Re: Interim Warehouse and Security Agreement, dated as
of ________, 199_, between Prudential Securities Credit
Corporation, [Borrower] and [Guarantor] (the
"Agreement")
Gentlemen:
Pursuant to Section 1(A)(2) of the Agreement, this letter
constitutes notice that the undersigned desires to obtain an Advance in the
principal amount of $____________, constituting ___% of the aggregate
outstanding principal balance of the Mortgage Loans shown on the attached
Mortgage Loan Schedule, as of the Cut-Off Date shown thereon.
This letter will further certify that: (1) the undersigned
has no notice or knowledge of any Event of Default; (2) the representations and
warranties in the Agreement relating to the Mortgage Loans shown on the
attached Mortgage Loan Schedule are true and correct as of the date hereof; (3)
each of the conditions precedents to an Advance listed in Section 1(A)(2) of
the Agreement are true and correct as of the date hereof and shall be true and
correct on the date of the Advance requested herein, before and after giving
effect thereto.
Capitalized terms used and not otherwise defined herein shall
have their respective meanings set forth in the Agreement.
[BORROWER]
By:
----------------------------------
Name:
Title:
D-1
<PAGE> 32
Exhibit E
FORM OF
GUARANTEE
OF
[GUARANTOR]
FOR VALUE RECEIVED, [Guarantor], a [corporation] organized and
existing under the laws of the State of _________ (the "Guarantor"), hereby
guarantees, unconditionally, to the holder of that certain Secured Note dated
_________, 199__ (herein called the "Note"), issued to Prudential Securities
Credit Corporation (the "Lender") pursuant to the terms of the Interim
Warehouse and Security Agreement, dated ________, 199__, among the Lender, [the
Borrower] and the Guarantor (the "Agreement"), the due and punctual payment of
(i) at the time of A Collateral Deficiency Situation or (ii) upon the
occurrence and continuance of an Event of Default, one hundred percent (100%)
of the Secured Obligations outstanding at such respective time (the "Guarantee
Amount") and in furtherance thereof but subject to the Guarantee Amount, the
Guarantor shall be obligated to pay (a) following the occurrence of A
Collateral Deficiency Situation, the Restoration Amount, if any, then due to
the Lender and (b) following the occurrence of an Event of Default, principal
and interest outstanding on the Loan after the Lender has liquidated the
Collateral, in either case, when and as the same shall become due and payable,
whether at their respective due dates or on a declaration or otherwise, in
accordance with the terms of the Note and of the Agreement; provided, however,
that payment of interest on overdue installments of interest is hereby
guaranteed only to the extent permitted by applicable law. In the event of a
default by the Borrower in the payment of any such Guarantee Amount, the
Guarantor agrees duly and punctually to pay the same without demand.
Subject to the terms and limitations of this Guarantee: the
Guarantor also guarantees all of the obligations of the Borrower under this
Agreement, including the indemnification provisions thereof; the Guarantor
hereby agrees that its respective obligations under this Guarantee and the
Agreement shall be unconditional, irrespective of any invalidity, illegality,
irregularity or unenforceability of the Note or the Agreement as regards the
Borrower (other than by reason of lack of genuineness), or the absence of any
action to enforce the same, the recovery of any judgment against the Borrower
or any action to enforce the same or any circumstance which might otherwise
constitute a legal or equitable discharge or defense of a guarantor; and the
Guarantor hereby waives diligence, presentment, demand of payment, filing of
claims with a court in the event of merger, amalgamation, insolvency or
bankruptcy of the Borrower, any right to require a proceeding first against the
Borrower, protest or notice with respect to the Note or the indebtedness
evidenced thereby and all demands whatsoever, and covenants that this Guarantee
will not be discharged except by payment in full of (a) the Secured Obligations
or (b) the Guarantee Amount.
The obligations of the Guarantor under this Guarantee shall be
a continuing obligation and a fresh cause of action under this Guarantee shall
be deemed to arise in respect of each default in the payment of principal of or
interest on the Note.
E-1
<PAGE> 33
The Guarantor shall be subrogated to all rights of the holder
of the Note against the Borrower in respect of any amount paid by the Guarantor
pursuant to the provisions of this Guarantee; provided, however, that the
Guarantor shall not be entitled to enforce, or to receive any payments arising
out of or based upon such right of subrogation until the Secured Obligations
shall have been paid in full.
No remedy for the enforcement of the rights of the holder of
the Note to receive payment of the principal of and/or interest on the Note,
under the Note, the Agreement and hereunder, shall be exclusive of or dependent
on any other remedy.
This Guarantee has been given in accordance with the terms of
the Agreement and is subject to all applicable provisions thereof and the same
shall be deemed to be incorporated herein.
The Guarantor hereby certifies and warrants that all acts,
conditions and things required to be done and performed and to have happened
prior to the creation and issuance of this Guarantee to constitute the same
valid and legally binding obligation of the Guarantor enforceable in accordance
with its terms (except as enforcement thereof may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally) have been done and
performed and have happened in due and strict compliance with all applicable
law.
Capitalized terms used herein and not otherwise defined herein
shall have the meaning ascribed to such terms in the Agreement.
This Guarantee shall be construed in accordance with and
governed by the laws of the State of New York.
Executed as of _____________, 199__.
[GUARANTOR]
By:
-----------------------------------
Name:
Title:
E-2
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1. The Loan and the Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Reimbursement of Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3. Mortgage Files and Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4. Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5. Mandatory Prepayment of Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6. Release of Mortgage Files following Payment of Loan . . . . . . . . . . . . . . . . . . . . 10
Section 7. Servicing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. No Oral Modifications; Successors and Assigns; Assignment of Collateral . . . . . . . . . . 11
Section 9. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 10. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 11. Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 12. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 13. Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 14. Governing Law; Agreement Constitutes Security Agreement; Jurisdiction . . . . . . . . . . . 15
Section 15. Lender May Act Through Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 16. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 17. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 18. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Appendix I - Defined Terms
Exhibit A - Form of Secured Note
Exhibit B - Form of Legal Opinion
Exhibit C - Form of Credit Increase Confirmation and Note Amendment
Exhibit D - Form of Funding Notice
Exhibit E - Form of Guarantee
</TABLE>
i
<PAGE> 1
EXHIBIT 11.1
ITEM 14 (c)
EMERGENT GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1994 1995 1996
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Income (loss) Applicable to Common Stock
Income from continuing operations $1,792 $4,581 $10,095
Income from discontinued operations $546 ($3,924) --
Cumulative effect of change in accounting method -- -- --
-----------------------------------------
Net Income $2,338 $657 410,095
=========================================
Primary Earnings Per Share Computation
Weighted average number of shares
outstanding during the year 6,669,343 6,464,582 6,852,420
Dilutive effect of Common Stock options
and warrants based on the average
market price 19,391 203,610 247,454
-----------------------------------------
6,688,734 6,668,192 7,099,874
=========================================
Per share amounts:
Income from continuing operations before
cumulative effect of change in accounting method $0.27 $0.69 $1.42
Income from discontinued operations $0.08 ($0.59) --
-----------------------------------------
Income before cumulative effect of change in
accounting method $0.35 $0.10 $1.42
Cumulative effect of change in accounting method -- -- --
-----------------------------------------
Net Income $0.35 $0.10 $1.42
=========================================
Fully Diluted Earnings Per Share Computation
Weighted average number of shares
outstanding during the year 6,669,343 6,464,582 6,852,420
Dilutive effect of Common Stock options
and warrants based on the average
market price 19,391 203,610 247,454
-----------------------------------------
6,688,734 6,668,192 7,099,874
=========================================
Per share amounts:
Income from continuing operations before
cumulative effect of change in accounting method $0.27 $0.69 $1.42
Income from discontinued operations $0.08 ($0.59) $0.00
Income before cumulative effect of change in -----------------------------------------
accounting method $0.35 $0.10 $1.42
Cumulative effect of change in accounting method -- -- --
-----------------------------------------
Net Income $0.35 $0.10 $1.42
=========================================
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of Emergent Group,
Inc. (the "Company"). It should be read in conjunction with the Consolidated
Financial Statements, notes, and tables of the Company appearing elsewhere in
this report. As used herein, "Discontinued Operations" refers to the Company's
former transportation and apparel operations. Unless otherwise noted, the
discussion contained herein relates to the continuing operations of the
Company, which consist of its Financial Services operations. See notes 13 and
14 to the Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
Certain statements in the financial discussion and analysis by
management 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 are many and include: lower origination volume due to market
conditions, higher losses due to economic downturn or lower real estate values,
adverse consequences of changes in interest rate environment,
uncreditworthiness of borrowers and risk of default, limited operating history
of retail lending operations, termination of strategic alliance agreements and
Mortgage Banker relationships, general economic conditions in the Company's
markets, including inflation, recession, interest rates and other economic
factors, loss of funding sources, loss of ability to sell loans, general
lending risks, dependence on Federal programs, loss of operating loss
carryforwards, impact of competition, regulation of lending activities, and
changes in the regulatory environment and dependence on key executives.
GENERAL
The Company is a diversified financial services company headquartered in
Greenville, South Carolina which originates, services and sells Mortgage Loans,
Small Business Loans and Auto Loans. Prior to current management's acquisition
of control of the Company in December 1990, the Company was primarily engaged
in its Transportation operations. Under previous management, the Company
incurred significant losses which resulted in net operating loss carryforwards
(the "NOL"). In 1991, current management implemented a strategic plan to
acquire profitable businesses. Pursuant to such strategy, the Company acquired
Carolina investors, Inc. ("CII"), Premier Financial Services, Inc. ("Premier"),
Emergent Business Capital, Inc. ("EBC"), The LoanPro$, Inc. ("Loan Pro$") in
1991 (all financial-related companies) and Young Generations, Inc. ("YGI") (an
apparel manufacturer) in 1993. In 1994, the Company made a strategic decision
to divest all nonfinancial operations and to focus exclusively on the financial
services industry. In accordance with such strategy, the Company completed its
divestiture of its apparel and transportation operations in 1995.
1
<PAGE> 2
The Company's total serviced loans receivable increased from $157.4
million at December 31, 1994, to $214.5 million at December 31, 1995 and to
$309.1 million at December 31, 1996. Mortgage Loans increased during all such
periods principally as a result of the Company's retail Mortgage loan
origination network established during 1996, and an increase in the number of
Mortgage Bankers originating Mortgage Loan Division, as well as increased loan
volume from existing Mortgage Bankers. The Mortgage Loan Division is expected
to continue its growth in 1997 in both its retail and wholesale loan
distribution channels as a result of increased personnel and resources devoted
to this division. In 1995, the U. S. Small Business Administration ("SBA")
adopted certain policies, such as the temporary implementation of a maximum SBA
Loan amount of $500,000 and the temporary prohibition of the use of SBA Loan
proceeds for certain financings (which temporary limitations were removed in
October 1995). Consequently, Small Business Loan volume in 1995 was relatively
unchanged from the 1994 level as a result of the negative market impact from
these changes. Small Business Loan volume in 1996 increased due to the removal
of the temporary governmental restrictions in the SBA program as well as
increased marketing efforts, the hiring of additional loan officers, and
increase in the number of commercial loan brokers which refer Small Business
Loans to the Company and the opening of the Company's asset-based lending
operation in Atlanta, Georgia in April 1996. The Company plans to grow its
Small Business Loan Division in 1997 with the opening of two additional
offices. Auto Loans increased during all such periods principally as a result
of an increase in the number of loan production offices and successful efforts
at establishing additional dealer relationships. No significant growth is
anticipated in 1997 for the Auto Loan Division as the Company plans to focus on
collections rather than expansion and asset growth.
Approximately $125.3 million, or approximately 68% of the company's
Mortgage Loans in 1995, were originated through First Greensboro Home Equity,
Inc. ("First Greensboro"). In 1996, First Greensboro originated approximately
$80.9 million or 24.6% of the Company's Mortgage Loans. On June 1, 1996, First
Greensboro terminated its strategic alliance agreement with the Company.
Consequently, the Company's Mortgage Loan originations were less than if First
Greensboro had not terminated this agreement (which was scheduled to expire
December 31, 1997). Although First Greensboro generated a large percentage of
the Company's Mortgage Loan originations, the Company was able to replace such
loan originations through (i) its other Strategic Alliance Mortgage Bankers,
three of which entered into strategic alliance agreements with the Company
subsequent to April 1996 and (ii) its direct retail lending operation, the
planned implementation of which was accelerated as a result of the termination
of the First Greensboro strategic alliance agreement.
The Company's retail mortgage lending operations were established in the
second quarter of 1996, and at December 31, 1996, operated through offices in
Indianapolis, IN, Phoenix, AZ, Baton Rouge, LA, and New Orleans, LA. The
Company opened additional retail lending operations in Greenville, SC, Atlanta,
GA, Jackson, MS, and Jacksonville, FL during the first quarter of 1997, and
plans to open additional new offices later in 1997. Through its retail
offices, the Company targets Mortgage Loan borrowers through a variety of
marketing methods. During December 1996, January 1997, and February 1997,
retail originations totaled $18.9 million, $22.2 million, and $28.6 million,
respectively. The Company expects continued growth in retail Mortgage Loan
originations.
2
<PAGE> 3
The following table sets forth certain data relating to the Company's loans at
and for the period indicated:
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE DIVISION LOANS: $ 20,536 $ 99,373 $ 192,800 $ 328,649
Mortgage Loans originated during year 42,335 60,151 88,165 146,232
Total Mortgage Loans owned (period end) 42,335 60,151 88,165 146,232
Total serviced Mortgage Loans (period end) 42,397 51,243 74,158 97,281
Average Mortgage Loans (1) 42,397 51,243 74,158 97,281
Average Serviced Mortgage Loans (1) 11.96% 12.37% 12.10% 11.97%
Weighted averaged interest rate
SMALL BUSINESS DIVISION LOANS:
Small Business loans originated during year $ 37,867 $ 43,123 $ 39,560 $ 68,210
Total Small Business loans owned (period end) 17,933 26,764 20,620 29,385
Total serviced Small Business Loans (period end) 58,552 88,809 108,696 140,809
Average Small Business Loans (1) 13,956 22,348 23,692 26,700
Average serviced Small Business Loans (1) 40,117 73,681 98,753 125,723
Weighted average interest rate 7.65% 10.11% 10.39% 12.61%
Weighted average servicing fee 1.11% .41% .59% 1.30%
AUTO DIVISION LOANS:
Auto Loans originated during year $ 5,230 $ 7,547 $ 17,148 $ 18,287
Total Auto Loans owned (period end) 6,011 8,483 17,673 13,915
Total serviced Auto Loans (period end) 6,011 8,483 17,673 22,033
Average Auto Loans (1) 5,179 7,247 13,078 11,917
Average serviced Auto Loans (1) 5,179 7,247 13,078 21,277
Weighted average interest rate 28.33% 28.28% 27.40% 23.57%
Weighted average servicing fee -- -- -- 21.20%
TOTAL LOANS:
Total loans receivable owned (period end) $ 66,279 $ 95,398 $ 126,458 $ 189,532
Total serviced loans receivable (period end) 106,898 157,443 214,534 309,073
Total unguaranteed serviced loans (period end) 59,584 87,405 130,705 212,281
</TABLE>
(1) Averages are computed using beginning and ending balances for the period
presented, except that the 1996 averages are calculated based on the daily
average (rather than the beginning and ending balances).
3
<PAGE> 4
PROFITABILITY
The principal components of the Company's profitability are (i) net
interest and servicing revenues associated with the Company's loans receivable
and serviced loans, which is the excess of interest and fees earned on its
serviced loans receivable over interest expense paid on borrowed funds
associated with such serviced loans receivable; (ii) gains resulting from the
sale of its Mortgage Loans; and (iii) gains resulting from the sale of the SBA
Loan participations and the related servicing revenue.
For the periods indicated, the following table sets forth certain
information derived from the Company's Consolidated Financial Statements
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income 63.9% 58.8% 57.8% 35.5%
Servicing fee income 2.4 1.1 1.7 6.5
Gain on sale of loans 30.0 35.4 34.9 47.3
Other revenues 3.7 4.7 5.6 10.7
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Interest expense 42.1% 32.3% 32.5% 21.9%
General and administrative expenses 46.7 40.4 39.6 46.6
Provision for credit losses 5.7 13.8 9.4 10.7
----- ----- ----- -----
Income from continuing operations before income taxes 5.5 13.5 18.5 20.8
Income tax expense (benefit) (1.6) 3.3 0.8 1.4
Minority interest (0.2) (0.3) (0.3) .7
Income (loss) from discontinued operations 2.1 3.0 (14.9) --
Cumulative effect of change in accounting principle 0.9 -- -- --
----- ----- ----- -----
Net income 9.9% 12.9% 2.5% 20.1%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased $24.1 million, or 92%, from $26.3 million in
1995 to $50.4 million in 1996. The increase in revenues resulted principally
from increases in interest and servicing revenue and gain on sale of loans.
Interest revenue increased $2.7 million, or 18%, from $15.2 million in
1995 to $17.9 million in 1996. This increase was due principally to the growth
in the serviced loan portfolio in the Mortgage Loan Division. Interest revenue
earned by the Mortgage Loan Division increased $4.6 million or 51%, from $9.1
million in 1995 to $13.7 million in 1996.
4
<PAGE> 5
Servicing revenue increased $2.85 million, or 640% from $446,000 in
1994 to $3.3 million in 1996. This increase was due to the securitization of
Small Business Loans and Auto Loans in 1996, for which the company retains
servicing rights.
Gain on sale of loans increased $14.6 million, or 159%, from $9.2
million in 1995 to $23.8 million in 1996. The increase resulted partially from
increased sales of Mortgage Loans and Small Business Loans associated with the
increased loan originations and the securitization of Small Business Loans in
November 1996. Mortgage Loans sold increased $157.2 million, or 123% from
$127.6 million in 1995 to $284.8 million in 1996. Small Business Loans sold
increased $7.7 million, or 30%, from $25.4 million in 1995 to $33.1 million in
1996. Additionally, the Company received a recoupment of previously shared
premiums of $7.3 million in connection with the settlement with First
Greensboro Home Equity, Inc. and Amerifund Group, Inc., two strategic partners
who terminated their agreements with the Company in 1996.
Loan fees increased $3.6 million, or 616% from $586,000 in 1995 to $4.2
million in 1996. The increase in loan fees was due principally to the increase
in loan originations in the Mortgage Loan Division.
Management fees decreased $56,000, or 10% from $570,000 in 1995 to
$514,0000 in 1996. These management fees were paid to the Company by the two
funds managed by the Company. In 1995, the fees included additional income due
to the success of one of the investments of one of the funds.
Other revenues increased $413,000, or 131%, from $314,000 in 1995 to
$727,000 in 1996. Other revenues are comprised principally of insurance
commissions. The increase of other revenues resulted principally from the
increase in the Company's loan originations.
Total expenses increased $18.5 million, or 86%, from $21.4 million in
1995 to $39.9 million in 1996. Total expenses are comprised of interest
expense, provision for credit losses and general and administrative expenses.
Interest expense increased $2.5 million, or 29%, from $8.5 million in
1995 to $11.0 million in 1996. 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, increased $55.7
million, or 53%, from $105.2 million at December 31,1 995 to $160.9 million at
December 31, 1996. Interest expense in the Mortgage Loan Division increased
$2.4 million in 1996 from 1995. Total borrowings attributable to the Small
Business Loan Division decreased $6.1 million, or 41%, from $14.8 at December
31, 1995 to $8.7 million at December 31, 1996. This decrease in debt resulted
principally from cash received from the securitization completed in November
1996 which was used to pay down outstanding debt. Interest expense in the
Small Business Loan Division increased $198,000 in 1996 from 1995. There were
no borrowings outstanding in the Auto Loan Division as of December 31, 1996,
down from $9.9 million at December 31, 1995. This decreased resulted
principally from cash received from the securitization transaction completed in
March 1996 and from the Company's public offering completed in November 1996.
The offering was used to pay outstanding debt. Interest expense in the Auto
Loan Division decreased $220,000 in 1996 from 1995.
5
<PAGE> 6
Provision for credit losses increased $2.9 million, or 116%, from $2.5
million in 1995 to $5.4 million in 1996. The provision was made to maintain
the general reserves for credit losses associated with loan originations, as
well as to increase specific reserves for possible losses with particular
loans.
General and administrative expense increased $13.1 million, or 126%,
from $10.4 million in 1995 to $23.5 million in 1996. This is a result of
increased personnel costs in the Mortgage Loan Division due to the continued
expansion in the servicing and underwriting departments, and the increased
expenses associated with the opening of retail lending offices in Indianapolis,
Baton Rouge, New Orleans, and Phoenix. General and administrative expenses
increased from 5.63% of average serviced loans in 1995 to 9.62% in 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, servicing-released basis, with customary representations and
warranties. Accordingly, costs have been increased relative to the serviced
portfolio.
Income from continuing operations increased $5.5 million, or 120%, from
$4.6 million in 1995 to $10.1 million in 1996. The improvement in income was
due principally to the increased growth and profitability of the Mortgage Loan
Division, although the Small Business Loan Divison's profitability also
increased significantly in 1996 from 1995.
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Total revenues increased $8.1 million, or 44%, from $18.2 million in
1994 to $26.3 million in 1995. The increase in revenues resulted principally
from increases in interest and servicing revenue and gain on sale of loans due
to increased loan originations, sales and serviced loan portfolio of the
Mortgage Loan Division.
Interest revenue increased $4.5 million, or 42%, from $10.7 million in
1994 to $15.2 million in 1995. This increase was due principally to the growth
in the serviced loan portfolio in the Mortgage Loan Division. Interest revenue
earned by the Mortgage Loan Division increased $2.8 million or 44%, from $6.3
million in 1994 to $9.1 million in 1995. Interest revenue earned by the Small
Business Loan Division increased $200,000, or 9%, from $2.3 million in 1994 to
$2.5 million in 1995. This increase resulted from continued growth in serviced
SBA Loans, despite the temporary changes in the SBA policies which negatively
impacted the Company's SBA Loan originations. Interest revenue earned by the
Auto Loan Division increased $1.5 million, or 71%, from $2.1 million in
1994 to $3.6 million in 1995. The increase in interest and servicing revenue
for the Auto Loan Division was due to the growth of its loan portfolio.
Servicing revenue increased $234,000, or 110%, from $212,000 in 1995 to
$446,000 in 1996. This increase was due to the securitization of loans in the
Small Business Loan Division in June 1995 as well as the increase in the
guaranteed portion of sold SBA Loans serviced by the Company as a result of
increased loan originations.
Gain on sale of loans increased $2.7 million, or 42%, from $6.5 million
in 1994 to $9.2 million in 1995. Gain on sale of loans was generated from the
sale of Mortgage Loans and SBA Loan Participations. The increase resulted
principally from increased sales of Mortgage Loans associated with the
increased loan originations of the Mortgage Loan Division.
6
<PAGE> 7
Loan Fees increased $310,000, or 112% from $276,000 in 1994 to $586,000
in 1995. The increase in loan fees was due principally to the increase in loan
origination fees charged in the Auto Loan Division.
Management fees increased $250,000, or 78%, from $320,000 in 1994 to
$570,000 in 1995. These management fees were paid to the Company by the two
funds managed by the Company. In 1995, the fees included additional income
due to the success of one of the investments of one of the funds.
Other revenues increased $68,000, or 28%, from $246,000 in 1994 to
$314,000 in 1995. Other revenues are comprised principally of insurance
commissions. The increase in other revenues in other revenues resulted
principally from the increase in the Company's loan originations.
Total expenses increased $5.7 million, or 36%, from $15.7 million in
1994 to $21.4 million in 1995. Total expenses are comprised of interest
expense, provision for credit losses and general and administrative expenses.
Interest expense increased $2.6 million, or 44%, from $5.9 million in
1994 to $8.5 million in 1995. The increase was due principally to increased
borrowings by the Mortgage and Auto Loan Divisions associated with increased
loan originations. Total borrowings attributable to the Mortgage Loan
Division, both under the Credit Facilities and in connection with the sale of
investor savings debentures, increased $27.7 million, or 36%, from $77.5
million at December 31, 1994 to $105.2 million at December 31, 1995. Interest
expense in the Mortgage Loan Division increased $1.6 million in 1995 from 1994.
Total borrowings attributable to the Small Business Loan Division increased
$400,000, or 3%, from $14.4 million at December 31, 1994 to $14.8 million at
December 31, 1995. This increase in debt resulted principally from current
year loan origination activity, partially offset by a reduction to outstanding
debt due to the securitization transaction completed in June 1995. Interest
expense in the Small Business Loan Division increased $553,000 in 1995 from
1994. Total borrowings attributable to the Auto Loan Division increased $7.0
million, or 241%, from $2.9 million at December 31, 1994 to $9.9 million at
December 31, 1995. Interest expense in the Auto Loan Division increased
$500,000 in 1995 from 1994.
Provision for credit losses remained flat at $2.5 million in 1994 and
in 1995. The provision was made to maintain the general reserves for credit
losses associated with loan growth, as well as to increase specific reserves
for possible losses associated with particular loans. In 1994, the majority of
the provision resulted from the writedown to market value of certain foreclosed
properties in the amount of $1.7 million. These foreclosed properties
related principally to speculative construction loans made by CII prior to its
acquisition by the Company. Speculative construction loans are no longer being
made by the Company.
General and administrative expense increased $3.0 million, or 40%, from
$7.4 million in 1994 to $10.4 million in 1995 principally as a result of
increased personnel costs of $1.7 million due primarily to the continued
expansion in the servicing and underwriting areas, increased legal, audit, and
professional fees of $504,000 as a result of the stock tender offer by the
Company in February 1995 and costs associated with the one-for-three reverse
stock split approved by the shareholders in June 1995, and increased expenses
of $477,000 associated with the opening of three new loan production offices by
the Auto Loan Division. General and administrative expense increased from
5.59% of average serviced loans in 1994 to 5.63% in 1995, principally as a
result of the increase in the Mortgage Loan Division's servicing operations in
anticipation of increased originations of Mortgage Loans, including Mortgage
Loans which may be sold servicing retained.
7
<PAGE> 8
Income from continuing operations increased $2.8 million, or 155% from
$1.8 million in 1994 to $4.6 million in 1995. The improvement in income was
due principally to increased growth and profitability of the Mortgage Loan
Division.
DISCONTINUED OPERATIONS
In connection with the Company's strategic plan to focus its business
efforts on financial services, the Company divested its apparel operations,
which was comprised solely of the operations of Young Generations, Inc.
("YGI"). On September 30, 1995, the Company sold all of the outstanding stock
of YGI to fifteen individuals, who were members of YGI's management team. As a
result, the loss on the sale of the stock and operating results of the apparel
operations have been classified in the accompanying financial statements as
discontinued operations. The results of operations for 1994 and 1995 have been
restated to exclude the apparel operations from continuing operations.
The Company sold the stock for $600,000 under a non-recourse promissory
note from the buyers. As a result of the sale, the Company wrote off all
amounts due from YGI resulting in a charge of $3,580,300, net of income taxes
of $67,700, reported as a loss from discontinued operations. The Company
remains contingently liable for the guaranty of certain bank loans and trade
accounts payable which existed prior to the stock sale which do not exceed
$396,000. Management does not anticipate any significant charges to future
earnings as a result of these guarantees.
The Company's transportation operations were also discontinued during
1995. In July 1994, the Company sold an operating railroad for $940,000. In
connection with this sale, the Company received $20,000 cash, and a note
receivable of $920,000, payable in semi-annual payments over five years, with
an interest rate of 10%. In November 1994, the Company assigned the rights to
boxcars in a lease with a Class I railroad for $1,174,000 cash. The Company
sold additional railcars in June 1995 for $111,000 cash.
At December 31, 1995, the Company had remaining assets in its
transportation operations of $77,000, the majority of which the Company sold
during 1996.
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
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 a representation 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.
8
<PAGE> 9
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 on its portfolio loans and
its residual asset-backed certificates held as a result of its securitizations
of loans (which represent all loans for which the Company bears credit risk).
At December 31, 1996, the total allowance for credit losses for the Company was
$4.3 million, including $1.2 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, 1994 and 1995 of $1.7 million and $2.6
million, respectively. The increase in the allowance resulted from increases
in the general allowance due to the 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. In addition to
general reserves established, each division may establish a specific reserve
for a particular loan that is deemedd by management to be a potential problem
loan 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
securities and its excess servicing receivable.
The table below summarizes certain information with respect to the
Company's allowance for credit losses and the compositiuon of charge-offs and
recoveries for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning of period $ 952 $ 1,730 $ 2,647
Total loans charged off (1,808) (1,718) (4,223)
Total loans recovered 76 155 446
------- ------- -------
Net charge-offs (1,732) (1,563) (3,777)
Provision charged to expense 2,510 2,480 5,416
------- ------- -------
Allowance for credit losses at the end of the period $ 1,730 $ 2,647 $ 4,286
Shown on balance sheet as: ======= ======= =======
Allowance for credit losses on loans $ 1,730 $ 1,874 $ 3,084
Allowance for credit losses on asset-backed
securities -- 773 354
Allowance for credit losses on excess
servicing receivable -- -- 848
------- ------- -------
Total allowance for credit losses $ 1,730 $ 2,647 $ 4,286
======= ======= =======
</TABLE>
9
<PAGE> 10
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. Management considers the allowance
appropriate and adequate to cover inherent losses in the loan portfolio;
however, management's judgment is based upon a number of assumptions about
future events, which are believed to be reasonable. Actual results could
differ from these estimates. Thus, there can be no assurance that charge-offs
in future periods will not exceed the allowance for credit losses or that
additional increases in the allowance for 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.
The following table sets forth the Company's allowance for credit
losses at the end of the periods indicated, the credit loss experience over the
periods indicated, and delinquent loan information at the dates indicated for
loans receivable at least 90 days past due.
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED
-------------------------
DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES AS A
% OF UNGUARANTEED SERVICED LOANS:
Mortgage Loan Division 1.23% 0.93% 0.80%
Small Business Loan Division 3.91 4.50 3.84
Auto Loan Division 3.00 4.03 6.45
Total allowance for credit losses as
a % of serviced loans 1.98 2.03 2.02
NET CHARGE-OFFS AS A % OF AVERAGE
SERVICED LOANS:
Mortgage Loan Division 2.96% 1.04% 0.81%
Small Business Loan Division 0.21 1.43 2.71
Auto Loan Division 2.53 3.68 9.65
Total net charge-offs as a % of
total serviced loans 2.36 1.43 2.47
LOANS RECEIVABLE PAST DUE 90 DAYS OR MORE AS
A % OF SERVICED LOANS:
Mortgage Loan Division 2.96% 3.67% 2.23%
Small Business Loan Division -- 0.97 2.63
Auto Loan Division 0.64 0.77 1.90
Total loans receivable past due 90 days
or more as a % of total serviced loans 2.10 2.77 2.28
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF
SERVICED LOANS PAST DUE 90 DAYS OR MORE 94.20% 73.21% 88.71%
</TABLE>
Net loans charged off increased from 1.43% of average unguaranteed
serviced loans outstanding for the year ended December 31, 1995, to 2.47% for
the year ended December 31, 1996. The increase in net loans charged off
resulted from writedowns in the estimated fair market value of real estate
acquired through
10
<PAGE> 11
foreclosure, increased losses in the Small Business Loan Division due to the
continued seasoning of the SBA Loan portfolio, and higher losses in the Auto
Loan Division due to increased delinquencies, repossession activity, and
personal bankruptcy filings by its borrowers. Net Mortgage Loans charged off
in 1996 were $792,000 or 80 basis points of total serviced mortgage loans. Net
Small Business Loans charged off in 1996 were $932,000 or 2.71% of unguaranteed
serviced Small Business Loans. Net Auto Loans charged off in 1996 were $2.1
million, or 9.65% of total serviced Auto Loans. The allowance for loan losses
in the serviced loan portfolio was increased from $2.6 million at December 31,
1995 to $4.3 million at December 31, 1996, which represents 2.03% and 2.02%,
respectively, of the unguaranteed serviced loan portfolio outstanding. Total
delinquencies over 30 days have decreased from 13.31% of total unguaranteed
serviced loans at December 31, 1995, to 8.41% at December 31, 1996. Total
delinquencies over 30 days as a percentage of total unguaranteed serviced loans
have decreased from December 31, 1995 to December 31, 1996, for both the
Mortgage Loan Division (from 14.43% to 7.26%) and the Small Business Loan
Division (from 9.69% to 7.92%), but have increased for the Auto Loan Division
(from 12.83% to 17.09%).
Management anticipates that net charge-offs as a percentage of average
serviced loans will be lower for 1997 compared to 1996 as a result of the
increased writedowns in 1996 discussed above, which are not anticipated to be a
recurring event. Further, the delinquencies for the Company have declined in
the first two months of 1997. At February 28, 1997, total delinquencies over
30 days as a percentage of total unguaranteed serviced loans have decreased
from 8.41% at December 31, 1996 to 6.15% at February 28, 1997. The improved
delinquencies were across all three business lines, with Mortgage Loan Division
delinquencies decreasing from 7.26% to 5.69%, Small Business Loan Division
delinquencies decreasing from 7.92% to 5.57%, and Auto Loan Division
delinquencies decreasing from 17.09% to 11.34%. Accordingly, charge-offs for
1997 are anticipated to improve also. However, anticipated charge-off levels
represent forward-looking statements, and no assurance can be given that actual
results will not differ materially. Factors which could cause charge-off
levels to increase are many and include economic downturn, poor underwriting or
quality control, and depressed real estate values.
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 sales of the loans it originates and purchases, proceeds from the
sale of investor savings debentures, borrowings under the Bredit Facilities,
proceeds from securitizations of loans and cash flows from operations. While
the Company believes that such sources of funds will be adequate to meet its
liquidity requirements, no asurance of this may be given.
Shareholder's equity increased from $9.7 million at December 31, 1994,
to $9.9 million at December 31, 1995, and to $46.7 million at December 31,
1996. Each of these increases resulted principally from the retention of
income by the Company and the public offering of additional common stock in
November 1996 which raised $26.4 million.
11
<PAGE> 12
Cash and cash equivalents remained stable at $1.3 million at December
31, 1995 and 1996. Cash used in operating activities increased from $10.1
million in 1995 to $59.6 million in 1996, cash used in investing activities
decreased from $23.2 million in 1995 to $6.8 million in 1996; and cash provided
by financing activities increased from $34.4 million in 1995 to $66.3 million
in 1996. The increase in cash used in operations was due principally to loans
held for sale which were originated, but not yet sold as of December 31, 1996.
Cash used in investing activities was principally for the net increase in loans
originated with the expectations of holding the loans until maturity. Cash
provided by financing activities was due principally to the increase in
borrowing, both under the lines of credit available to the Company (the "Credit
Facilities") and through the sale of the investor savings debentures, as well
as the proceeds from the issuance of additional common stock.
At December 31, 1996, the Company's Credit Facilities were comprised of
credit facilities of $90 million for the Mortgage Loan Division which had
aggregate unused borrowing availability of $14.2 million (the "Mortgage Loan
Division Facility"), credit facilities of $40 million for the Small Business
Loan Division which had aggregate unused borrowing availability of $13.7
million (the "Small Business Loan Division Facility"), and credit facilities of
$26 million for the Auto Loan Division which had aggregate unused borrowing
availability of $9.8 million (the "Auto Loan Division Facility"). The Credit
Facilities contain a number of financial covenants including but not limited
to, maintenance of certain debt to equity ratios, maintenance of minimum book
net worth, limitations on declaring or paying dividends, limitations on making
payments with respect to certain subordinated debt, and limitations on making
certain changes to its equity structure. The Company believes that it is
currently in material compliance with these covenants. At December 31, 1996,
one of the Company's automobile lending subsidiaries exceeded the maximum
delinquency levels permitted under the $20,000,000 agreement. In addition, the
Company's automobile lending subsidiaries were also in violation of the minimum
interest coverage ratio. The lender for the Auto Loan Division Facility has
provided a waiver to the Company's automobile lending subsidiaries for the
above violations. At December 31, 1996, $46.8 million bearing interest at the
lender's prime rate eas outstanding under the Mortgage Loan Division Facility,
$8.7 million bearing interest at the lender's prime rate was outstanding under
the Small Business Loan Division Facility, and there was no debt outstanding
under the Auto Loan Division Facilities. 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. Send Note 8 to the Consolidated
Financial Statements for additional information.
To date, the Company has sold the majority of its Mortgage Loans and
the guaranteed portion of its SBA Loans. During 1995 and 1996, the Company
sold $127.6 million and $284.8 million, respectively, of Mortgage Loans and
$25.4 million and $33.1 million, respectively, of the guaranteed portion of the
SBA Loans.
In June 1995 and November 1996, the Company securitized approximately
$17.1 million and $17.5 million, respectively 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. In connection with each
loan securitization, the Company has retained subordinated certificates
representing interests in the transferred loans equal to approximately 10% of
the loans transferred. The retained subordinated certificates totaled
approximately $3.6 million, net of allowances, at December 31, 1996.
12
<PAGE> 13
CII engages in the sale of investor savings debentures to residents of
South Carolina. The debentures are comprised of senior notes and subordinated
debentures bearing fixed rates of interest. The offering of the debentures is
registered under South Carolina securities law and exempt from Federal
registration under the Federal intrastate exemption. At December 31, 1996, CII
had an aggregate of $98.0 million of senior notes outstanding and $16 million
in subordinated debentures bearing a weighted average interest rate of 6%.
Both senior 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 expects to continue offering
the debentures.
The Company plans to continue to enhance its Management Information
Systems in 1997, as well as incur additional other capital expenditures. The
Company believes its capital requirements during 1997 will be met from retained
earnings, current earnings, and utilization of proceeds from the common stock
offering in 1996, although additional capital may be required in the event that
business expands significantly more than anticipated, or in the event of a
material adverse change in the Company's operations.
TAX CONSIDERATIONS
As a result of the operating losses incurred by the Company under prior
management, the Company generated the NOL. At December 31, 1996, the amount of
the NOL remaining and available to the Company was approximately $13.5 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 1996, was approximately $1.2
million and $3.4 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 years ended December 31, 1994, 1995, and 1996. A valuation allowance equal
to the tax effect of the NOL was applied to the NOL in each of the years ended
December 31, 1995 and 1996. A valuation allowance of approximately $7.5
million was applied to the tax effect of the NOL for the year ended December
31, 1996
ACCOUNTING CONSIDERATIONS
In connection with the Company's sale of SBA Loan participations and
securitization transactions, the Company accounts for the servicing revenue in
excess of that defined as "normal" servicing revenue as excess servicing
receivable in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 65. This asset is
amortized against servicing revenue over the life of the loan to which it
relates. In the event that the related loan is prepaid or the related borrower
defaults on such loan, the balance of the excess servicing receivable is
charged against servicing revenue in the period in which the prepayment or
default occurs.
13
<PAGE> 14
The Company complies with the provisions of Emerging Issues Task Force
("EITF") 88-11 dealing with income recognition on the sales of loans. EITF
88-11 requires that the amount of gain or loss recognized on the sale of a
portion of a loan be based on the relative fair values of the loan portion sold
and the loan portion retained. For the Company, EITF 88-11 primarily impacts
the amount of gain recognized by the Company on the sale of the SBA Loan
Participations. As result of the Company's accounting treatment described
above, a portion of the cash premiums received are deferred and recognized as
income over the remaining term of the retained unguaranteed portion of the
loan.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." FASB's
objective is to develop consistent accounting standards for such transactions,
including determining when financial assets should be considered sold and
removed from the statement of financial position, and when related revenues and
expenses should be recognized. This approach focuses on analyzing the
components of financial asset transfers and requires each party to a transfer
to recognize the financial assets it controls and liabilities it has incurred
and remove such assets from the statement of financial position when control
over them has been relinquished. The statement is not expected to have a
significant impact on the accounting practices of the Company and is generally
effective for transactions entered into after December 31, 1996.
In December 1996, the FASB issued SFAS 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." The provisions relating
to this statement are not applicable to the Company.
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 Loan Division, the Company sells a
significant portion of its mortgage loan production on a monthly basis and
commitments for mortgage loans do not extend beyond 45 days. In the event that
the 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. The Company's Mortgage Loans bear
interest at a fixed rate. The Company does not currently hedge its loan
pipeline. The Mortgage Loans generally have maturities of 15 to 30 years while
the
14
<PAGE> 15
line of credit used to fund these loans has a one-year maturity and bears
interest at a variable rate. Accordingly, the Company has duration risk and
interest rate risk on its Mortgage Loans prior to sale or securitization.
Beginning in the first quarter of 1997, the Company plans to begin securitizing
a portion of its Mortgage Loan production on a quarterly basis, and accordingly
will hold an inventory of loans in its portfolio for up to 90 days. This
exposes the Company to increased interest rate risk during that holding period.
Once the securitization is completed, the loans are sold, so the Company no
longer bears any interest rate risk or duration risk for the loans after the
securitization is completed. The Company currently has no plans to hedge its
interest rate risk during the accumulation period prior to the completion of
its securitization transactions, although it may decide to do so in the future.
With respect to the Small Business Loan Division, the Company only
originates variable rate loans, which adjust on the first day of each calendar
quarter. The funding for these loans are variable rate, which adjust on the
first day of each month. Therefore, interest rate risk exists for a maximum
period of 60 days, due to the Small Business Loan Credit Facility having a
variable rate which adjusts monthly. The SBA Loans generally have maturities
from 7 to 25 years while the line of credit used to fund these loans has a much
shorter maturity. Accordingly, the Company has duration risk on its SBA Loans
prior to sale or securitization. The Company bears no interest rate risk or
duration risk relating to its securitized SBA Loans or the sold guaranteed SBA
Loan participations.
With respect to the Auto Loan Division, the Company's spread is in
excess of 15%. All of the Company's Auto Loans are fixed rate loans. The
contractual terms of the loans are generally three to four years, but the
actual life approximates 18 months after considering the estimated constant
prepayment rate. Because the Company's funding for these loans are variable
rate while the funded loans are fixed rate, the Company bears both interest
rate risk and duration risk on its Auto Loans prior to securitization. The
Company currently has no plans to hedge its interest rate risk, although it may
decide to do so in the future. The Company believes that this interest rate
spread provides adequate margin to allow for any potential increase in
interest rates, given the relatively short term of these loans. Further, the
Auto Loans securitized are sold, so the Company no longer bears any interest
rate risk or duration risk relating to its securitized Auto Loans.
The company's average interest rate and servicing fee earned for the
years ended December 31, 1995 and 1996 were 13.94% and 15.52%, respectively,
computed on a simple average monthly basis. The Company's average interest
rate paid for the years ended December 31, 1995 and 1996 were 7.57% and 7.36%,
respectively, which resulted in an average spread of 6.37% and 8.16%,
respectively, between the rate at which the Company borrows and the rate at
which it lends.
15
<PAGE> 1
EXHIBIT 21.0
Subsidiary State of Incorporation
- ----------------------------------- -----------------------
Emergent Mortgage Corp. South Carolina
Emergent Commercial Mortgage Corporation South Carolina
Carolina Investors, Inc. South Carolina
Emergent Mortgage Corp. of Tennessee South Carolina
Emergent Mortgage Holdings Corporation South Carolina
Emergent Business Capital, Inc. South Carolina
Emergent Business Capital Holdings, Corp. South Carolina
Emergent Financial Corp. South Carolina
Emergent Equity Advisors, Inc. South Carolina
The Loan Pro$, Inc. South Carolina (80% owned)
Premier Financial Services, Inc. South Carolina
Emergent Auto Holdings Corp. South Carolina
The Mississippian Railway, Inc. (Inactive) South Carolina
Pickens Liquidation Corp. (Inactive) South Carolina (81% owned)
Sterling Lending Corporation South Carolina (80% owned)
Sterling Insurance Agency Louisiana
33
<PAGE> 1
EXHIBIT 23.1 MEMBERS OF THE
AMERICAN INSTITUTE
OF CERTIFIED PUBLIC
ACCOUNTANTS
GREENVILLE, S.C.
GREENWOOD, S.C.
ANDERSON, S.C.
COLUMBIA, S.C.
[EDC LOGO]
ELLIOTT, DAVIS & COMPANY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
EMERGENT GROUP, INC. AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of EMERGENT
GROUP, INC. AND SUBSIDIARIES as of December 31, 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 consolidated financial position of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ Elliott, Davis & Company, L.L.P
- -----------------------------------
ELLIOTT, DAVIS AND COMPANY, L.L.P.
Greenville, South Carolina
January 31, 1996
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Emergent Group, Inc.
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No. 333-07927)
1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer and Employee
Stock Option Plan and (No. 333-20179) Employee Stock Purchase Plan of Emergent
Group, Inc. of our report dated January 30, 1997, relating to the consolidated
balance sheets of Emergent Group, Inc. and subsidiaries (the "Company") as of
December 31, 1996 and the related consolidated statements of income,
shareholders' equity, and cash flows for the year ended December 31, 1996,
which report appears in the December 31, 1996 Annual Report on Form 10-K of the
Company.
/s/ KPMG Peat Marwick LLP
----------------------------------
Greenville, South Carolina KPMG Peat Marwick LLP
March 24, 1997
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