-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ha7WxYaB4DaDBEWHq8GuWB+o37a7rXmoSkJb4fFk8NALXNIJdXpGlc8KtF73964w 75mqpz5LXnrAxt9voTQ7cA== 0000950168-97-002238.txt : 19970814 0000950168-97-002238.hdr.sgml : 19970814 ACCESSION NUMBER: 0000950168-97-002238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGENT GROUP INC CENTRAL INDEX KEY: 0000277028 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570513287 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08909 FILM NUMBER: 97659773 BUSINESS ADDRESS: STREET 1: 15 SOUTH MAIN ST STE 750 CITY: GREENVILLE STATE: SC ZIP: 29601 BUSINESS PHONE: 8642358056 MAIL ADDRESS: STREET 1: 15 SOUTH MAIN ST STE 750 CITY: GREENVILLE STATE: SC ZIP: 29601 FORMER COMPANY: FORMER CONFORMED NAME: NRUC CORP DATE OF NAME CHANGE: 19911002 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL RAILWAY UTILIZATION CORP DATE OF NAME CHANGE: 19840813 10-Q 1 EMERGENT GROUP INC. 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant To Section 13 Or 15 (d) of the Securities Exchange Act Of 1934 For The Period Ended JUNE 30, 1997 OR [ ] Transition Report Pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________. Commission File Number 0-8909 ----------------------- EMERGENT GROUP, INC. (Exact name of registrant as specified in its charter) South Carolina 57-0513287 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 17526 Greenville, South Carolina 29606 (Address of principal executive offices) Registrant's telephone number, including area code: 864-235-8056 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each Class: Outstanding at July 31, 1997 - --------------------------------------- ---------------------------- Common Stock, par value $0.05 per share 9,650,691 EMERGENT GROUP, INC. AND SUBSIDIARIES Form 10-Q Quarter Ended JUNE 30, 1997 INDEX PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 4 Consolidated Statements of Income for the six months and three months ended June 30, 1996 and June 30, 1997 6 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and June 30, 1997 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 (2) PART I. FINANCIAL INFORMATION (3) EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) JUNE 30, DECEMBER 31, 1997 1996 (Unaudited) ____________ ____________ ASSETS ______ Cash and cash equivalents $ 1,276 $ 2,445 Restricted cash 5,319 3,176 Loans receivable: Loans receivable 89,469 117,182 Mortgage loans receivable held for sale 100,063 192,881 _______ _______ Total loans receivable 189,532 310,063 Less allowance for credit losses (3,084) (4,621) Less unearned discount, dealer reserves and deferred fee income (1,419) (3,803) ________ ________ Net loans receivable 185,029 301,639 Other receivables: Accrued interest receivable 2,087 3,225 Other receivables 4,459 4,280 _______ _______ Total other receivables 6,546 7,505 Investment in asset-backed securities, net of allowance for losses of $354 in 1996 and $764 in 1997 3,581 6,959 Interest-only strip security, net of allowance for losses of $848 in 1996 and $5,450 in 1997 4,315 18,942 Property and equipment 8,875 12,961 Less accumulated depreciation (1,698) (2,613) ________ ________ Net property and equipment 7,177 10,348 Excess of cost over net assets of acquired business, net of accumulated amortization of $781 in 1996 and $876 in 1997 2,722 2,627 Real estate and personal property acquired through foreclosure 4,720 4,063 Other assets 3,464 7,284 ______ ______ Total Assets $ 224,149 $ 364,988 ========== ========== See Notes to Unaudited Financial Statements 4 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (in thousands) JUNE 30, DECEMBER 31, 1997 1996 (Unaudited) ____________ ____________ LIABILITIES AND SHAREHOLDERS' EQUITY ____________________________________ Liabilities: Notes payable to banks $ 55,494 $ 174,353 Subordinated investor savings: Notes payable to investors 97,987 105,730 Subordinated debentures 16,115 19,160 _______ ________ Total subordinated investor savings 114,102 124,890 Other accrued liabilities 3,958 4,262 Remittance due to loan participants 3,519 2,544 Accrued interest payable 597 1,784 ______ ______ Total other liabilities 8,074 8,590 ______ ______ Total liabilities 177,670 307,833 Minority interest (156) - Shareholders' equity: Common stock, par value $0.05 per share- authorized 30,000,000 shares in 1996 and 100,000,000 shares in 1997; issued and outstanding 9,141,131 shares in 1996 and 9,643,157 shares in 1997 457 482 Capital in excess of par value 33,150 38,479 Retained earnings 13,028 18,194 _______ _______ Total shareholders' equity 46,635 57,155 _______ _______ Total Liabilities and Shareholders' Equity $ 224,149 $ 364,988 ============ ========== See Notes to Unaudited Financial Statements 5 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except share data)
Three months ended Six Months Ended June 30, June 30, 1996 1997 1996 1997 ______________ _____________ _____________ _____________ Revenues: - ------------- Interest income $ 4,051 $ 8,817 $ 8,375 $ 15,024 Servicing income 1,026 1,940 1,563 3,085 Gain on sale of loans 4,450 11,889 7,468 18,107 Management fees 146 129 257 257 Loan fee income 205 7,337 426 13,215 Other income 148 67 220 176 __________ ___________ __________ ___________ Total revenues 10,026 30,179 18,309 49,864 Expenses: __________ Interest expense 2,836 6,055 5,576 9,782 Provision for credit losses 622 2,599 1,532 4,671 Salaries, wages and employee benefits 2,497 10,715 4,321 18,761 Depreciation 182 525 333 947 Amortization 81 143 163 288 Advertising and promotional 199 1,781 290 2,979 Legal, audit and professional fees 191 1,435 340 2,124 Travel and entertainment 190 663 330 1,187 Telephone 123 662 230 1,061 Other general and administrative expense 931 2,505 1,615 4,368 _______ _______ _______ ________ Total expenses 7,852 27,083 14,730 46,168 _______ _______ _______ ________ Income before income taxes and minority interest 2,174 3,096 3,579 3,696 Provision (benefit) for income taxes: _____________________________________ Current 82 454 154 833 Deferred (5) (2,121) (33) (2,458) _______ ________ ________ ________ Total provision (benefit) for income taxes 77 (1,667) 121 (1,625) _______ ________ ________ ________ Income before minority interest 2,097 4,763 3,458 5,321 Minority interest in earnings of subsidaries (10) - (22) (156) ________ ________ _________ _________ Net income $ 2,087 $ 4,763 $ 3,436 $ 5,165 ---------- ----------- ------------- ------------- Earnings per share $ 0.31 $ 0.51 $ 0.51 $ 0.55 ---------- ----------- -------------- ------------- Weighted average shares, options and warrants outstanding 6,785,457 9,310,153 6,727,674 9,318,050 =========== ============ ============= =============
See Notes to Unaudited Financial Statements 6 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended June 30, 1996 1997 __________ ___________ Operating Activities: ______________________ Net income $ 3,436 $ 5,165 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 496 1,235 Provision for deferred income taxes (33) (2,458) Provision for credit losses 1,532 4,672 Loans originated with intent to sell (137,940) (494,857) Principal proceeds from loans sold 173,343 175,767 Proceeds from securitization of loans 14,102 201,034 Payments to securitization certificate holders for loan losses - (723) Other 1,136 1,225 Changes in operating assets and liabilities increasing (decreasing) cash: Restricted cash (2,318) 2,143 Other receivables 922 262 Interest-only strip security (472) (14,627) Accounts payable, income taxes payable, and other accrued liabilities (1,039) 189 Remittance due to loan participants 639 (975) Accrued interest payable 70 1,186 Accrued interest receivable 104 (1,110) Other assets (1,008) (1,901) _____________ ____________ Net cash provided by (used in) operating activities $ 52,970 $ (123,773)
See Notes to Unaudited Financial Statements 7 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - (Continued) (In thousands)
Six Months Ended June 30, 1996 1997 _____________ ___________ Investing Activities: _______________________ Loans originated for investment purposes $ (54,289) $ (62,324) Principal collections on loans not sold 23,373 57,569 Principal collections on asset-backed securities 421 337 Proceeds from sale of real estate and personal property acquired through foreclosure 1,898 3,271 Purchase of property and equipment (1,271) (4,136) Other (228) (280) _______________ _______________ Net cash used in investing activities (30,096) (5,563) Financing Activities: _____________________ Advances under notes payable to banks 209,636 535,895 Payments on notes payable to banks (221,008) (417,036) Net increase in notes payable to investors 9,230 7,743 Net increase in subordinated debentures 526 3,046 Proceeds from issuance of stock 213 857 ______________ _______________ Net cash (used in) provided by financing activities (1,403) 130,505 ______________ _______________ Net increase in cash and cash equivalents 21,471 1,169 Cash and cash equivalents at begining of year 1,260 1,276 ______________ _______________ Cash and cash equivalents at June 30 $ 22,731 $ 2,445 ______________ _______________
See Notes to Unaudited Financial Statements 8 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1- BASIS OF PREPARATION The accompanying consolidated financial statements are prepared in accordance with the SEC's rules regarding interim financial statements, and therefore do not contain all disclosures required by generally accepted accounting principles for annual financial statements. Reference should be made to the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, including the footnotes thereto. Certain previously reported amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on net income or shareholders' equity. The consolidated balance sheet as of June 30, 1997, and the consolidated statements of income for the six-month periods and three-month periods ended June 30, 1996 and 1997, and the consolidated statements of cash flows for the six-month periods ended June 30, 1996 and 1997, are unaudited and in the opinion of management contain all known adjustments, which consist of only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company. KPMG Peat Marwick LLP previously examined and reported on the Company's financial statements for the year ended December 31, 1996, from which the consolidated balance sheet as of that date is derived. The Company considers all highly liquid investments readily convertible to known amounts of cash or having a maturity of three months or less to be cash equivalents. NOTE 2-INTEREST AND INCOME TAXES For the six-month periods ended June 30, 1996 and 1997, the Company paid interest of $5,506,000 and $8,596,000, respectively. For the six-month periods ended June 30, 1996 and 1997, the Company paid income taxes of $30,000 and $566,000 respectively. NOTE 3- CASH AND CASH EQUIVALENTS The Company maintains its primary checking accounts with three principal banks and makes overnight investments in reverse repurchase agreements with those banks. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30, 1997, the amounts maintained in overnight investments in reverse repurchase agreements, which are not insured by the FDIC, totaled $925,000. The investments were secured by U.S. Government securities pledged by the banks. NOTE 4-RESTRICTED CASH The Company is required to establish and maintain cash reserve and collection accounts with a trustee in connection with the securitizaton of certain mortgage, SBA and auto loans. These accounts are shown as restricted cash on the Company's consolidated balance sheets. NOTE 5-SECURITIZATION OF LOANS In March and June of 1997, the Company securitized $77,526,000 and $121,214,000 of mortgage loans, respectively. The securitizations were effected through a trust fund (the "Trust"), the ownership of which is represented by Class A and Class R certificates. The Trust serves as a real estate mortgage investment conduit ("REMIC") for federal income tax purposes. The Class A certificates were purchased by investors, while the Company retained the Class R certificates. 9 NOTE 6- INCOME TAXES Total income tax expense was allocated as follows:
Six Months Years Ended December 31, Ended June 30, 1995 1996 1996 1997 ______ ______ ______ ______ (in thousands) Income from continuing operations $ 190 $ 718 $ 121 $(1,625) Discontinued operations (75) - - - --------- -------- ------- ------- $ 115 $ 718 $ 121 $(1,625) ========= ======== ======= ======= A reconciliation of the provision for Federal and state income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes and minority interest are as follows: Six Months Years Ended December 31, Ended June 30, 1995 1996 1996 1997 ______ ______ ______ ______ (in thousands) Statutory Federal rate of 34% applied to pre-tax income from continuing operations before minority interest$ 1,650 $ 3,557 $ 1,220 $ 1,256 State income taxes, net of federal income tax benefit 3 350 36 81 Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income tax expense (1,566) (3,229) (1,181) (3,059) Nondeductible expenses 5 17 5 34 Amoritization of excess cost over net assets of acquired businesses 62 64 22 33 Other, net 36 (41) 19 28 ___________ _________ ___________ ________ 190 718 121 (1,625) =========== ========= =========== ======== Provision (benefit) for income taxes from continuing operations is comprised of the following: Six Months Years Ended December 31, Ended June 30, 1995 1996 1996 1997 ______ ______ ______ ______ (in thousands) Current Federal $ 100 $ 199 $ 88 $ 260 State and Local 49 660 66 573 ______ _______ _____ _______ 149 859 154 833 Deferred Federal 27 (11) (22) (2,008) State and Local 14 (130) (11) (450) ______ _______ _____ _______ 41 (141) (33) (2,458) Total Federal 127 188 66 (1,748) State and Local 63 530 55 123 ______ _______ _____ _______ $ 190 $ 718 $ 121 $(1,625) ====== ======= ===== =======
10 Deferred income taxes reflect the net tax effect 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: December 31, June 30, 1995 1996 1997 ______ ______ ______ (in thousands) Deferred tax liabilities: Difference between book and tax basis of property $ (269) $ (372) $ (547) Deferred tax assets: Differences between book and tax basis of deposit base intangibles 165 205 223 Allowance for credit losses 1,202 1,672 4,226 Write-off of notes receivable 1,386 - - AMT credit carryforward 367 586 848 Operating loss carryforward 7,700 4,590 181 Unrealized gain on loans to be sold 382 1,182 2,313 _________ __________ _________ Total gross deferred tax assets 11,202 8,217 7,244 Less valuation allowance (10,737) (7,508) (4,449) _________ __________ _________ Net deferred tax asset $ 196 $ 337 $ 2,795 ========= ========== ========= 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 June 30, 1997, the Company has available Federal net operating loss ("NOL") carryforwards of approximately $ 564,000 expiring in 1998 through 2001. There are no known significant pending assessments from taxing authorities regarding taxation issues at the Company or its subsidiaries. In the second quarter, the company reduced its valuation allowance resulting in a net deferred tax asset of $2.8 million. Management based the decision to reduce the valuation allowance by $1.9 million on the level of historical taxable income and current projections for future taxable income over the periods in which the deferred tax assets would be realized. Two main factors contributed to the current projections for future taxable income. First was the substantial increase in the number of mortgage loans originated in the new Greenville and Phoenix offices. The Indianapolis office continues to show a sizable increase in mortgage loans, also. Together, loan production for the three offices has increased to $50 million per month. Second, the company had a large NOL remaining at the end of 1996. By the second quarter, the Company believed that it would have taxable income for 1997 well in excess of the remaining NOL and that it was no longer necessary to maintain a valuation allowance against the majority of the asset. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjuction with the Consolidated Financial Statements of the Company appearing elsewhere herein. General The Company is a diversified financial services company headquartered in Greenville, South Carolina, which makes mortgage loans, small business loans, and auto loans. The Company commenced its lending operations in 1991 through the acquisition of Carolina Investors, Inc. ("CII"), a small mortgage lending company, which had been in operation since 1963. Since such acquisition through December 31, 1996, the Company has experienced a compounded annual growth rate of 86% in loan originations. Since 1996, the Company has been focused principally on expanding its mortgage loan division and small business loan division, and has recently determined to pursue the divestiture of its auto loan division. The auto loan division has historically originated only a small percentage of total Company loans and is not believed to have the profit potential of the Company's mortgage and small business loan divisions. The Company's total serviced loans increased from $157.4 million at December 31, 1994, to $214.5 million at December 31, 1995, to $309.1 million at December 31, 1996, and to $636.9 million at June 30, 1997. Mortgage loans have increased during all such periods principally as a result of an increase in the number of mortgage bankers originating loans through the mortgage loan division, as well as increased loan volume from existing mortgage bankers and due to the startup and growth of the retail division. Small business loans have increased due to the opening of additional offices, an increase in the number of commercial loan brokers, which refer loans to the small business loan division, and new product offerings. However, 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 refinancings (which temporary limitations were removed in October 1995). Consequently, small business loan volume in 1995 was relatively unchanged from the 1994 level. Auto loans increased during all such periods, prior to 1997, principally as a result of an increase in the number of loan production offices and successful efforts at establishing additional dealer relationships. Beginning in September 1996, the Company curtailed the expansion of its auto loan operations and, consequently, has experienced a decline in auto loan originations since that time. The following table sets forth certain data relating to the Company's loans at and for the periods indicated:
Year Ended Six Months Ended December 31, June 30, 1994 1995 1996 1996 1997 ______ ______ ______ ______ ______ (Dollars in thousands) Mortgage Loans: Mortgage loans originated $ 99,373 $ 192,800 $ 328,649 $ 153,802 $ 474,261 Mortgage loans sold 54,565 127,632 284,794 143,924 158,480 Mortgage loans securitized - - - - 198,740 Total mortgage loans (period end) 60,151 88,165 146,231 70,430 247,892 Total serviced mortgage loans (period end) 60,151 88,165 146,231 70,430 444,472 Average mortgage loans(1) 51,243 74,158 97,281 92,188 215,304 Average serviced mortgage loans (1) 51,243 74,158 97,281 92,188 286,618 Average interest earned (1) 12.37% 12.10% 11.97% 12.24% 10.19%
12
Year Ended Six Months Ended December 31, June 30, 1994 1995 1996 1996 1997 ______ ______ ______ ______ ______ (Dollars in thousands) Small Business Loans: Small business loans origianted $ 43,123 $ 39,560 $ 68,210 $ 30,583 $ 30,996 Small business loans sold 31,207 25,423 33,060 15,909 17,646 Small business loans securitized - 17,063 12,851 - 4,626 Total small business loans (period end) 26,764 20,620 29,386 24,013 44,491 Total serviced small business loans (period end) 88,809 108,696 140,809 125,687 169,891 Total serviced unguaranteed small business loans (period end) (2) 18,771 24,867 44,017 32,219 63,043 Average small business loans (1) 22,348 23,692 26,700 20,839 29,652 Average serviced small business loans (1) 73,681 98,753 125,723 116,038 150,249 Average serviced unguaranteed small business loans (2) (3) 15,004 21,819 34,442 28,201 51,030 Average interest earned (1) 10.11% 10.39% 12.61% 12.61% 14.15% Auto Loans: Auto loans originated $ 7,547 $ 17,148 $ 18,287 $ 10,052 $ 8,488 Auto loans securitized - - 16,107 16,107 - Total auto loans (period end) 8,483 17,673 13,916 8,822 17,680 Total serviced auto loans (period end) 8,483 17,673 22,035 21,865 22,556 Average auto loans (1) 7,247 13,078 11,917 12,138 15,869 Average serviced auto loans (1) 7,247 13,078 21,277 19,883 22,435 Average interest earned (1) 28.28% 27.40% 23.57% 22.72% 24.12% Total Loans: Total loans recievable (period end) $ 95,398 $ 126,458 $189,532 $ 103,265 $ 310,063 Total serviced loans (period end) 157,443 214,534 309,073 217,982 636,919
__________________________________ (1) Averages are computed using beginning and ending balances for the period presented, except that the 1996 and 1997 averages are calculated based on the daily averages for small business loan division and auto loan division and monthly averages for mortgage loan division (rather than the beginning and ending balances). (2) Excludes guaranteed protion of SBA loans. (3) Averages are computed using beginning and ending balances for the period presented. Operating Cash Flow The Company expects to operate on a negative cash flow basis due to increases in the volume of loans purchased and originated and due to the growth of its securitization program. The Company's primary operating sources of cash are (i) excess cash flow received in each period with respect to interest only and residual certificates, (ii) cash payments of contractual an ancillary servicing revenues received by the Company in its capacity as servicer for securitized loans, (iii) interest income on loans receivable and certain cash balances, (iv) fee income received in connection with its retail mortgage loan originations, and (v) cash gains from sale of SBA loan participations and whole-loan mortgage loan sales. Currently, the Company's primary operating cash uses include the funding of (i) mortgage originations and purchases pending their securitization or sale, (ii) interest expense on CII notes and on warehouse and other financing, (iii) fees, expenses and tax payments incurred in connection with the securitization program, and (iv) ongoing administrative and other operating expenses. 13 The Company reduces the negative cash flow impact of securitizatons by its ongoing sale of whole loans, the generation of loan fees in its retail mortgage loan operation and the utilization of a wholesale loan origination strategy whereby loans are generally funded at par, rather than at the significant premiums typically associated with a correspondent-based strategy. The table below summarizes cash flows provided by and used in operating activities. Year Ended Six Months Ended December 31, June 30, 1994 1995 1996 1996 1997 _____ ____ ____ ____ ____ (Dollars in thousands) Operating Cash Income: Servicing fees received and excess cash flow from securitization trusts $ 694 $ 1,259 $ 3,782 $ 1,757 $ 3,652 Interest received 10,498 14,549 17,392 8,501 13,913 Cash gain on sale of loans 4,990 8,987 21,554 6,996 7,295 Cash loan origination fees received 729 -- 4,961 1,463 15,599 Other cash income 637 491 1,267 554 447 _____ ______ _____ ______ ______ Total operating cash income 17,548 25,286 48,956 19,271 40,906 Operating Cash Expenses: Securitization costs -- (266) (639) (639) (1,664) Securitization hedge losses -- -- -- -- (1,606) Cash operating expenses (6,576) (9,480) (22,156) (7,125) (30,480) Interest on CII notes and warehouse financing (5,849) (8,424) (11,045) (5,506) (8,596) Taxes paid (214) (267) (322) (30) (566) ________ _______ _______ ______ ______ Total operating cash expenses (12,639) (18,437) (34,162) (13,300) (42,912) Cash flow due to operating cash income and expenses 4,909 6,849 14,794 5,971 (2,006) Other Cash Flows: Cash (used in) provided by other payables and receivables 1,080 (4,850) (6,580) (2,583) (2,988) Cash provided by (used in) loans held for sale 11,984 (13,767) (67,819) 49,505 (118,779) Net cash provided by (used in) operating activities of discontinued operations (1,253) 1,592 77 77 -- Net cash provided by (used in) operating activities $16,720 $(10,176) $(59,528) $52,970 $(123,773) ======= ========= ======== ======= ========= Profitability The principal components of the Company's profitability are (i) net interest revenues associated with the Company's loans receivable, (ii) servicing revenues associated with the Company's loans serviced for others, (iii) gain on sale of mortgage loans associated with securitizations and whole loan sales, (iv) gains resulting from the sale of the SBA loan participations, and (v) loan origination fees generated by the company's retail mortgage loan operation. The following table sets forth, for the periods indicated, certain information derived from the Company's Consolidated Financial Statements. Year Ended Six Months Ended December 31, June 30, 1994 1995 1996 1996 1997 _____ ____ ____ ____ ____ (Percentage of total revenue) Interest revenue 58.8% 57.8% 35.5% 45.8% 30.1% Servicing revenue 1.1 1.7 6.5 8.5 6.2 Cash gain on sale of loans 27.4 34.2 42.8 38.2 14.6 14 Non-cash gain on sale of loans 8.0 0.7 4.5 2.6 21.7 Loan fee income 1.5 2.2 8.2 2.3 26.5 Other Revenues 3.2 3.4 2.5 2.6 0.9 ---- ---- ---- ---- ---- Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== Interest expense 32.3% 32.5% 21.9% 30.5% 19.6% General and administrative expenses 40.4 39.6 46.6 41.6 63.6 Provision for credit losses 13.8 9.4 10.7 8.4 9.4 ---- ---- ---- ---- ----- Income from continuing operations before income taxes 13.5 18.5 20.8 19.5 7.4 Income tax expense 2.9 0.8 1.4 0.6 (3.3) Minority interest (0.3) (0.3) 0.7 (0.1) (0.3) Income (loss) from discontinued operations 2.6 (14.9) -- -- -- ----- ------ ---- ---- ------ Net income 12.9% 2.5% 20.1% 18.8% 10.4% ===== ====== ===== ===== ====== Results of Operations Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Total revenues increased $31.6 million, or 173%, from $18.3 million for the six month period ended June 30, 1996, to $49.9 million for the six month period ended June 30, 1997. The increase in revenues resulted principally from increases in interest revenue, servicing revenue and gain on sale of loans. Interest revenue increased $6.6 million, or 79%, from $8.4 million for the six month period ended June 30, 1996, to $15.0 million for the six month period ended June 30, 1997. This increase was due principally to the growth in the serviced loan portfolio of the mortgage loan division. Interest revenue earned by the mortgage loan division increased $5.7 million, or 88%, from $6.5 million for the six month period ended June 30, 1996, to $12.2 million for the six month period ended June 30, 1997. Servicing revenue increased $1.5 million, or 94%, from $1.6 million for the six month period ended June 30, 1996, to $3.1 million for the six month period ended June 30, 1997. The increase was due to the securitization of the unguaranteed portion of the SBA loans in November of 1996 and the securitizations of mortgage loans in March 1997 and June 1997. The Company's total serviced portfolio increased $418.9 million, or 192%, from $218.0 million at June 30, 1996, to $636.9 million at June 30, 1997. Cash gain on sale of loans increased $299,000, or 4%, from $7.0 million for the six month period ended June 30, 1996, to $7.3 million for the six month period ended June 30, 1997. Non-cash gain on sale of loans increased $10.3 million from $472,000 for the six month period ended June 30, 1996, to $10.8 million for the six month period ended June 30, 1997. The increase resulted primarily from the securitization of mortgage loans in the first and second quarters. Loan fee income increased $12.8 million from $426,000 for the six month period ended June 30, 1996, to $13.2 million for the six month period ended June 30, 1997. The increase was due principally to the increase in the Company's retail mortgage loan originations. The Company began its retail operations in April 1996 and generated $239.6 million in mortgage loans in the first six months of 1997 through its retail operations. Other revenues decreased $44,000, or 9%, from $477,000 for the six month period ended June 30, 1996, to $433,000 for the six month period ended June 30, 1997. Other revenues are comprised principally of insurance commissions. Total expenses increased $31.5 million, or 214%, from $14.7 million for the six month period ended June 30, 1996, to $46.2 million for the six month period ended June 30, 1997. Total expenses are comprised of interest expense, provision for credit losses, and general and administrative expenses. Interest expense increased $4.2 million, or 75%, from $5.6 million for the six month period ended June 30, 1996, to $9.8 million for the six month period ended June 30, 1997. The increase was due principally to increased borrowings by the mortgage loan division associated with increased loan originations. Borrowings attributable to the mortgage loan division, both under the Credit Facilities and in conneciton with the sales of CII subordinated investor savings, totaled $264.7 million as of June 30, 1997, which represented an increase of 15 145%, compared to $108.1 million as of June 30, 1996. Borrowings attributable to the small business loan division totaled $28.4 million as of June 30, 1997, which respresented an increase of 78%, compared to $16.0 million as of June 30, 1996. This increase in debt resulted principally from the loan origination activity for the six month period ended June 30, 1997, as compared to the same period in 1996. Provision for credit losses increased $3.2 million, or 213%, from $1.5 million for the six month period ended June 30, 1996, to $4.7 million for the six month period ended June 30, 1997. The provision was made to maintain the general reserves for credit losses associated with loan growth, as well as to fund specific reserves for possible losses associated with particular loans. General and administrative expenses increased $24.1 million, or 317%, from $7.6 million for the six month period ended June 30, 1996 to $31.7 million for the six month period ended June 30, 1997. This primarily resulted from increased personnel and other costs which increased from $4.3 million in the first six months of 1996 to $18.8 million in the first months of 1997 and resulted principally from the continued expansion in the servicing and underwriting areas and increased expenses associated with nine new retail locations. In addition, advertising and promotion expenses increased $2.7 million to $3.0 million in the first half of 1997 as compared to prior year's period, also as a result of the continued expansion of the retail operations. Income taxes decreased $1.7 million from $121,000 for the six month period ended June 30, 1996 to a tax benefit of $1.6 million for the six month period ended June 30, 1997, as a result of the reduction in the valuation allowance associated with the Company's net operating loss carryforward and deferred tax assets. Net income increased $1.8 million, or 53%, from $3.4 million for the six month period ended June 30, 1996, to $5.2 million for the six month period ended June 30, 1997. Net income as a percentage of total revenues decreased from 18.8% for the six months ended June 30, 1996 to 10.4% for the six months ended June 30, 1997 as a result of the Company's investment in expansion and infrastructure to facilitate its rapid growth. Three Months Ended June 30, 1997, Compared to Three Months Ended June 30, 1996 Total revenues increased $20.2 million, or 202%, from $10.0 million for the three-month period ended June 30, 1996, to $30.2 million for the three-month period ended June 30, 1997. The increase in revenues resulted principally from increase in interest and servicing revenue, gain on sale of loans, and loan fee income. Interest income increased $4.7 million, or 115%, from $4.1 million for the three-month period ended June 30, 1996, to $8.8 million for the three-month period ended June 30, 1997. The increase was due principally to growth in the serviced loan portfolio in the mortgage loan division. Interest revenue earned by the mortgage loan division increased $3.8 million, or 112% from $3.4 million for the three-month period ended June 30, 1996, to $7.2 million for the three-month period ended June 30, 1997. Servicing income increased $900,000, or 90%, from $1.0 million for the three month period ended June 30, 1996, to $1.9 million for the three-month period ended June 30, 1997. This increase was due to the securitization of the unguaranteed portion of the SBA loans in November of 1996 and the securitization of mortgage loans in March in June of 1997. The Company's total serviced portfolio increased $418.9 million, or 192%, from $218.0 million at June 30, 1996, to $636.9 million at June 30, 1997. Gain on sale of loans increased $7.5 million, or 170%, from $4.4 million for the three-month period ended June 30, 1996, to $11.9 million for the three-month period ended June 30, 1997. This increase resulted mainly from the securitization of mortgage loans in June of 1997. The mortgage loan division securitized $121.2 million in mortgage loans and reported a gain of $6.4 million. Loan fee income increased $7.1 million from $205,000 for the three-month period ended June 30, 1996, to $7.3 million for the three-month period ended June 30, 1997. The increase was due principally to the increase in the Company's retail mortgage loan originations. Management fees decreased $17,000, or 12%, from $146,000 for the three-month period ended June 30, 1996, to $129,000 for the three-month period ended June 30, 1997. These management fees were paid to the Company by the venture capital and mezzanine level lending funds managed by the Company. 16 Other revenues decreased $81,000, or 55% from $148,000 for the three-month period ended June 30, 1996, to $67,000 for the three-month period ended June 30, 1997. Other revenues are comprised principally of insurance commissions. Total expenses increased $19.2 million, or $243%, from $7.9 million for the three-month period ended June 30, 1996, to $27.1 million for the three-month period ended June 30, 1997. Total expenses are comprised of interest expense, provision for credit losses, and general and administrative expenses. Interest expense increased $3.3 million, or 118%, from $2.8 million for the three-month period ended June 30, 1996, to $6.1 million for the three-month period ended June 30, 1997. The increase was due principally to increased borrowings by the mortgage loan division 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 $156.6 million, or 145%, from $108.1 million as of June 30, 1996, to $264.7 million as of June 30, 1997. Total borrowings attributable to the small business loan division increased $11.8 million, or 78%, from $16.6 million as of June 30, 1996, to $28.4 million as of June 30, 1997. The increase resulted principally from the loan origination activity for the six month period ended June 30, 1997 as compared to the same period in 1996. Provision for credit losses increased $2.0 million, or 318%, from $622,000 for the three-month period ended June 30, 1996, to $2.6 million for the three- month period ended June 30, 1997. 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 expenses increased $14.0 million, or 318%, from $4.4 million for the three-month period ended June 30, 1996, to $18.4 million for the three-month period ended June 30, 1997. This is a result of increased personnel costs in the mortgage loan division due to the continued expansion in the servicing and production departments, and the increased expenses associated with the nine retail locations which were not in operation on June 30, 1996. General and administrative expenses increased from 7.1% of average serviced loans at June 30, 1996, to 13.5% at June 30, 1997, principally as a result of the costs associated with the retail mortgage origination facilities and increased servicing capacity. Net income increased $2.7 million, or 129&, from $2.1 million for the three- month period ended June 30, 1996, to $4.8 for the three-month period ended June 30, 1997. FINANCIAL CONDITION Net loans receivable increased $116.6 million to $301.6 million at June 30, 1997 from $185.0 million at December 31, 1996. The increase in investment in asset-backed securities of $3.4 million was due to the retention of the residual interest certificates in the Company's mortgage loan securitizations completed in March 1997 and June 1997. The interest only strip security increased by $14.6 million to $18.9 million at June 30, 1997, from $4.3 million at December 31, 1996. This increase was due to the estimated present value of the excess cash flow on loans sold with servicing retained of $15.2 million, offset by amortization of $566,000. Net property, plant and equipment increased by $3.1 million to $10.3 million at June 30, 1997, from $7.2 million at December 31, 1996. The Company purchased additional computer equipment to provide system improvements and equipment supporting electronic document generation, storage, and retrieval, and purchased additional furniture and office equipment in connection with the expansion of its retail operations and servicing center. The primary source of funding the Company's receivables comes from borrowings issued under various credit arrangements (including the warehouse credit facilities and the CII subordinated investor savings). At June 30, 1997, the Company had notes payable to banks of $174.4 million, which compares with $55.5 million at December 31, 1996, for an increase of $118.9 million. At June 30, 1997, the Company had $124.9 million of CII subordinated investor savings outstanding, which compares with $114.1 million at December 31, 1996, for an increase of $10.8 million. Total stockholders' equity at June 30, 1997 was $57.2 million, which compares to $46.6 million at December 31, 1996, an increase of $10.6 million. This increase resulted from net income of $5.2 million for the six months 17 ended June 30, 1997 and the issuance of stock in the amount of $5.2 million related to the acquisition of Reedy River Ventures. 18 ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE The Company is exposed to the risk of loan delinquencies and defaults, particularly with respect to loans retained in its portfolio. With respect to loans to be sold on a non-recourse basis, the Company is at risk for loan delinquencies and defaults on such loans while they are held by the Company pending such sale. Following the sale of such loans, the Company's loan delinquency and default risk with respect to such loans is limited to those circumstances in which it is required to repurchase such loans due to a breach of a representation or warranty in connection with the whole loan sale. This risk with respect to breaches of representations or warranties also exists for loans sold through securitization. In addition, in securitization transactions, the subordinate and/or residual certificates bear the risk of default for the entire pool of securitized loans to the extent of such certificates' value. Accordingly, the value of the subordinate and/or residual certificates retained by the Company would be impaired to the extent of losses on the securitized loans. To provide for credit losses, the Company charges against current earnings an amount necessary to maintain the allowance for credit losses at levels expected to cover future losses of principal on its portfolio loans and its interest only and 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 June 30, 1997, the total allowance for credit losses for the Company was $10.8 million, including $6.2 million reserved for potential losses relating to the Company's securitized mortgage, SBA, and auto loans. This compares to an allowance for credit losses at December 31, 1996 of $4.3 million, which included $1.2 million reserved for potential losses relating to the Company's securitized SBA loans. 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 interest only and residual asset-backed certificates. The table below summarizes certain information with respect to the Company's allowance for credit losses and the composition of charge-offs and recoveries for each of the periods indicated. SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
Six Months Year ended Ended December 31, June 30, 1994 1995 1996 1997 ------- ------- --------- --------- (Dollars in thousands) Allowances for credit losses at beginning of period $ 952 $ 1,730 $ 2,647 $ 4,286 Total loans charged-off (1,808) (1,718) (4,223) (3,197) Total loans recovered 76 155 446 308 -------- -------- -------- -------- Net charge-offs (1,732) (1,563) (3,777) (2,889) Provision charged to expense 2,510 2,480 5,416 4,671 Provision netted against gain on securitizations -- -- -- 4,767 -------- -------- -------- -------- Allowance for credit losses at end of period $ 1,730 $ 2,647 $ 4,286 $ 10,835 ======== ======== ======== ========
The total allowance for credit losses as shown on the balance sheet is as follows:
December 31, June 30, 1994 1995 1996 1997 ---- ---- ---- ------- (Dollars in thousands) Allowance for losses on investment in asset-backed securities $ -- $ 773 $ 354 $ 764 Allowance for losses on I/O strip security -- -- 848 5,450 Allowance for credit losses on loans 1,730 1,874 3,084 4,621 -------- -------- -------- -------- Allowance for credit losses at end of period $ 1,730 $ 2,647 $ 4,286 $ 10,835 ======== ======== ======== ========
19 The Company considers its allowance for credit losses to be adequate in view of the Company's loss experience and the secured nature of most of the Company's outstanding loans. Although management considers the allowance appropriate and adequate to cover possible losses, management's judgement is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for possible credit losses or that additional increases in the allowance for possible credit losses will not be required. Management closely monitors delinquency to measure the quality of its loan portfolio and securitized loans and the potential for credit losses. The Company's policy is to place a loan on non-accrual status after it becomes 90 days past due, or sooner if the interest is deemed uncollectable. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined that 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 30 days past due.
Six Months Year ended Ended December 31, June 30, 1994 1995 1996 1997 (Dollars in thousands) Allowance for Credit Losses as a % of Serviced Loans (1): Mortgage loan division 1.23% 0.93% 0.80% 1.55% Small business loan division 3.91 4.50 3.84 4.33 Auto loan division 3.00 4.03 6.45 5.30 Total 1.98 2.03 2.02 2.04 Net Charge-Offs as a % of Average Serviced Loans (2): Mortgage loan division 2.96 (3) 1.04 0.81 0.38 Small business loan division 0.21 1.43 2.71 2.42 Auto loan division 2.53 3.68 9.65 15.40 Total 2.36 1.43 2.47 1.60 Loans Receivable Past Due 30 Days or more as a % of Serviced Loans (1): Mortgage loan division 17.66 14.43 7.26 5.78 Small business loan division 1.11 9.69 7.92 3.20 Auto loan division 3.72 12.83 17.09 10.82 Total 12.75 13.31 8.41 5.69 Total Allowance for Credit Losses as a % of Serviced Loans Past Due 90 Days or More (1) 94.20% 73.21% 88.71% 91.38%
- -------------- (1) For purposes of these calculations, serviced loans represents all loans for which the Company bears credit risk, and includes all portfolio mortgage loans and auto loans, all securitized loans, and the small business loans, but excludes the guaranteed portion of the SBA loans. (2) Average serviced loans have been determined by using beginning and ending balances for the period presented except that the 1996 and 1997 averages are calculated based on the daily averages for small business loan division and auto loan division and monthly averages for mortgage loan division (rather than the beginning and ending balances). Net charge-offs as a % of average serviced loans for the six month period ended June 30, 1997, have been annualized. 20 (3) Approximately 90% of the amount in 1994 relates to the writedown to market of certain foreclosed properties associated with speculative construction loans made by the mortgage loan division prior to its acquisition by the Company. The Company no longer makes speculative construction loans. Liquidity and Capital Resources The Company's business requires continued access to short-and long-term sources of debt financing and equity capital. The Company's cash requirements arise from loan originations and purchases, repayments of debt upon maturity, payments of operating and interest expenses, expansion activities and capital expenditures. The Company's primary sources of liquidity are cash flow from operations, sales of the loans it originates and purchases, proceeds form the sale of CII investor savings notes ("CII Notes"), borrowings under the warehouse credit facilities ("Credit Facilities") and proceeds from securitizations of loans. While the Company believes that such sources of funds will be adequate to meet its liquidity requirements, no assurance of such fact may be given. Shareholders' equity increased form $9.7 million at December 31, 1994, to $9.9 million at December 31, 1995, to $46.6 million at December 31, 1996, to $57.2 million at June 30, 1997. Each of these increases resulted principally from the retention of income by the Company and, for 1996, the public stock offering with proceeds of $26.2 million and, for 1997, the issuance of 494,000 additional shares of common stock at a value of $5.2 million related to the acquisition of the mezzanine lending operations. Cash and cash equivalents were $1.3 million at December 31, 1995, $1.3 million at December 31, 1996, and $2.4 million at June 30, 1997. Cash provided by (used in) operating activities decreased from $53.0 million for the six month period ended June 30, 1996, to ($123.8) million for the six month period ended June 30, 1997; cash used in investing activities decreased from $30.0 million for the six month period ended June 30, 1996, to $5.6 million for the six month period ended June 30, 1997; and cash (used in) provided by financing activities increased from ($1.4) million for the six month period ended June 30, 1996, to $130.5 million for the six month period ended June 30, 1997. The increase in cash provided by operations was due principally to the increase in loans sold and securitized during the first six month period of 1997 and the increase in net income. Cash used in investing activities was principally for the net increase in loans originated with the expectation of holding the loans until maturity. Cash used in financing activities was due principally to the repayment of the Credit Facilities, principally from the proceeds of the securitization of $16.1 million in auto loans in March 1996, partially offset by the cash provided by the sale of CII Notes by the mortgage loan division. At June 30, 1997, the Company's Credit Facilities were comprised of credit facilities of $345.0 million for the mortgage loan division (the "Mortgage Loan Division Facility"), credit facilities of $50.0 million for the small business loan division (the "Small Business Loan Division Facility"), and credit facilities of $6.5 million for the Auto Loan division (the "Auto Loan Division"). Based on the borrowing base limitations contained in the Credit Facilities, at June 30, 1997, the Company had aggregate outstanding borrowings of $139.8 million and aggregate borrowing availability of $30.2 million under the Mortgage Loan Division Facility, aggregate outstanding borrowings of $28.4 million and aggregate borrowing availability of $2.9 million under the Small Business Loan Division Facility, and aggregate outstanding borrowings of $6.1 million and aggregate borrowing availability of $360,000 under the Auto Loan Division Facility. The Mortgage Loan Division Facility and the Small Business Loan Division Facility both bear interest at variable rates, ranging from Fed Funds plus 1.875% to the bank's prime rate, while the Auto Loan Division Facility bears interest at 0.75% over the lender's prime rate. The Credit Facilities have original terms ranging from three months to three years and are renewable upon the mutual agreement of the Company and the respective lender. The Credit Facilities contain a number of financial covenants, including, but not limited to, covenants with respect to certain debt to equity ratios, borrowing base calculations and minimum adjusted tangible net worth. The Credit Facilities also contain certain other covenants, including, but not limited to, covenants that impose limitations on the Company with respect to declaring or paying dividends, making payments with respect to certain subordinated debt, and making certain changes to its equity capital structure. The Company has obtained waivers for certain covenant violations and believes that it is currently in material compliance with the other covenants not covered under the waivers. 21 CII engages in the sale of CII Notes to investors. The CII Notes are comprised of senior notes and subordinated debentures bearing fixed rates of interest which are sold by CII only to South Carolina residents. The offering of the CII Notes is registered under South Carolina securities law and is exempt from Federal registration under the Federal intrastate exemption. CII conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). At June 30, 1997, CII had an aggregate of $105.7 million of senior notes outstanding bearing a weighted average interest rate of 7.2%, and an aggregate of $19.2 million of subordinated debentures bearing a weighted average interest rate of 5.0%. The senior notes and subordinated debentures are subordinate in priority to the Mortgage Loan Division Credit Facility. Substantially all of the CII Notes have one year maturities. The Company expects that after the Offering, CII will continue the offering of CII Notes. Loan Sales and Securitizations The Company sells or securitizes substantially all of its mortgage loans and 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 SBA loan participations. During the six months ended June 30, 1997, the Company sold $158.5 million of mortgage loans and $17.6 million of SBA loan participations. In March 1997 and June 1997, the Company securitized $77.5 and $121.2 million, respectively, of mortgage loans. Since 1995, the Company has securitized $34.6 million, of loans representing the unguaranteed portions of the SBA loans and $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, while building servicing revenues by increasing the serviced portfolio. In connection with its mortgage loan, SBA loan, and auto loan securitizations, the Company has retained interest only and residual certificates representing residual interests in the trusts. These securities totaled approximately $25.9 million, net of allowances, at June 30, 1997. In securitizations, the Company sells the loans that it originates or purchases to a trust for cash, and records certain assets and income based upon the difference between all principal and interest received from the loans sold and (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded on the Company's balance sheet as interest-only and residual certificates (as "Interest-Only Strip Securities" and "Investments in Asset-backed Securities"), and are aggregated and reported on the income statement as gain on sale of loans, after being reduced (increased) by the costs of securitization and any hedge losses (gains). The following sets forth facts and assumptions used by the Company in arriving at the gain on sale relating to its Mortgage Loan securitizations:
March 1997 June 1997 ---------- --------- Loans securitized.............................................................. $77,526,090 $121,214,000 Average stated principal balance............................................... 63,288 63,190 Weighted average coupon on loans............................................... 11.01% 10.80% Weighted average original term to stated maturity.............................. 209 months 200 months Weighted average LTV........................................................... 80.62 75.94 % or first mortgage loans...................................................... 100.00 100.00 % secured by primary residence................................................. 98.60 98.80 Weighted average pass-through rate to bondholders............................. 7.40 7.06 Spread of pass-through rate over comparable treasury rate..................... 0.89 0.78 Estimated annual losses........................................................ 0.50 0.50 Annual servicing fee........................................................... 0.50 0.50 Discount rate implicit in cash flow before overcollateralization............... 26.00 22.00 Discount rate applied to cash flow after overcollateralization................. 12.00 12.00 Discount rate applied to losses................................................ 0.00 0.00 Prepayment speed (1)........................................................... 18 HEP 18 HEP Annual wrap fee and trustee fee................................................ 0.285% 0.205% Initial overcollateralization (2).............................................. 3.25 0.00 Final overcollateralization (2)................................................ 6.50 3.75
- --------------- (1) Prepayments on Mortgage Loans are commonly measured relative to a prepayment standard or model. The variable the Company used in its securitization model to indicate rate at prepayment was Home Equity Prepayment ("HEP"). For example 18 HEP assumes that the pool of loans prepays in the first month at a constant prepayment rate of 1.8% and increases by an additional 1.8% each month thereafter until the tenth month, where it remains at constant annual prepayment rate equal to 18% (the "Prepayment Assumption"). HEP represents an assumed annualized rate of prepayment relative to the then outstanding principal balance on a pool of new mortgage loans. (2) Based on percentage of original principal balance, subject to step-down provisions after 30 months. The gains recognized into become resulting from securitization transactions can vary depending on the assumptions used, the specific characteristics of the underlying loan pools, and the structure of the transaction. The Company believes the assumptions it has used are appropriate and reasonable. Each of the Company's mortgage loan securitizations have been credit-enhanced by an insurance policy provided through a monoline insurance company to receive ratings of "Aaa" from Moody's Investor Services, Inc. ("Moody's") and "AAA" from Standard & Poor's Rating Group, a division of the McGraw-Hill Companies, Inc. ("Standard & Poor's"). The Company plans to continue to pursue securitizations in the future, including the quarterly securitization of a substantial portion of its mortgage loans, principally because the Company believes that securitization is potentially more profitable than whole loan sales and because the Company (as servicer) wants to maintain the relationship with its loan customers. The Company expects to begin receiving Excess Cash Flow on its mortgage loan securitizations approximately 16 months from the date of securitization, although this time period may be shorter or longer depending upon the structure and performance of the securitization. Prior to such time, the monoline insurer requires a reserve provision to be created within the securitization trust which uses Excess Cash Flow to retire the securitization bond debt until the spread between the outstanding principal balance of the loans in the securitization trust and the securitization bond debt equals a percentage (depending on the structure of the securitization) of the initial securitization principal balance (the "overcollateralization limit"). Once this overcollateralization limit is met, excess cash flows are distributed to the Company. The Company begins to receive regular monthly servicing fees in the month following securitization. 22 The Company also sells on a whole loan basis all of its SBA loan participations (servicing retained) and a minority of its mortgage loans (servicing released), including substantially all of its mortgage loans secured by second liens and loans originated through strategic alliance mortgage bankers, principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. In addition to the Excess Cash Flow from securitizations and proceeds from whole loan sales, the Company earns the net interest spread on loans receivable held in its portfolio, origination fees on its mortgage loans and servicing fees of 0.50% per annum on the mortgage loans, 0.40% per annum on the SBA loans and 3.00% per annum on the auto loans it services for others. ACCOUNTING CONSIDERATIONS In June 1996, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125 which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. SFAS No. 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after December 31, 1996, and is to be applied prospectively. Effective January 1, 1997, the Company adopted SFAS No. 125, which supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights." Securitization of a financial asset, a portion of a financial asset, or a pool of financial assets in which the transferor surrenders control over the assets transferred, is accounted for as a sale. If the transfer does not qualify as a sale, the transferred assets will remain on the balance sheet and the proceeds raised will be accounted for as a secured borrowing with no gain or loss recognition. Because the Company's transfers of loans made in connection with its securitizations qualify as sales under this pronouncement, the required accounting will be an allocation of basis approach. After the securitization of mortgage loans held for sale, the asset-backed securities retained by the Company (whether they are subordinate classes or interest-only or residual certificates) are classified as trading securities and reported at fair value under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Servicing assets created in a securitization (contractually specified servicing fees which are due the servicer in exchange for servicing those assets) are initially measured at their allocated carrying amount, based upon the relative fair value at the date of securitization. Servicing assets are to be amortized in proportion to, and over the period of, estimated net servicing income (the excess of servicing revenues over servicing costs). SFAS No. 125 requires mortgage banking entities that acquire or originate loans and subsequently sell or securitize those loans and retain the mortgage servicing rights to allocate the total cost of the loans to the mortgage servicing rights and the mortgage loans with the mortgage servicing rights. The Company determines fair value based upon the present value of estimated net future servicing revenues less the estimated cost that would fairly compensate a substitute servicer to service the loans. The servicing asset is then recorded on the balance sheet and accounted for under SFAS No. 125 using the allocation of cost relative to fair value approach. The assumptions used to calculate fair value are the same assumptions used to determine the fair value of the interest-only strip. The cost allocated to the servicing rights is amortized in proportion to and over the period of estimated net future cash flows related to servicing income. SFAS No. 125 also requires impairment evaluations of all amounts capitalized as servicing rights, including those purchased before the adoption of SFAS No. 125, based upon the fair value of the underlying servicing rights. The continuing effects of SFAS No. 125 on the Company's financial position and results of operations will depend on several factors, including among other things, the amount of acquired or originated loans sold or securitized, the type, term and credit quality of loans and estimates of future prepayment rates. 23 TAX CONSIDERATIONS -- THE NOL As a result of the operating losses incurred by the Company under prior management in its discontinued transportation segment operations, the Company generated a net operating loss carryforward ("NOL"). 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. Although the calculation of the "change of control" is factually difficult to determine, the Company believes that it has had a maximum cumulative change of control of 33% during the relevant three-year period. No net deferred tax asset was recognized with respect to the NOL for the years ended December 31, 1994, 1995, and 1996. Deferred tax assets of approximately $7.2 million, less a valuation allowance of $4.4 million, were recorded as of June 30, 1997. At June 30, 1997, the Company reduced its valuation allowance associated with its deferred tax assets by $1.9 million based upon the level of historical taxable income and current projections for future taxable income over the periods in which the deferred tax assets would be realized. The Company had a federal NOL of approximately $13.5 million remaining at December 31, 1996. By June 30, 1997, the Company had generated enough taxable income to use all of the remaining NOL except for approximately $564,000. The expected taxable income for the remainder of 1997 is projected to allow the Company to fully utilize all remaining NOLs in 1997. In assessing the realizability of deferred tax assets, the Company determined that it is more likely than not that all of the deferred tax assets will be realized. The Company continues to carry a valuation allowance against its deferred tax asset relating to the current year temporary differences generated by the difference in book and taxable income. As a result of the reduction of the valuation allowance for deferred tax assets in 1996, the Company expects that, based on current projections, the effective tax rate on its earnings for the remainder of 1997 will be 4.7%. The Company expects that the effective tax rate on its earnings for 1998 will be 37%. INFLATION AND INTEREST RATES Inflation affects the Company most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates which affect the Company's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of the Company is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate and purchase loans and affect the mix of first and second mortgage loan products. Generally, first mortgage production increases relative to second mortgage production in response to low interest rates and second mortgage production increases relative to first mortgage production during periods of high interest rates. A significant decline in interest rates could decrease the size of the Company's loan servicing portfolio by increasing the level of loan prepayments. Additionally, to the extent servicing rights, interest-only and residual classes of certificates have been capitalized on the books of the Company, higher than anticipated rates of loan prepayments or losses could require the Company to write down the value of such servicing rights, interest-only and residual certificates, adversely impacting earnings. Fluctuating interest rates may also affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sales and the interest paid by the Company for funds borrowed under the Company's warehouse facilities. 24 PART II. OTHER INFORMATION 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The shareholders of the Company voted on the election of directors and eight proposals at the Annual Meeting of Shareholders held on May 27, 1997. 1. Election of Directors Approved.
For Against Porter B. Rose 7,184,514 37,946 John M. Sterling, Jr. 7,184,514 37,946 Clarence B. Bauknight 7,184,978 37,482 Keith B. Giddens 7,184,978 37,482 Tecumseh Hooper, Jr. 7,184,978 37,482 Larry G. Blackwell 7,184,978 37,482 Buck Mickel 7,184,978 37,482 J. Robert Philpot, Jr. 7,184,978 37,482
2. Proposal to Amend the Company's Articles of Incorporation to Increase the Authorized Shares of Common Stock to 100,000,000 shares. Approved. For 6,896,458 Against 320,248 Abstained 5,754 3. Proposal to Amend the Company's Articles of Incorporation to Authorize and Issue Preferred Stock. Not Approved (required affirmative vote of holders of 2/3 of Common Stock outstanding on the record date). For 4,617,892 Against 1,302,603 Abstained 6,412 4. Proposal to Amend the Company's Articles of Incorporation to Provide for a Staggered Board and that a Director May be Removed Only for Cause. Not Approved (required affirmative vote of holders of 2/3 of Common Stock outstanding on the record date). For 4,696,636 Against 1,238,602 Abstained 5,849 26 5. Proposal to Amend the Company's Articles of Incorporation to Eliminate Cumulative Voting. Not Approved (required affirmative vote of holders of 2/3 of Common Stock outstanding on the record date). For 4,785,948 Against 1,136,517 Abstained 5,042 6. Proposal to Amend the Company's Articles of Incorporation to require an 80% supermajority vote of the shareholders to approve any business combinations between the Company and any other Corporation. Not Approved (required affirmative vote of holders of 80% of the Company's Common Stock outstanding). For 4,687,530 Against 1,266,090 Abstained 3,863 7. Proposal to Amend the Company's Articles of Incorporation to provide that in evaluating potential acquisitions of the Company by third parties, the Board can consider the impact of the transaction on local employees, customers, and local community, in addition to monetary considerations. Not Approved (required affirmative vote of holders of 2/3 of Common Stock outstanding on the record date). For 4,690,366 Against 1,229,031 Abstained 7,510 8. Proposal to Amend the 1995 Employee and Officer Stock Option Plan. Approved. For 7,142,717 Against 75,025 Abstained 4,718 9. Proposal to Adopt the Employee Stock Purchase Plan. Approved. For 7,169,395 Against 49,667 Abstained 3,398 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.23. Amended and restated loan and security agreement dated June 13, 1997, between NationsBank, N.A. and Emergent Financial Corp. 10.24. Amended and restated loan and security agreement dated June 13, 1997, between NationsBank, N.A. and Emergent Commercial Mortgage. 10.25. Amended and restated Interim Warehouse Agreement dated July 25, 1997, between Prudential Securities Credit Corporation and Emergent Mortgage Corp. 10.26. Amendment No. 3 to Loan and Security Agreement between BankAmerica Business Credit, Inc. and The Loan Pro$, Inc. dated July 30, 1997. 10.27. Amendment No. 5 to Loan and Security Agreement between BankAmerica Business Credit, Inc. and Premier Financial Services, Inc. dated August 1, 1997. b) Reports on From 8-K None 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMERGENT GROUP, INC. Date: August 13, 1997 By: ______________________________________ Kevin J. Mast, Vice President, Chief Financial Officer, and Treasurer 28 EX-10 2 EXHIBIT 10.23 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of June 13, 1997 between NationsBank, N.A. and Hibernia National Bank, as Lenders and Emergent Financial Corp., as Borrower and NationsBank, N.A., as Agent $20,000,000 TABLE OF CONTENTS SECTION PAGE 1. DEFINITIONS AND ACCOUNTING TERMS............................................1 1.1 DEFINITIONS......................................................1 1.2 ACCOUNTING TERMS..................................................6 1.3 USE OF DEFINED TERMS..............................................6 1.4 SECTION AND EXHIBIT REFERENCES, ETC...............................6 2. AMOUNT AND TERMS OF THE LOANS...............................................6 2.1 THE LOANS.........................................................7 2.2 INTEREST AND OTHER CHARGES........................................8 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES.........................9 2.4 CHARGES...........................................................9 2.5 PAYMENT...........................................................9 2.6 PAYMENT ON NON-BANKING DAYS.......................................9 2.7 EFFECTIVE DATE AND TERMINATION....................................9 2.8 LOAN ACCOUNTS; STATEMENTS OF ACCOUNT; PAYMENTS BY AGENT, LENDERS..........................................................10 3. SECURITY INTERESTS.........................................................11 4. CONDITIONS PRECEDENT TO ADVANCES...........................................12 4.1 DOCUMENTS........................................................12 4.2 OTHER CONDITIONS PRECEDENT.......................................12 5. CLOSING PROCEDURES.........................................................12 5.1 TRANSFERS OF LOAN DOCUMENTS......................................12 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL.......................13 6. GENERAL REPRESENTATIONS AND WARRANTIES.....................................13 6.1 ORGANIZATION, STANDING, ETC......................................13 6.2 ENFORCEABILITY...................................................13 6.3 QUALIFICATION....................................................13 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC...........................................14 6.5 SUBSIDIARIES; PARENT.............................................14 6.6 FINANCIAL STATEMENTS.............................................14 6.7 CHANGES IN FINANCIAL CONDITION...................................14 6.8 TAX RETURNS AND PAYMENTS.........................................15 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC.......................15 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC............................15 6.11 LITIGATION, ETC.................................................15 -i- 6.12 ADVERSE DEVELOPMENTS............................................16 6.13 DISCLOSURE......................................................16 6.14 MARGIN SECURITIES...............................................16 6.15 INVESTMENT COMPANY..............................................16 6.16 ERISA...........................................................16 6.17 LOCATIONS.......................................................17 6.18 SOLVENCY........................................................17 6.19 NAME CHANGE; MERGER.............................................17 7. AFFIRMATIVE COVENANTS......................................................17 7.1 INSURANCE........................................................17 7.2 TAXES AND LIABILITIES............................................17 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC............................17 7.4 INSPECTION.......................................................18 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS.........19 7.6 USE OF PROCEEDS..................................................19 7.7 NOTICE OF DEFAULT................................................19 7.8 MAINTENANCE OF PROPERTIES........................................19 7.9 NOTICE OF ERISA DEVELOPMENTS.....................................19 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE..........................19 7.11 PAYMENT OF LOANS................................................20 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION.............20 7.13 TANGIBLE NET WORTH..............................................20 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH................20 7.15 INTEREST COVERAGE RATIO.........................................20 7.16 EGI SUBSIDIARY..................................................20 7.17 COLLATERAL REPORTING............................................20 8. NEGATIVE COVENANTS.........................................................20 8.1 DEBT 21 8.2 LIENS............................................................21 8.3 GUARANTEES.......................................................21 8.4 PLAN LIABILITIES.................................................21 8.5 FISCAL YEAR......................................................21 8.6 OTHER TRANSACTIONS...............................................21 8.7 MERGER; SUBSIDIARY; ETC..........................................22 8.8 SALE OF ASSETS...................................................22 8.9 CHANGES IN BUSINESS..............................................22 8.10 DIVIDENDS AND REDEMPTIONS.......................................22 8.11 LOANS...........................................................22 8.12 PLEDGE OF CREDIT................................................22 8.13 INVESTMENTS.....................................................22 8.14 CAPITAL EXPENDITURES............................................22 9. POWER OF ATTORNEY..........................................................23 -ii- 10. REMEDIES..................................................................23 11. AGENT.....................................................................24 11.1 APPOINTMENT OF AGENT............................................24 11.2 DELEGATION OF DUTIES............................................24 11.3 EXCULPATORY PROVISIONS..........................................24 11.4 RELIANCE BY AGENT...............................................25 11.5 NOTICE OF DEFAULT...............................................25 11.6 NON-RELIANCE ON AGENT AND OTHER LENDERS.........................25 11.7 INDEMNIFICATION.................................................26 11.8 AGENT IN ITS INDIVIDUAL CAPACITY................................26 11.9 RESIGNATION AND REMOVAL OF AGENT................................26 11.10 NOTICES FROM AGENT TO LENDERS..................................27 12. MISCELLANEOUS.............................................................27 12.1 NO WAIVER; CUMULATIVE REMEDIES..................................27 12.2 AMENDMENTS, ETC.................................................27 12.3 ADDRESSES FOR NOTICES, ETC......................................27 12.4 COSTS, EXPENSES, AND TAXES......................................28 12.5 COMMERCIAL TRANSACTION..........................................29 12.6 SUCCESSORS AND ASSIGNS..........................................29 12.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................29 12.8 TIME IS OF THE ESSENCE..........................................29 12.9 HEADINGS........................................................29 12.10 ENTIRE AGREEMENT...............................................30 12.11 SEVERABILITY...................................................30 12.12 PRO RATA PARTICIPATION.........................................30 12.13 COUNTERPARTS...................................................31 12.14 GOVERNING LAW; CONSENT TO JURISDICTION.........................31 12.15 WAIVER OF TRIAL BY JURY........................................31 -iii- Exhibits: Exhibit A - - Form of Borrower's Secretary's Certificate (Section 1.1) Exhibit B - - Form of Borrower's CEO's Certificate (Section 1.1) Exhibit C - - Form of Opinion (Section 1.1) Schedules: Schedule 1 - - Liens (Section 8.2) Schedule 2 - - Trademarks, Trade Names, Name Changes, etc. (Sections 6.10 and 6.19) Schedule 3 - - Litigation (Section 6.11) -iv- AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Agreement is made as of the 13th day of June, 1997, between NationsBank, N.A., as successor to NationsBank of Georgia, N.A. ("NationsBank"), and Hibernia National Bank ("Hibernia"), as lenders (the "Lenders"), NationsBank, N.A., as agent for the Lenders (the "Agent"), and Emergent Financial Corp., a South Carolina corporation, as borrower (the "Borrower"). Recitals: The Borrower and NationsBank entered into that certain Loan and Security Agreement dated as of May 31, 1996 (as amended, the "EFC Loan Agreement"), pursuant to which NationsBank agreed to finance the Borrower's portfolio of commercial loans. NationsBank has assigned to the Agent and the Lenders all of its right, title and interest in the EFC Loan Agreement. The Borrower, the Lenders and the Agent desire to amend and restate the EFC Loan Agreement to make certain changes, all as more particularly described herein. The Borrower, the Lenders and the Agent therefore agree as follows: 1. DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. The following terms, when capitalized as in this Section 1.1, shall have the following meanings: "Advance": the proceeds of a Loan. "Affiliate" of any designated Person: another Person controlling, controlled by, or under common control with such designated Person (but not including a Lender), and shall include (x) the spouse, parents, brothers, sisters, children, and grandchildren of such designated Person, (y) any association, partnership, trust, entity, or enterprise in which such designated Person is a director, officer, or general partner or in which such designated Person together with Affiliates of such designated Person own in the aggregate at least a 10% beneficial interest in assets, profits, or losses, and (z) any Subsidiary of such designated Person. "Agent": NationsBank, N.A., in its capacity as agent for the Lenders, together with any successor Agent under Section 11 hereof. Banking Day": a day for dealings by and between banks, excluding Saturday, Sunday, any legal holiday in Atlanta, Georgia, and any other day on which banking institutions in Atlanta, Georgia are generally closed. "Borrower's CEO's Certificate": the Certificate of the Borrower's Chief Executive Officer, substantially in the form of Exhibit B. "Borrower's Secretary's Certificate": the Certificate of the Borrower's Secretary, substantially in the form of Exhibit A. "Borrowing Base": defined in Section 2.1(a). "Borrowing Group": EBC, ECM, and the Borrower. "Capital Expenditures": the dollar amount of gross expenditures (including obligations under leases which are required under GAAP to be capitalized for financial reporting purposes) made or incurred for fixed assets, real property, and plant and equipment which are required to be capitalized for financial reporting purposes in accordance with GAAP. "Code": the Internal Revenue Code of 1986, as amended. "Collateral": all property described in Section 3 hereof, and all the Borrower's other property in which the Agent at any time has a security interest or which at any time are in the Agent's possession or control. "Commitment": as to each Lender, the amount set forth opposite such Lender's name on the signature pages hereof, representing such Lender's obligation, upon and subject to the terms and conditions of this Agreement, to make Loans. "Commitment Percentage": as to each Lender, the percentage of the Total Commitment obtained by dividing such Lender's Commitment by the Total Commitment. "Default": (x) an event, act, or condition that would be an Event of Default but for the requirement(s) that notice be given or time elapse, or (y) an Event of Default. "EBC": Emergent Business Capital, Inc. "EBC L&SA": the Amended and Restated Loan and Security Agreement, to be entered into after the date hereof, between the Lenders, the Agent and EBC, in form and substance satisfactory to the Agent and the Lenders. "EBIT": the total earnings of the Borrowing Group and their consolidated Subsidiaries from all sources, excluding extraordinary items, before deducting interest or income tax expense, but after deducting depreciation and amortization expense. -2- "ECM": Emergent Commercial Mortgage, Inc. "ECM L&SA": the Amended and Restated Loan and Security Agreement, dated of even date herewith, between NationsBank and ECM. "EGI": Emergent Group, Inc. "Eligible Loan: a commercial loan (excluding overlines and overadvances) for which the Borrower holds a first-priority Lien on the property being financed and which (1) is held by the Borrower, (2) does not exceed $2 million, and (3) meets all the Lenders' other funding requirements which may be imposed with respect to the loan involved in its sole discretion. "ERISA": the Employee Retirement Income Security Act of 1974, as amended. "Event of Default": any of the following: (1) non-payment, within seven days after the due date, of any amount payable on any of the Obligations; (2) failure to perform any material agreement or meet any obligation of the Borrower or any of its Affiliates contained herein; (3) nonpayment when due of any premium on any insurance policy required to be maintained under Section 7.1 hereof; (4) the existence of a default under any other agreement between the Borrower, ECM, or EBC and the Agent or a Lender or any Affiliate of a Lender; (5) any statement, representation, or warranty of the Borrower made in writing herein or in any other writing at any time furnished or made by the Borrower to a Lender or the Agent is untrue in any material respect as of the date furnished or made; (6) suspension of the operation of the Borrower's present business; (7) any Obligor becomes insolvent or unable to pay debts as they mature, admits in writing that it is so, makes a conveyance fraudulent as to creditors under any state or federal law, or makes an assignment for the benefit of creditors, or a proceeding is instituted by or against any Obligor alleging that such Obligor is insolvent or unable to pay debts as they mature, or a petition under any provision of Title 11 of the United States Code (entitled "Bankruptcy"), as amended, is brought by or against any Obligor; (8) entry of any judgment for more than $50,000 against any Obligor; (9) creation, assertion, or filing of any Lien (other than a Permitted Lien) against any of the property of any Obligor; (10) dissolution, merger, or consolidation of any Obligor (other than a merger or consolidation of the Borrower or the Guarantor with or into the Borrower or the Guarantor); (11) termination or withdrawal of any guarantee for any of the Obligations, or the failure for any other reason of any such guarantee or agreement to be enforceable by the Agent or the Lenders in accordance with its terms; (12) transfer of a substantial part of the property of any Obligor; (13) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Borrower or the Guarantor; (14) appointment of a receiver for the Collateral or for any property in which the Borrower has an interest; (15) seizure of the Collateral by any third party; (16) at least 10% (face value) of the Borrower's loan portfolio are at least 90 days past due, and have remained at least 90 days past due for at least 30 days; (17) the Agent or the Lenders in good faith believe that the prospect of payment or performance of the Obligations has been impaired; or (18) the EBC L&SA shall not be effective, and/or all of the conditions precedent to the closing of the EBC L&SA shall not be satisfied or waived by the Agent and the Lenders, on or prior to June 30, 1997. -3- "GAAP": generally accepted accounting principles applied in a manner consistent with the financial statements described in Section 6.6. "Guarantee": the document by that name, dated the date of this Agreement, of the Guarantor, in favor of the Agent and the Lenders. "Guarantor": EGI. "Hibernia": Hibernia National Bank, and its successors and assigns. "herein", "hereof", "hereunder", etc.: in, of, under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Insurance": the policy or policies of insurance described in Section 7.1, including all required endorsements thereto. "Interest on Senior Funded Debt": the interest on the Obligations and all "Obligations" under the EBC L&SA and ECM L&SA during the period for which computation is being made. "Lenders": NationsBank and Hibernia, and any of their successors and assigns. "Lien": any mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind, including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Loans": the loan(s) under Section 2.1(a) in the principal amount of up to $20,000,000, plus any Overadvances, made by the Lenders to the Borrower under this Agreement. "NationsBank": NationsBank, N.A., and its successors and assigns. "Obligations": all present and future (a) duties, obligations, and liabilities of the Borrower to the Agent and the Lenders under this Agreement, or under any document or agreement executed and delivered pursuant to or in connection with this Agreement, (b) sums owing to the a Lender for goods or services purchased by the Borrower from any other firm financed by a Lender, (c) obligations under all notes and contracts of suretyship, guarantee, or accommodation made by the Borrower in favor of a Lender, and (d) all other obligations of the Borrower to a Lender, however and whenever created, arising, or evidenced, whether direct or indirect, through assignment from -4- third parties, absolute, contingent, or otherwise, primary or secondary, now or hereafter existing, or due or to become due. "Obligor": the Borrower, any guarantor, or any other party at any time primarily or secondarily, directly or indirectly liable on any of the Obligations. "Opinion": the legal opinion, of counsel to the Borrower satisfactory to the Agent, substantially in the form of Exhibit C. "or": at least one, but not necessarily only one, of the alternatives enumerated. "Overadvances": loans by the Lenders to the Borrower in excess of those described in Section 2.1(a). "Permitted Lien": a Lien permitted by Section 8.2. "Person": any individual, joint venture, partnership, firm, corporation, trust, unincorporated organization, or other organization or entity, or a governmental body or any department or agency thereof. "Plan": any present or future employee benefit plan (as defined in Section 3 of ERISA) and any trust created thereunder, covered by Title I or Title IV of ERISA, established or maintained for employees of the Borrower or the Guarantor. "Prime Rate": the rate of interest announced by NationsBank from time to time as its "Prime Rate". "Projections": the Borrower's forecasted consolidated and consolidating balance sheets, profit- and-loss statements, and cash-flow statements, all prepared on a basis consistent with the Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Reportable Event": as defined in Title IV of ERISA. "Securities": any share(s) of beneficial or equity interest or capital stock or any other instrument commonly understood to be a "security", excluding promissory notes issued for money borrowed in commercial transactions. "Solvent": has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its debts. -5- "Subordinated Debt": EBC's debt that is subordinated (as to right and time of payment) to the Obligations under the Subordination Agreement, and any other debt of EBC, ECM, or the Borrower that is subordinated (as to right and time of payment) to such party's obligations to the Agent and the Lenders in a manner satisfactory to the Agent and the Lenders. "Subordination Agreement": the Amended and Restated Agreement of Subordination and Assignment, dated the date of this Agreement, of Carolina Investors, Inc. and EBC in favor of the Agent and the Lenders. "Subsidiary" of any designated corporation: any other corporation more than 20% of the shares of voting stock of which is owned, directly or indirectly, by such designated corporation, including subsidiary of a subsidiary. "Tangible Net Worth": the total assets of the Borrowing Group and their consolidated Subsidiaries, plus Subordinated Debt, minus Total Liabilities (excluding from the definition of total assets the amount of (a) any write-up in the book value of any asset resulting from a revaluation thereof after December 31, 1992, (b) treasury stock, (c) Receivables and other amounts due from stockholders and other Affiliates, (d) unamortized debt discount and expense and (e) patents, trademarks, trade names, goodwill, deferred charges, organizational expenses and other intangible assets, all determined in accordance with GAAP). "Total Commitment": the sum of the Commitments. "Total Liabilities": all obligations of the Borrowing Group and their consolidated Subsidiaries to pay money, excluding Subordinated Debt. 1.2 ACCOUNTING TERMS. All accounting terms used herein shall be construed in accordance with GAAP applied consistently with those principles applied in the preparation of the financial statements referred to in Section 6.6, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. In the event of ambiguities in GAAP, the more conservative principle or interpretation shall be used. 1.3 USE OF DEFINED TERMS. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in Section 1.1, or the term "Agreement", means such agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. 1.4 SECTION AND EXHIBIT REFERENCES, ETC. References to sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. 2. AMOUNT AND TERMS OF THE LOANS -6- 2.1 THE LOANS. (a) Revolving Loans. Each Lender agrees, severally but not jointly, to make loans to the Borrower in amounts equal to such Lender's Commitment Percentage of each such loan, and the Borrower agrees to borrow from the Lenders, upon request of the Borrower from time to time, up to 80% of the Borrower's Eligible Loans (the sum of the Eligible Loans being the "Borrowing Base"); provided, that the total amount of all Loans outstanding at any time under this sentence shall not exceed $20,000,000. The amounts of such Loans shall be determined in the sole discretion of the Agent and the Lenders to be consistent with the value of the Eligible Loans, taking into account all fluctuations of the value thereof in light of the Agent's and the Lenders' experience and sound business principles. Such determinations shall be subject to the requirements of good faith on the Agent's and the Lenders' part, the Borrower's undertakings hereunder, and especially the Borrower's grant to the Agent of a security interest in the Collateral as security for the Loans and all other Obligations, which will, of necessity, fluctuate in amount, and to the condition that the Lenders at all times be fully secured. To the extent necessary to reduce the total amount of all Loans outstanding to the maximum amount then available under clauses (i) and (ii) of this Section 2.1, the Borrower shall pay to the Lenders, on demand, the amount of outstanding Loans in excess of that maximum amount. An Eligible Loan shall be included in the Borrowing Base when the Borrower has provided the Agent with a copy of the original loan documentation for that loan (to the extent requested by the Agent), and such other documentation as the Agent reasonably requests, by fax or otherwise. (b) Overadvances. The Lenders may make Overadvances as, in their sole and absolute discretion, they determine to lend. Any such Overadvances may be evidenced by a written agreement between the Agent, the Lenders and the Borrower, which agreement may provide, at the Lenders' option, for interest and fees on such Overadvances in addition to those specified hereunder. Except to the extent otherwise provided in any such agreement, any such Overadvances shall be "Loans", shall be repayable upon demand, and shall in all other respects be subject to the terms and conditions of this Agreement. (c) Manner of Borrowing Loans. The Borrower shall give the Agent prior written or telephonic notice no later than 1:00 p.m. (Atlanta time) on the date of the requested borrowing. Such notice shall be irrevocable and shall specify the aggregate amount of the proposed borrowing and the date thereof (which shall be a Banking Day). Such notice, to be effective, must be received by the Agent by the time specified in the first sentence of this subsection (c). Such notice shall specify the total amount of the Loan requested from the Lenders. On the borrowing date specified in such notice, NationsBank shall make such borrowing available to the Borrower in immediately available funds. On the last Banking Day of each week the Agent shall notify the Lenders of the amounts then outstanding under the Loans, at which time the Lenders will pay each other such amounts as are necessary to ensure that the amounts outstanding under the Loans are shared pro rata by the Lenders based upon their respective Commitments. The Borrower hereby agrees that such payments shall represent debits and credits to their loan accounts; provided, however, after the occurrence of an Event of Default hereunder, unless waived by all of the Lenders (i) the Agent shall promptly notify the Lenders that it has received notice from the Borrower of a proposed borrowing pursuant to this paragraph, (ii) on the borrowing date specified in such notice, each Lender shall -7- make its ratable share of such borrowing available to the Borrower at the offices of the Agent in immediately available funds provided all of the Lenders have elected in their sole discretion to fund such borrowing, and (iii) the Agent shall pay to the Lenders their pro rata share of all amounts collected on the Loans promptly after the receipt thereof by the Agent; provided further, if the Lenders are prevented from funding any of the proposed borrowings on account of the institution of any bankruptcy proceeding by or against the Borrower, the Lenders agree to purchase participations in the Loans of the other Lenders to ensure that the amounts outstanding to the Lenders on account of the Loans are shared pro rata based upon their respective Commitment. 2.2 INTEREST AND OTHER CHARGES. The Loans shall bear interest on the average daily net balance thereof, calculated monthly, at a fluctuating rate of interest equal to the Prime Rate. Changes in the rate of interest shall be effected monthly to reflect changes in the Prime Rate, as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Interest shall be due and payable monthly, on the first day of each month, for the preceding month. The final payment of all accrued and unpaid interest shall be due and payable on the date that the outstanding principal amount of the Loans is paid or due and payable in full. After an Event of Default, interest shall also be due and payable upon the Lender's demand from time to time. The Agent shall inform the Borrower of the amount of interest due and payable as of each payment date set forth in the preceding paragraph, and the Borrower shall pay the interest when due or the Agent may, in its discretion, charge such amount to the Borrower's account under this Agreement. As additional consideration for the credit facility established in Section 2.1, the Borrower agrees to pay to the Agent, for the ratable benefit of the Lenders, a fee, payable on the first day of each month for the preceding month, equal to the average unused principal portion of the maximum loan facility hereunder (i.e., $20,000,000 minus the average daily principal amount of Loans outstanding) times 0.125% per annum. For interest computation purposes, Borrower's account will be credited for each remittance received on the day that the underlying funds are collected; the day of receipt of funds shall be deemed to be the following Banking Day if the receipt is after the Agent's cutoff time for receipt of funds or if such day is not a Banking Day. If the outstanding principal amount of the Loans becomes due and payable or if any payment of principal or interest is not timely made, or (at the Agent's option) if any Event of Default exists, interest shall accrue on the unpaid principal balance of the Loans or on such defaulted principal payment, from the date that the Loans became so due and payable or that the defaulted payment was not timely made, at a rate of 4% per annum above the Prime Rate. Changes in the rate shall be effected monthly to reflect changes in the Prime Rate as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Such interest shall continue to accrue -8- until the date of payment of all principal and accrued but unpaid interest or such defaulted payment, as applicable, and shall be due and payable upon demand from time to time by the Agent. 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES. Interest on the Loans, and other periodic charges hereunder, shall be computed on the basis of a 360-day year and actual days lapsed. 2.4 CHARGES. The Borrower, the Agent and the Lenders hereby agree that the only charges imposed upon the Borrower for the use of money in connection herewith are and shall be the interest described in Section 2.2. All other charges imposed upon the Borrower in connection with the Loans, any commitment fees, collection fees, letter of credit fees, facility fees, origination fees, prepayment charges or early termination fees, default charges, late charges, attorneys' fees, and reimbursement for costs and expenses paid by the Agent and the Lenders to third parties, or for damages incurred by Agent and the Lenders, are and shall be deemed to be charges made to compensate the Agent and the Lenders for underwriting or administrative services and costs and other services or costs performed and incurred, and to be performed and incurred, by the Agent and the Lenders in connection with the Loans, and shall under no circumstances be deemed to be charges for the use of money. In no event shall the amount of interest due or payable hereunder exceed the maximum rate of interest allowed by applicable law, and if any such payment is made by the Borrower or received by the Lenders, then such excess sum shall be credited as a payment of principal, unless the Borrower notifies the Agent, in writing, that the Borrower elects to have such excess sum returned to it forthwith. It is the express intent hereof that the Borrower not pay and the Lenders not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrower under applicable law. 2.5 PAYMENT. All payments by the Borrower shall be made to the Agent at its address referred to in Section 12.3 hereof in lawful money of the United States of America and in immediately available funds. The Borrower shall establish a special collections account, at a bank satisfactory to the Agent (which may be an Affiliate of a Lender), to collect payments on the Borrower's commercial loans and pay them to the Agent. 2.6 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the following Banking Day, and such extension of time shall be included in the computation of interest. 2.7 EFFECTIVE DATE AND TERMINATION. This Agreement shall be effective on the date set forth in the first paragraph of this Agreement, and shall continue in full force and effect until December 29, 2000, at which time all of the Borrower's Obligations hereunder shall be due. If the Borrower terminates this Agreement other than on December 29, 2000 or any subsequent anniversary thereof, the Borrower shall pay to the Lenders an early termination fee equal to $100,000 for any termination before December 29, 1998, $50,000 for any termination after -9- December 29, 1998 and before December 29, 1999, and $25,000 for any termination thereafter not on a December 29. Upon the occurrence of an Event of Default, the Agent may, and at the direction of either Lender shall, exercise the right to terminate this Agreement at any time without notice. Upon the occurrence of an Event of Default, the Agent may, and at the direction of either Lender shall, exercise the right to terminate this Agreement at any time without notice. This Agreement shall automatically terminate upon the termination of the EBC L&SA. Notwithstanding any termination of this Agreement, the Agent and the Lenders shall retain all of their rights and remedies hereunder (including its security interest in the Collateral), and the Borrower shall continue to be bound by all the terms, conditions, and provisions hereof until all of the Obligations of every nature have been fully disposed of, concluded, finally paid, satisfied, and liquidated. 2.8 LOAN ACCOUNTS; STATEMENTS OF ACCOUNT; PAYMENTS BY AGENT, LENDERS. (a) Each Lender shall open and maintain on its books a loan account in the Borrower's name (each, a "Loan Account" and collectively, the "Loan Accounts"). Each such Loan Account shall show as debits thereto each Loan made under this Agreement by such Lender to the Borrower and as credits thereto all payments received by such Lender and applied to principal of such Loan, so that the balance of such Loan Account at all times reflects the principal amount due such Lender from the Borrower. (b) The Agent shall maintain on its books a control account for the Borrower in which shall be recorded (i) the amount of each disbursement made hereunder, (ii) the amount of any principal or interest due or to become due from the Borrower hereunder, and (iii) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's ratable share therein. (c) The entries made in the accounts pursuant to subsections (a) and (b) shall be prima facie evidence, in the absence of manifest error, of the existence and amounts of the obligations of the Borrower therein recorded and in case of discrepancy between such accounts, in the absence of manifest error, the accounts maintained pursuant to subsection (b) shall be controlling. (d) The Agent will account separately to the Borrower and each Lender monthly with a statement of Loans, charges and payments made to and by the Borrower pursuant to this Agreement, and such accounts rendered by the Agent shall be deemed final, binding and conclusive, save for manifest error, unless the Agent is notified by the Borrower or either Lender in writing to the contrary within 30 days of the date the account is received by the Borrower or any Lender. Failure of the Agent to render such account shall in no way affect the rights of the Agent or of the Lenders hereunder. (e) Payment by any Lender to the Agent shall be made not later than 4:00 p.m. (Atlanta time) on the Banking Day such payment is due, provided that, if such payment is due on demand by another Lender, such demand is made on the paying Lender not later than 2:00 p.m. (Atlanta time) on such Banking Day. Payment by the Agent to any Lender shall be made by wire transfer, -10- promptly following the Agent's receipt of funds received by the Agent, provided that if the Agent received such funds at or prior to 1:30 p.m. (Atlanta time), the Agent shall pay such funds to such Lender by 4:00 p.m. (Atlanta time) on such Banking Day. If a demand for payment is made after the applicable time set forth above, the payment due shall be made by 4:00 p.m. (Atlanta time) on the first Banking Day following the date of such demand. If a Lender shall, at any time, fail to make any payment to the Agent required hereunder, the Agent may, but shall not be required to, retain payments that would otherwise be made to such Lender hereunder and apply such payments to such Lender's defaulted obligations hereunder, at such time, and in such order, as the Agent may elect in its sole discretion. With respect to the payment of any funds under this subsection, whether from the Agent to a Lender or from a Lender to the Agent, the party failing to make full payment when due pursuant to the terms hereof shall, upon demand by the other party, pay such amount together with interest on such amount at the Federal Funds Effective Rate. "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve system arranged by federal funds brokers, as published for such day (or, if such day is not a Banking Day, for the next preceding Banking Day) by the Federal Reserve Bank of Atlanta, or, if such rate is not so published for any day which is a Banking Day, the average of the quotations for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by the Agent. 3. SECURITY INTERESTS As security for the full payment and performance of the Obligations, the Borrower hereby grants to the Agent, for the ratable benefit of the Lenders, a security interest in all of the following property and interests in property of the Borrower, whether now owned or existing or acquired or arising in the future or in which the Borrower now has or in the future acquires any rights, and wherever located: (a) all right, title, and interest in any loan made by the Borrower, including all related documentation, and all guarantees, collateral, and other security therefor, (b) all of the Borrower's accounts, inventory, general intangibles, instruments, chattel paper, documents, equipment, and other goods, (c) all accessions to, substitutions for, and replacements, products, and proceeds of any of the foregoing, including insurance proceeds and rental payments, and (d) all books and records (including customer lists, credit files, computer programs, printouts, and other computer materials and records) pertaining to any of the foregoing. The Borrower shall execute and deliver all supplemental documentation that the Agent from time to time requests to perfect or maintain the perfection of the security interest granted in this Section, and shall pay (or reimburse the Agent for) the cost of filing or recording any such documentation, on demand. -11- 4. CONDITIONS PRECEDENT TO ADVANCES 4.1 DOCUMENTS. The determination by the Lenders to make Advances is subject to the Agent's having received the following, in form and substance satisfactory to the Agent: (a) the Guarantee, (b) the Borrower's Secretary's Certificate, (c) the Borrower's CEO's Certificate, (d) certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, (e) the Opinion, (f) appropriate UCC-1 financing statements, (g) the documentation described in Section 5.1 for each loan for which an Advance is made, and (h) such other documentation as the Agent reasonably requests. 4.2 OTHER CONDITIONS PRECEDENT. In addition to the foregoing, any obligation of the Lenders to make each Advance is subject to the following conditions precedent: (a) the representations and warranties contained in Section 6 (except 6.13, 6.17, and 6.19) hereof shall be correct on and as of the date of the Advances with the same effect as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; (b) since the date of the statements referred to in Section 6.6 hereof, no materially adverse change shall have occurred in the Borrower's business, prospects, condition, affairs, operations, or assets, nor in its right or ability to carry on its operations; (c) no Default shall exist or would result from the Advance; (d) the Agent in its sole discretion determines that such Advance will be fully secured, as provided for in Section 2.1, and will not cause the outstanding balance of the Loans to exceed the limits described in Section 2.1; and (e) in the case of the first Advance, the Agent shall have received from the Borrower a non-refundable $80,000 closing fee (which shall be distributed as follows: $50,000 to NationsBank and $30,000 to Hibernia. 5. CLOSING PROCEDURES. 5.1 TRANSFERS OF LOAN DOCUMENTS. Before the Lenders fund an Advance for an Eligible Loan, the Borrower shall provide the Agent with a copy of all original loan documentation for that loan (to the extent requested by the Lender), and such other documentation as Lender reasonably requests, by fax or otherwise. The Borrower shall deliver the original of each -12- underlying note to the Agent by the third Banking Day following the closing for the related Eligible Loan. In addition, if the Borrower requests a Loan for which the Borrowing Base would be insufficient without the Agent's having a perfected security interest in the related underlying note, then if and to the extent that the Agent so requests, the Borrower shall execute and deliver to the Agent the underlying note and all other documents relating to that Eligible Loan, and properly executed assignments of each such document, in recordable form acceptable to the Agent in its sole discretion. The originals of all such collateral, loan, and other documents (other than the originals of each underlying note for the related Eligible Loan, which shall be delivered to the Agent in accordance with the previous paragraph) shall be held by the Borrower unless specifically requested by the Agent. The Agent may hold any such specifically-requested documents until the Agent releases its security interest in such Collateral pursuant to Section 5.2 (unless an Event of Default exists, in which case the Agent shall have its right to pursue the rights and remedies). Neither the Agent's nor the Lenders' execution of this Agreement nor their taking of any action contemplated or permitted hereunder shall constitute or be deemed to be an assumption of any of the Borrower's liabilities or obligations. 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL. Upon receipt of payment in full of any Loan, the Agent shall release its security interest in the related loan, and shall return any related note that it holds. 6. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce the Agent and the Lenders to enter into this Agreement and to make Advances hereunder, the Borrower represents and warrants the following: 6.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of South Carolina, and has all requisite power and authority (corporate and otherwise) to own and operate its properties and to carry on its business as now conducted and proposed to be conducted; and the Borrower has all requisite power and authority (corporate and otherwise) to execute, deliver, and perform its obligations under this Agreement and all other documents executed in connection therewith. 6.2 ENFORCEABILITY. This Agreement, and all other documents executed in connection with the Loans, when delivered for value received, shall constitute valid and binding obligations of the Borrower enforceable in accordance with their terms. 6.3 QUALIFICATION. The Borrower is duly qualified, licensed, or domesticated, and in good standing as a foreign corporation duly authorized to do business, in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary, as follows: South Carolina, Georgia. -13- 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC. (a) The Borrower is not in violation of any material term of its articles of incorporation or by-laws, and no event, status, or condition has occurred or exists which upon notice or lapse of time, or both, would constitute a violation thereof; (b) to the best of its knowledge, the Borrower is not in violation of any material term of any mortgage, indenture, or agreement relating to outstanding borrowings to which it is a party, or of any judgment, decree, or order to which it is subject, or of any other instrument, lease, contract, or agreement to which it is a party, or of any statute, or governmental rule or regulation applicable to it, and no event, status, or condition has occurred or exists which upon the giving of notice or lapse of time, or both, would constitute a material violation of any such term; (c) the Borrower's execution, delivery, and performance of this Agreement and the other instruments and agreements provided for by this Agreement to which the Borrower is, or is to be, a party, and the carrying out of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of the Borrower (corporate and otherwise) and will not result in any violation of the articles of incorporation or by-laws of the Borrower, or violate or constitute a default under any term of anything described in clause (b) above, or result in the creation of any mortgage, lien, encumbrance or charge upon any of the properties or assets of the Borrower pursuant to any term of anything described in clause (b) above; and (d) there is no term of anything described in clause (b) above which materially adversely affects or in the future may (so far as the Borrower can now foresee) materially adversely affect the Borrower's business, prospects, condition, affairs, operations, properties, or assets. 6.5 SUBSIDIARIES; PARENT. The Borrower has no Subsidiary. EGI owns all the stock of the Borrower. 6.6 FINANCIAL STATEMENTS. The Borrower has furnished the Lenders with copies of the fiscal year-end consolidated and consolidating balance sheet of EGI and its consolidated subsidiaries as at December 31, 1996, and the consolidated and consolidating statements of income and of cash flows of such corporations for such fiscal year, which annual financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants; and copies of such financial statements for each month thereafter through _________________, 1997, duly certified by the chief financial officer of EGI. Such financial statements are complete and have been prepared in accordance with GAAP applied on a basis consistent with the accounting principles applied in the preceding fiscal period, and present fairly the financial condition of EGI as at the dates indicated and the results of the operations of EGI for such periods. Such financial statements show all liabilities (direct, indirect, and contingent, including guarantee and surety obligations) of the Borrower and the Guarantor as of the respective dates thereof, except those arising in the ordinary course of business since the date of the last of such financial statements. 6.7 CHANGES IN FINANCIAL CONDITION. Since the date of the annual financial statements referenced in Section 6.6, there has been no change in the assets, liabilities, or financial condition of the Borrower or the Guarantor from that set forth or reflected in the fiscal year-end -14- balance sheet referred to in Section 6.6, other than changes in the ordinary course of business, none of which has been, either in any case or in the aggregate, materially adverse. 6.8 TAX RETURNS AND PAYMENTS. All federal, state, and local tax returns and reports of the Borrower or the Guarantor required to be filed have been filed, and all taxes, assessments, fees, and other governmental charges upon the Borrower or the Guarantor, or upon any of the properties, assets, incomes, or franchises of either, which are due and payable in accordance with such returns and reports, have been paid, other than those presently (a) payable without penalty or interest, or (b) contested in good faith and by appropriate and lawful proceedings prosecuted diligently. The aggregate amount of the taxes, assessments, charges, and levies so contested is not material to the condition (financial or otherwise) and operations of the Borrower or the Guarantor. The charges, accruals, and reserves on the books of the Borrower and the Guarantor in respect of federal, state, and local taxes for all fiscal periods to date are adequate, and the Borrower knows of no unpaid assessment for additional federal, state, or local taxes for any such fiscal period or of any basis therefor. 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC. The Borrower has (a) good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the fiscal year-end balance sheet referred to in Section 6.6, except properties and assets disposed of since the date of such balance sheet in the ordinary course of business, and (b) good and marketable title to its leasehold estates and such properties, assets, and leasehold interests are subject to no covenant, restriction, easement, right, lease, or Lien, other than Permitted Liens. 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC. The Borrower owns or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, and licenses, and rights with respect thereto, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others, and, in each case, subject to no Lien, lease, license, or option, except as specified on Schedule 2. Each such asset or agreement is in full force and effect, and the holder thereof has fulfilled and performed all of its obligations with respect thereto. No event has occurred or exists which permits, or after notice or lapse of time or both would permit, revocation or termination, or which materially adversely affects or in the future may materially adversely affect, the rights of such holder thereof with respect thereto. No other license or franchise is necessary to the operations of the business of the Borrower as now conducted or proposed to be conducted. The Borrower does not do business (and has not done business since the date that it was formed) under any trade names or tradestyles other than those listed on Schedule 2. 6.11 LITIGATION, ETC. Except as specified on Schedule 3, there are no actions, proceedings, or investigations, however described or denominated, pending or (to the knowledge of the Borrower) threatened (or any basis therefor known to the Borrower) which, either in any case or in the aggregate, might result in any materially adverse change in the Borrower's or the Guarantor's business, prospects, condition, affairs, operations, properties, or assets, or in its right or ability to carry on its operations as now conducted or proposed to be conducted, or might result in any material liability on the part of the Borrower or the Guarantor, and none which questions the -15- validity of this Agreement or any of the other instruments or agreements provided for by this Agreement or of any action taken or to be taken in connection with the transactions contemplated hereby or thereby. 6.12 ADVERSE DEVELOPMENTS. Since the date of the latest financial statements referred to in Section 6.6, neither the financial condition, business operations, affairs, or prospects of the Borrower or the Guarantor, nor the properties or assets of either, have been materially adversely affected in any way as the result of any legislative or regulatory change, or any revocation, amendment, or termination, or any pending or threatened such action, or any franchise or license or right to do business, or any fire, explosion, flood, drought, windstorm, earthquake, accident, casualty, labor trouble, riot, condemnation, requisition, embargo or Act of God or the public enemy or of armed forces, or otherwise, whether or not insured against. 6.13 DISCLOSURE. To the best of the Borrower's knowledge, neither this Agreement nor the financial statements referred to in Section 6.6 nor any other document, certificate or statement furnished to Lender by or on behalf of the Borrower or the Guarantor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 6.14 MARGIN SECURITIES. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of the Loans has been or will be used, directly or indirectly, to purchase or carry any margin securities within the meaning of Regulation U. 6.15 INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.16 ERISA. The Borrower, the Guarantor, and each Plan is in compliance with those portions of ERISA and the Code pertaining to each Plan. No Plan that is subject to the minimum funding standards of ERISA or the Code has incurred any accumulated funding deficiency within the meaning of ERISA or the Code. Neither the Borrower nor the Guarantor has incurred, and no facts lead the Borrower to believe it or the Guarantor will incur, any liability to the Pension Benefit Guaranty Corporation in connection with any Plan. The assets of each Plan that is subject to Title IV of ERISA are sufficient to provide the benefits under such Plan which the Pension Benefit Guaranty Corporation would guarantee the payment thereof if such Plan terminated, and are also sufficient to provide all other benefits due under the Plan. No Reportable Event has occurred and is continuing with respect to any Plan. No Plan nor any trust created under a Plan, nor any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which would subject any Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust, to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code. -16- Neither the Borrower nor the Guarantor is required to contribute to or is contributing to a "multiemployer pension plan" (as defined in the Multiemployer Pension Plan Amendments Act of 1980), and neither the Borrower nor the Guarantor has any "withdrawal liability" (as defined in such Act) to any multiemployer pension plan. 6.17 LOCATIONS. The Borrower's principal place of business and chief executive office is located at its address specified in Section 12.3. 6.18 SOLVENCY. The Borrower is Solvent. 6.19 NAME CHANGE; MERGER. During the past five years, the Borrower has not changed its corporate name or been party to a merger or consolidation, except as specified in Schedule 2. 7. AFFIRMATIVE COVENANTS. The Borrower covenants, for so long as any Loan is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 7.1 INSURANCE. The Borrower shall insure its property against all risks to which it is exposed, including loss, damage, fire, theft, and all other such risks, and in such amounts, as would be prudent for similar businesses similarly situated, including loss, damage, fire, theft, and all other such risks, and in such amounts, with such companies, under such policies, and in such form as shall be satisfactory to the Agent. In addition, the Borrower will maintain comprehensive public liability and worker's compensation insurance and such other insurance against loss or damage as are customarily carried by corporations similarly situated, with reputable insurers, in such amounts, with such deductibles, and by such methods as shall be adequate and in any event in amounts of not less than the amounts generally maintained by other companies engaged in similar businesses. 7.2 TAXES AND LIABILITIES. The Borrower shall pay and discharge, when due, all taxes, assessments, and governmental charges or levies imposed upon it or its income or profits, or against its properties, and all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; provided, that the Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim so long as it is being contested in good faith and by appropriate and lawful proceedings diligently pursued and with respect to which adequate reserves have been set aside on its books. 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC. The Borrower will deliver to each Lender: (a) within 30 days after the end of each of the first 11 months in each fiscal year of the Borrower a consolidating balance sheet of the Borrowing Group and their consolidated -17- subsidiaries (including the Borrower), as at the end of such period and statements of income and of cash flows of such corporations for such period and for the year-to-date period then ended, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, in form and detail as reasonably required by the Agent, and certified as complete and correct by the chief financial officers of the Borrowing Group, together with a certificate by such officers stating that, as of the date of such certification, no Default exists (or, if any Default exists, specifying the nature thereof and what action the Borrower has taken, is taking or proposes to take with respect thereto); (b) within 90 days after the end of each fiscal year, a consolidated balance sheet of EGI and a consolidating balance sheet of EGI and its consolidated subsidiaries (including the Borrower) as at the end of such fiscal year, and statements of profit and loss, shareholders' equity, and changes in cash flows of such corporations for such year, setting forth in each case in comparative form the figures for the previous fiscal year in form and detail as reasonably required by the Agent, and accompanied by an unqualified report and opinion on such financial statements (including on the supplemental schedules) from KPMG Peat Marwick LLP (or other certified public accountants satisfactory to the Agent), which report and opinion shall be prepared in accordance with GAAP, together with a certificate by the chief financial officer of EGI of the character specified in Section 7.3(a), and a certificate by such accountants stating whether or not their examination has disclosed the occurrence or existence of any Default, and, if their examination has disclosed a Default, specifying the nature and period of existence thereof, and demonstrating as at the end of such accounting period in reasonable detail compliance during such accounting period with Sections 6.18, 7.6, 7.13, 7.14, 7.15, 8.10, 8.11, 8.13, and 8.14; (c) copies of all other statements or reports prepared by or supplied to the Borrower by its accountants or auditors reflecting the financial position of the Borrower; (d) within 30 days after the end of each fiscal year, Projections for the next three years, year-by-year; (e) within 90 days after the end of each fiscal year, financial statements, of the type described in Section 7.3(b), for the Guarantor; and (f) with reasonable promptness, such other data and information as either Lender from time to time reasonably requests. 7.4 INSPECTION. The Borrower will permit authorized representatives designated by any Lender (a) to visit and inspect any of the properties of the Borrower, including its books and records (and to make extracts therefrom), and to discuss its affairs, finances, and accounts with its officers, directors, employees, and accountants, all at such reasonable times and as often as such Lender reasonably requests, and (b) to attend the Borrower's credit committee meetings. The Borrower will at all times keep accurate and complete records with respect to the Collateral. -18- 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS. The Borrower shall at all times preserve and maintain in full force and effect its corporate existence, powers, rights, licenses, permits, and franchises in the jurisdiction of its incorporation, and shall operate in full compliance with all applicable laws, statutes, regulations, certificates of authority, and orders in respect of the conduct of its business, and shall qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or appropriate in view of its business and operations. 7.6 USE OF PROCEEDS. The proceeds of the Loans will be used solely for repaying existing debt, and for general corporate purposes. No part of the proceeds will be used to cause a violation of Section 6.14. 7.7 NOTICE OF DEFAULT. The Borrower shall promptly notify each Lender in writing upon the occurrence or existence of any known Default, and shall provide to each Lender with such written notice a detailed statement by a responsible officer of the Borrower of all relevant facts and the action being taken or proposed to be taken by the Borrower with respect thereto. 7.8 MAINTENANCE OF PROPERTIES. The Borrower shall maintain or cause to be maintained in good repair, working order, and condition all properties used or useful in its business, and from time to time will make or cause to be made all appropriate repairs, renewals, and replacement thereof. The Borrower will not do or permit any act or thing which might impair the value or commit or permit any waste of its properties or any part thereof or permit any unlawful occupation, business, or trade to be conducted on or from any of its properties. 7.9 NOTICE OF ERISA DEVELOPMENTS. As soon as possible and in any event within 30 days after the Borrower knows or has reason to know of any Reportable Event or "prohibited transaction" (as defined in Section 6.16) with respect to any Plan or that the Pension Benefit Guaranty Corporation or the Borrower has instituted or will institute proceedings under ERISA to terminate a Plan subject to Title IV of ERISA, or a partial termination of a Plan has or is alleged to have occurred, or any litigation regarding a Plan or naming the trustee of a Plan or the Borrower or the Guarantor with respect to a Plan is threatened or instituted, the Borrower shall provide to the Agent and the Lenders the written statement of the chief financial officer of the Borrower setting forth details of such Reportable Event, prohibited transaction, termination proceeding, partial termination, or litigation and the action being or proposed to be taken with respect thereto, together with copies of the notice of such Reportable Event or any other notices, applications, or forms submitted to the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any notices or correspondence received from the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any pleadings, notices, or other documents relating to such litigation. 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE. The Borrower shall promptly give to the Agent and the Lenders written notice (a) of all threatened or actual actions, suits, investigations, or proceedings by or before any court, arbitrator, or governmental department, -19- commission, board, bureau, agency or other instrumentality (state, federal, or foreign), affecting the Borrower or the Guarantor or the rights or other properties of the Borrower or the Guarantor, except any litigation or proceedings which is not likely to affect the financial condition of the Borrower or the Guarantor or to impair the right or ability of the Borrower or the Guarantor to discharge the Obligations; (b) of any materially adverse change in the condition (financial or otherwise) of the Borrower or the Guarantor; and (c) of any seizure or levy upon any part of any of the Borrower's or the Guarantor's properties under any process or by a receiver. 7.11 PAYMENT OF LOANS. The Borrower shall punctually pay the principal and interest on the Loans, and all other sums falling due hereunder or under any other documents executed in connection with the Loans, in accordance with the terms hereof and thereof. 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION. The Borrower shall notify the Agent and the Lenders immediately of each change in the Borrower's corporate name and trade names, in the location of the Borrower's principal place of business, in each location where any of the Collateral is kept, and the office where the Borrower's books and records are kept. 7.13 TANGIBLE NET WORTH. The Borrowing Group shall maintain at all times a Tangible Net Worth of not less than $8,000,000 during 1997, and continuing to increase by $1,000,000 each fiscal year thereafter. 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. The Borrowing Group shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 6 to 1. 7.15 INTEREST COVERAGE RATIO. The Borrowing Group shall maintain (x) for the four-quarter period concluding at the end of each of the first three fiscal quarters in each fiscal year of the Borrowing Group, a ratio of EBIT to Interest on Senior Funded Debt of at least 1.15 to 1, and (y) for the four-quarter period concluding at the end of each fiscal year of the Borrowing Group, a ratio of EBIT to Interest on Senior Funded Debt of at least 1.5 to 1. 7.16 EGI SUBSIDIARY. The Borrower shall at all times be a wholly-owned Subsidiary of EGI. 7.17 COLLATERAL REPORTING. The Borrower shall provide to the Agent, on a weekly basis, a borrowing base certificate in form acceptable to the Agent. The Borrower shall provide to the Agent such other collateral reports as the Agent may request from time to time. 8. NEGATIVE COVENANTS. The Borrower covenants, for so long as any of the Loans are outstanding or any of the other Obligations remain unpaid or unperformed, as follows: -20- 8.1 DEBT. The Borrower will not obtain or attempt to obtain from any party (other than for the purpose of repaying the Obligations in full) any loans, advances, or other financial accommodations or arrangements other than (a) the Obligations, (b) debt underlying any purchase money security interest permitted by Section 8.2 not to exceed, in aggregated principal amount, $100,000 minus any such debt owed by EBC or ECM at any one time outstanding, (c) unsecured borrowings not to exceed in the aggregate $500,000 minus any such debt owed by EBC or ECM at any one time outstanding, (d) unsecured trade credit, incurred in the ordinary course of business, having commercially customary terms, and (e) borrowings from EBC, ECM, EGI, or Carolina Investors, Inc. that are fully subordinated to the Obligations. 8.2 LIENS. The Borrower shall not create, incur, assume, or suffer to exist any Lien of any kind upon any of its property or assets (including the Collateral), whether now owned or hereafter acquired, except (a) Liens in favor of the Agent, for the benefit of the Lenders; (b) Liens existing on the date hereof and specified on Schedule 1; (c) Liens on property securing all or part of the purchase price of such property if (1) such Lien is created contemporaneously with the acquisition of such property, (2) such Lien attaches only to the specific item(s) of property so acquired, (3) such Lien secures only the debt incurred to acquire such property, and (4) the debt secured by such Lien is permitted by Section 8.1; and (d) Liens for taxes, or for other claims, that are not then due. 8.3 GUARANTEES. The Borrower shall not guarantee, endorse, become surety with respect to, or otherwise become directly or contingently liable for or in connection with the obligations of any other Person, except by endorsement of negotiable instruments for deposit or collection and similar transactions in the ordinary course of business. 8.4 PLAN LIABILITIES. The Borrower shall not permit the aggregate present value of accrued benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Agent, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis, or permit the aggregate present value of vested benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis. 8.5 FISCAL YEAR. The Borrower will not change its fiscal year from a year ending on December 31 without prior written notice to the Agent. 8.6 OTHER TRANSACTIONS. The Borrower will not engage in any transaction with any of its officers, directors, employees, or Affiliates, except for an "arms-length" transaction on terms no more favorable to the other party than would be granted to an unaffiliated Person, which transaction shall be approved by its disinterested directors and shall be disclosed in a timely manner to the Agent before being consummated. -21- 8.7 MERGER; SUBSIDIARY; ETC. The Borrower will not merge or consolidate with any other corporation, form or acquire any Subsidiary, or issue any share of capital stock. 8.8 SALE OF ASSETS. The Borrower will not sell, lease or otherwise transfer all or any substantial part of its assets material to its operations, except in the ordinary course of its business; provided, that it may in any calendar year dispose of items of equipment having an aggregate market value of not more than $50,000, minus any such equipment disposed of by EBC or ECM, if the Borrower uses the proceeds of such disposition to acquire property of a similar nature. 8.9 CHANGES IN BUSINESS. The Borrower will not engage in any business other than the business presently conducted by it on the date of this Agreement and business of substantially the same type or directly related thereto. 8.10 DIVIDENDS AND REDEMPTIONS. The Borrower will not declare or pay any dividend (other than a dividend payable solely in common stock of the Borrower) on any share of any class of its capital stock, or apply any of its property or assets to the purchase, redemption, or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower. 8.11 LOANS. The Borrower will not make any loans or advances to or extend any credit to any Person except (a) the extension of trade credit in the ordinary course of business, (b) advances to employees not to exceed to any one employee an outstanding total of $5,000 minus any advances to such employee by EBC or ECM, and (c) loans to the Guarantor. 8.12 PLEDGE OF CREDIT. The Borrower will not pledge the Lenders' credit for any purpose whatsoever. 8.13 INVESTMENTS. The Borrower shall not purchase, acquire, or otherwise invest in any Person except: (a) Eligible Loans, (b) direct obligations of the United States of America maturing within one year from the acquisition thereof, (c) certificates of deposit issued by, or investment accounts in, banks or financial institutions having a net worth of not less than $50,000,000, (d) commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (e) overnight repurchase agreements issued by a Lender or any corporate Affiliate of a Lender, or (f) assets received from foreclosing on a loan. 8.14 CAPITAL EXPENDITURES. The Borrowing Group shall not make or incur Capital Expenditures in excess of $500,000 during any fiscal year of the Borrower, unless the Lenders give their prior written consent (which shall not be unreasonably withheld). -22- 9. POWER OF ATTORNEY. The Borrower hereby appoints and constitutes the Agent as its attorney-in-fact to do any of the following if an Event of Default exists: to receive, open, and dispose of all mail addressed to the Borrower pertaining to Collateral (or appearing to the Agent possibly to pertain to Collateral); to notify the postal authorities to change the address and delivery of mail addressed to the Borrower to such address as the Agent shall designate; to endorse the Borrower's name upon any notes, acceptances, checks, drafts, money orders, and other forms of payment that come into the Agent's or a Lender's possession, and to deposit or otherwise collect the same; to sign the Borrower's name on any document relating to any Collateral; to execute in the name of the Borrower any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this Agreement. The Borrower hereby waives notice of presentment, protest, and dishonor of any instrument so endorsed by the Agent. All the Agent's acts as attorney-in-fact are hereby authorized, ratified, and approved by the Borrower, and the Borrower agrees that, as attorney-in-fact, the Agent shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law, except to the extent of loss or damage caused directly and primarily by the Agent's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable so long as this Agreement remains in effect or any of the Obligations remains outstanding. 10. REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, the entire outstanding principal amount of the Loans, together with all accrued but unpaid interest thereon, and all other of the Obligations shall, at the option of the Agent or any Lender, immediately become absolute and due and payable, without presentation, demand of payment, protest, notice for demand of payment, protest and notice of nonpayment, or any other notice of any kind with respect thereto, all of which are hereby expressly waived by the Borrower to the full extent permitted by law. The Agent may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and other applicable law in Georgia or any other applicable jurisdiction. The Borrower agrees, after the occurrence of any Event of Default, immediately to assemble at the Borrower's expense all the Collateral at a convenient place acceptable to the Agent, and to surrender such property to the Agent. The Borrower agrees to pay all costs that the Agent and the Lenders pay or incur to collect the Obligations or enforce their rights hereunder. The Borrower agrees that the Agent may charge the Borrower's account for, and that the Borrower will pay on demand, all costs and expenses, including 15% of the total amount involved as attorneys' fees (not to exceed the amount of attorneys' fees actually incurred), incurred: (i) to liquidate any Collateral, (ii) to obtain or enforce payment of any Obligations, or (iii) to prosecute or defend any action or proceeding either against the Agent, the Lenders or against the Borrower concerning any matter growing out of or connected with this Agreement or any Receivable or any Obligation. The Borrower agrees that the Agent may apply any proceeds from disposing of the Collateral first to any security interest(s), lien(s), or encumbrance(s) prior to the Agent's security interest. -23- Any Lender shall be entitled to hold or set off any sums and all other property of the Borrower's, at any time to the credit of the Borrower or in the possession of such Lender, whether by pledge or otherwise, or upon or in which such Lender may have a lien or security interest. Recourse to security shall not at any time be required, and the Borrower shall at all times remain liable for the repayment to the Agent and the Lenders of all Obligations in accordance with their terms, regardless of the existence or non-existence of any Event of Default. 11. AGENT. 11.1 APPOINTMENT OF AGENT. Each of the Lenders hereby irrevocably designates and appoints NationsBank, N.A. as the Agent of such Lender under this Agreement and the other loan documents executed in connection herewith (the "Loan Documents"), and each such Lender irrevocably authorizes the Agent, as the Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and such other Loan Documents, including, without limitation, to make determinations as to the eligibility of loans, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or such other Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lender and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or the other Loan Documents or otherwise exist against the Agent. 11.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 11.3 EXCULPATORY PROVISIONS. Neither the Agent, nor any of its trustees, officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable to any Lender (or any Lender's participants) for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any Lender (or Lender's participants) for any recitals, statements, representations or warranties made by the Borrower or any officer or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or the other Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the other Loan Documents or for any failure of the Borrower to perform their obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrower. -24- 11.4 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of either Lender, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 11.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by either Lender; provided that prior to the receipt of such direction, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 11.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder or by the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. -25- 11.7 INDEMNIFICATION. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or the other Loan Documents, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Agent's gross negligence or willful misconduct or resulting solely from transactions or occurrences that occur at a time after such Lender has assigned all of its interests, rights and obligations under this Agreement. The agreements in the subsection shall survive the payment of the Loans, the Obligations and all other amounts payable hereunder and the termination of this Agreement. 11.8 AGENT IN ITS INDIVIDUAL CAPACITY. The Agent and its Affiliates may, in their individual capacity, make loans to, accept deposits from and generally engage in any kind of business with the Borrower as if the Agent were not the Agent hereunder; provided, however, neither the Agent nor any Lender shall make any loans or other extensions of credit to the Borrower secured by the Collateral without the prior written consent of each of the Lenders. With respect to its Commitment and the Loans made or renewed by it, the Agent, in its individual capacity as a Lender, shall have and may exercise the same rights and powers under this Agreement and the other Loan Documents and is subject to the same obligations and liabilities as and to the extent set forth herein and in the other Loan Documents for any other Lender. The terms "Lenders" or any other term shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity as a Lender. 11.9 RESIGNATION AND REMOVAL OF AGENT. The Agent may resign as Agent upon ten days' notice to the Lenders for any reason, and the Agent may be removed at the unanimous election of all of the Lenders (other than the Lender that is also the Agent) in the event of the Agent's gross negligence or willful misconduct in the performance of its duties hereunder and under the other Loan Documents. If the Agent shall resign or be removed as Agent under this Agreement, then the Lenders shall appoint from among the Lenders (other than the Lender who shall have resigned or shall have been removed) a successor agent for the Lenders, which successor agent shall be approved by the Borrower (which approval shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 11 shall inure to -26- its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 11.10 NOTICES FROM AGENT TO LENDERS. The Agent shall promptly, upon receipt thereof, forward to each Lender copies of any written notices, reports or other information (including the borrowing base certificate and other collateral reports described in Section 7.17) supplied to it by the Borrower (but which the Borrower are not required to supply directly to the Lenders). 12. MISCELLANEOUS. 12.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Agent or the Lenders in exercising any right, power, or remedy hereunder, or under any other document or agreement given by the Borrower or received by the Agent or the Lenders in connection herewith, shall operate as a waiver thereof, and no waiver shall be valid unless in writing signed by the Agent and the Lenders (and then only to the extent therein stated); nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy hereunder or thereunder. The remedies herein and therein provided are cumulative and not exclusive of any remedies provided by law or in equity. 12.2 AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of this Agreement or of any other document or agreement given by the Agent or the Lenders or received by the Borrower in connection herewith, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless it is in writing and signed by the Agent and the Lenders (and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given). No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 12.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, and other communications provided for hereunder, other than routine communications in the ordinary course of business, shall be in writing (including telecopies) and mailed, telecopied, or delivered as follows: if to the Borrower: Emergent Financial Corp. 15 S. Main Street, Suite 750 Greenville, South Carolina 29601 Attention: Kevin J. Mast Fax: (864) 271-8374 -27- with a copy to: Cary H. Hall, Jr. Wyche, Burgess, Freeman & Parham 44 East Camperdown Way Greenville, South Carolina 29601 Fax: (864) 235-8900 if to the Lenders: NationsBank, N.A. Business Credit Division P. O. Box 3406 Atlanta, Georgia 30302-3406 Attention: John F. Bohan Fax: (404) 607-6439 Hibernia National Bank P.O. Box 61540 New Orleans, Louisiana 70161-1540 Attention: Norman W. Winters Fax: (504) 533-3797 if to the Agent NationsBank, N.A. Business Credit Division P. O. Box 3406 Atlanta, Georgia 30302-3406 Attention: John Bohan Fax: (404) 607-6439 or, as to each party, at such other address as it designates in a written notice to the other party complying as to the delivery with the terms of this Section. Except as otherwise expressly provided in this Agreement, all such notices, requests, demands, and other communications shall, when mailed or telecopied, be effective two Banking Days after being deposited in the mails (postage paid) or when sent over a telecopier owned or operated by a party hereto with an answerback response set forth on the sender's copy of the document, addressed as aforesaid, and otherwise shall be effective upon receipt. 12.4 COSTS, EXPENSES, AND TAXES. The Borrower shall pay to the Agent and the Lenders, on demand, all costs and expenses paid or incurred by the Agent and the Lenders in connection with the preparation, reproduction, execution, delivery, administration, or enforcement -28- of this Agreement and other instruments and documents from time to time delivered in connection with this Agreement, including the fees and expenses of counsel for the Agent and the Lenders, and in connection with the Lenders' initial evaluation of the line of credit contemplated by this Agreement (including travel and field exam expenses). In addition, the Borrower shall pay any and all stamp and other taxes and recording and filing fees payable or determined to be payable in connection with the execution and delivery of this Agreement and all other instruments and documents from time to time delivered in connection with this Agreement, and shall save and hold harmless the Agent and the Lenders from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes or fees. 12.5 COMMERCIAL TRANSACTION. THE BORROWER HEREBY ACKNOWLEDGES THAT THE OBLIGATIONS AROSE OUT OF A "COMMERCIAL TRANSACTION" (AS DEFINED IN O.C.G.A. 44-14-260(1), CONCERNING FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY), AND AGREES THAT AFTER ANY EVENT OF DEFAULT (AS "Event of Default" IS DEFINED IN SECTION 1.1), THE AGENT AND THE LENDERS SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OR HEARING. THE BORROWER KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE OR POSTING OF A BOND BY THE AGENT AND THE LENDERS PRIOR TO SEIZURE BY THE LENDER (OR THE AGENT OR ANY LENDER'S TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST) OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE BORROWER AS A "WAIVER" AS DEFINED IN O.C.G.A. 44-14-260(3) (RELATING TO FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY). 12.6 SUCCESSORS AND ASSIGNS. All of the terms of this Agreement, and each of the documents and agreements executed and delivered pursuant to this Agreement, shall bind, benefit, and be enforceable by the successors and assignees of the parties hereto, whether so expressed or not. The Borrower shall not assign or transfer this Agreement, or any of its rights hereunder, without the prior written consent of the Agent and the Lenders. Neither Lender shall assign or transfer this Agreement, or any of its rights hereunder, without the prior written consent of the other Lender, such consent not to be unreasonably withheld. 12.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, covenants, and agreements contained herein or made in writing by the Borrower in connection herewith shall survive the execution and delivery of this Agreement and any and all other documents and instruments relating to or arising out of any of the foregoing. 12.8 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 12.9 HEADINGS. The headings in this Agreement are for convenience of reference only, and are not a substantive part of the agreement. -29- 12.10 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 12.11 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. In case any one or more of the provisions in this Agreement shall for any reason be held to be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 12.12 PRO RATA PARTICIPATION. (a) Each Lender agrees that: (i) if it shall exercise any right of counterclaim, set-off, banker's lien or similar right, or if under any applicable bankruptcy, insolvency or other similar law it receives a secured claim the security for which is a debt owed by it to the Borrower, it shall apportion the amount thereof, on a pro rata basis, between (A) amounts at the time owed to it by the Borrower under this Agreement, and (b) amounts otherwise owed to it by the Borrower, and (ii) if, as a result of the exercise of a right or the receipt of a secured claim and the apportionment thereof described in clause (i) of this Section 12.12(a) or otherwise, it shall receive payment of a proportion of the aggregate amount of principal and interest due with respect to the Obligations owed to it greater than the proportion of such amounts then received by any other Lender, such Lender shall purchase a participation (which it shall be deemed to have purchased simultaneously upon the receipt of such payment) in the Obligations then held by the other Lenders so that all such recoveries of principal and interest with respect to all Obligations owed to each Lender shall be pro rata on the basis of the respective amount of the Obligations owed to all Lenders, provided that if all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered by or on behalf of the Borrower from such Lender, such purchase price paid for such participation shall be returned to such Lender to the extent of such recovery, but without interest. (b) Each Lender which receives such a secured claim shall exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 12.12 to share in the benefits of any recovery on such secured claim. (c) The Borrower expressly consents to the foregoing arrangements and agree that any holder of a participation in any Obligation so purchased or otherwise acquired of which the Borrower has received notice may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by the Borrower to such holder as fully as if such holder were a holder of such Obligation in the amount of the participation held by such holder. -30- 12.13 COUNTERPARTS. This Agreement may be executed in separate counterparts. 12.14 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS SPECIFICALLY STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF GEORGIA (DISREGARDING ANY CONFLICTS-OF-LAWS RULE THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION). THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN ATLANTA, GEORGIA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR AGREEMENTS DESCRIBED OR CONTEMPLATED HEREIN, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH UNITED STATES FEDERAL OR STATE COURT. SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED ON THE BORROWER IN ANY SUCH ACTION OR PROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWER IN ACCORDANCE WITH SECTION 12.3 HEREOF. 12.15 WAIVER OF TRIAL BY JURY. THE BORROWER, THE AGENT AND EACH LENDER EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO TRANSACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS DESCRIBED OR CONTEMPLATED HEREIN. -31- IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have executed this Loan and Security Agreement. Borrower: EMERGENT FINANCIAL CORP. [Seal] By: (Signature Illegible) Title: CEO Attest: By: (Signature Illegible) Secretary Lenders: Commitment: $10,000,000 NATIONSBANK, N.A. By: (Signature Illegible) Title: VP Commitment: $10,000,000 HIBERNIA NATIONAL BANK By: (Signature Illegible) Title: VP Agent: NATIONSBANK, N.A. By: (Signature Illegible) Title: VP -32- EXHIBIT A Borrower's Secretary's Certificate I, Kevin J. Mast, Secretary of Emergent Financial Corp., Inc. (the "Borrower"), a South Carolina corporation, hereby certify that: 1. Attached hereto as Exhibit 1 is a certified copy of the articles of incorporation of the Borrower as originally filed, together with all amendments thereto. 2. Attached hereto as Exhibit 2 is a true and correct copy of the by-laws of the Borrower. Those by-laws have not been amended, modified, or revoked, and are in full force and effect as of the date hereof. 3. Attached hereto as Exhibit 3 is a good standing certificate for the Borrower issued by the South Carolina Secretary of State on ____________, 1997. 4. The Borrower has since the date of the certificate referred to in 3 above through the date hereof remained in good standing under the laws of the state of South Carolina. 5. No suit or proceeding for the dissolution or liquidation of the Borrower has been instituted or is now threatened. 6. Attached hereto as Exhibit 4 is a true and complete copy of resolutions of the Board of Directors of the Borrower, adopted at a meeting duly called and held on ______________, 1997, at which meeting a quorum for the transaction of business was present and acting throughout. The corporate action in adopting those resolutions was duly taken at that meeting in accordance with the provisions of law and of the Borrower's articles of incorporation and by-laws, and those resolutions are now in full force and effect and have not been modified in any respect. 7. The resolutions referred to in 6 authorized the Borrower and its officers referred to therein to execute and deliver, and to do all things necessary or appropriate for the payment and performance of all the Borrower's obligations under, the Amended and Restated Loan and Security Agreement (the "Agreement") dated as of _________________, 1997, between NationsBank, N.A. and Hibernia National Bank (the "Lenders"), NationsBank, N.A., as Agent for the Lenders, and the Borrower, and all certificates, agreements and other documents to be executed and delivered to the Agent and the Lenders by the Borrower pursuant to the Agreement, and pursuant to the specific resolutions referred to in 6. 8. The following persons have been duly elected, have duly qualified, as of the date of the execution of the Agreement were, and on the date hereof are, officers of the Borrower, holding the offices set opposite their names below, and the signatures set opposite their names below are their genuine signatures: Name Title Signature Keith B. Giddens Chief Executive _________________________ Officer Kevin J. Mast Executive Vice _________________________ Pres., Chief Financial Officer, Secretary and Treasurer Connie Warne President _________________________ A. Scott Lining Vice Pres.-Finance _________________________ Monte Harrell Controller _________________________ IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the Borrower's corporate seal on ____________________, 1997. _________________________ Secretary [Seal] -2- EXHIBIT 4 BOARD OF DIRECTORS' RESOLUTIONS EXHIBIT B Borrower's CEO's Certificate I, Keith B. Giddens, Chief Executive Officer of Emergent Financial Corp. (the "Borrower"), a South Carolina corporation, do hereby certify, pursuant to Section 4.1 of the Amended and Restated Loan and Security Agreement (the "Agreement") between NationsBank, N.A. and Hibernia National Bank (the "Lenders"), NationsBank, N.A., as Agent for the Lenders, and the Borrower, dated as of __________________, 1997, that Kevin J. Mast has been duly elected, has duly qualified, as of the date of the execution of the Agreement was, and on the date hereof is, the Secretary of the Borrower, and that the signature appearing below is a true specimen of his signature. Kevin J. Mast, Secretary __________________, 1997 Keith B. Giddens, Chief Executive Officer EXHIBIT C [To Be Retyped on Letterhead of Counsel to the Borrower] _________________, 1997 NationsBank, N.A. P.O. Box 3406 Atlanta, Georgia 30302-3406 Hibernia National Bank P.O. Box 61540 New Orleans, Louisiana 70161-1540 Re: Emergent Financial Corp. Ladies and Gentlemen: We have acted as counsel to Emergent Financial Corp. (the "Borrower"), a South Carolina corporation, in connection with its execution and delivery of the _________________, 1997 Amended and Restated Loan and Security Agreement (the "Loan Agreement") between the Borrower, each of you as Lenders, and NationsBank, N.A., as Agent for the Lenders, and certain related documents. Unless otherwise specified in this opinion letter, the terms used herein have the same meanings as in the Loan Agreement. We also have acted as counsel to Emergent Group, Inc. in connection with its execution and delivery of the Guarantee. In so acting, we have examined the Loan Agreement and the Guarantee, and originals or copies of all other documents that we deemed relevant and necessary as a basis for the opinions hereinafter set forth. Based upon the foregoing, we are of the opinion that: (1) The Borrower is a corporation duly organized and validly existing in good standing under the laws of South Carolina, and has all requisite power and authority to conduct its business, to own and operate its properties, and to execute, deliver, and perform all of its obligations under the Loan Agreement. The Borrower has no Subsidiary. The Borrower is duly qualified, licensed, or domesticated and in good standing as a foreign corporation duly authorized to do business in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary (as set forth in Section 6.3 of the Loan Agreement). (2) The Borrower's execution, delivery, and performance of the Loan Agreement have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of shareholders of the Borrower or violate the articles of incorporation, by-laws, or Securities of the Borrower, (b) violate any provision of any law, rule, or regulation (including Regulation X of the Board of Governors of the Federal Reserve System) of the United States or of South Carolina, or, to the best of our knowledge, any order, judgment, injunction, decree, determination, or award of any court, arbitrator, or governmental department, agency, or other instrumentality, (c) to the best of our knowledge, result in a breach of or constitute a default under any agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (d) result in, or require, to the best of our knowledge, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Borrower (other than the Liens created by the Loan Agreement). To the best of our knowledge, the Borrower is not in violation of any provision of any of the items described in clause (b) of this paragraph or in default under any provision of any of the items described in clause (c) of this paragraph. (3) No authorization, consent, approval, license, or exemption of, or filing or registration with, any court or governmental department, agency, or other instrumentality of the United States or of South Carolina is or will be necessary to the Borrower's valid execution, delivery, or performance of the Loan Agreement or for the payment to the Agent and the Lenders of all sums due and payable thereunder. (4) The Loan Agreement has been duly executed and delivered by the Borrower, and constitute the Borrower's legal, valid, and binding obligation, enforceable against the Borrower in accordance with its terms. (5) To the best of our knowledge, there are no actions, suits, or proceedings pending or threatened against or affecting the Borrower of the Guarantor or the properties of the Borrower or the Guarantor before any court, arbitrator, or governmental department, commission, board, bureau, agency, or other instrumentality (state, federal, or foreign) which, if determined adversely to the Borrower or the Guarantor, would have a materially adverse effect on the financial condition, properties, or operations of the Borrower or the Guarantor, or create a Lien on any property of the Borrower or the Guarantor. (6) You should perfect all the security interests granted under the Loan Agreement (in Collateral for which a security interest can be perfected by filing UCC-1 financing statements) by filing UCC-3 assignments in the attached form with the South Carolina Secretary of State. Upon the filing of such UCC-3 assignments, you will have a perfected first-priority security interest in such Collateral, and no further recording or filing in South Carolina or any other -2- jurisdiction is necessary or advisable in order to establish and perfect such first-priority security interest. (7) The Guarantee has been duly authorized, executed, and delivered by the Guarantor, and constitutes the Guarantor's legal, valid, and binding obligations, enforceable against the Guarantor in accordance with its terms. This opinion is limited to the laws of the United States and of South Carolina. The opinions in paragraphs nos. 4 and 7 are given as if the laws of South Carolina governed the Loan Agreement, and the Guarantee, despite their express choice of Georgia law as the law governing their construction and interpretation. No opinion is given as to the validity of the choice of law in the Loan Agreement and the Guarantee. Our opinions set forth herein as to the validity, binding effect, and enforceability of the Loan Agreement and the Guarantee are specifically qualified to the extent that the validity, binding effect, or enforceability of any obligations of the Borrower and the Guarantor thereunder or the availability or enforceability of any of the remedies provided therein, may be subject to or limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, and other statutory or decisional laws, heretofore or hereafter enacted or in effect, affecting the rights of creditors generally to the extent the same may constitutionally be applied including, without limitation, decisional or statutory law concerning recourse by creditors to security in the absence of notice of a hearing; (ii) the exercise of judicial or administrative discretion in accordance with general equitable principles; (iii) the possible unenforceability of any provision requiring or in effect requiring that waivers or amendments of any provision of the Loan Agreement or the Guarantee, or any related document, may be effected only in writing; (iv) the possible unenforceability of provisions imposing increased interest rates or late payment charges upon delinquency in payment or default, to the extent that any such provision is deemed a "penalty"; (v) limitations imposed by rules and statutes regarding forum, venue, pleading, service of process, qualification to do business, and statutes of limitation; or (vi) limitations on the availability or enforceability of the remedies of specific performance or injunctive relief and of waivers contained in the Loan Agreement or the Guarantee, all of which may be limited by equitable principles or applicable laws, rules, regulations, court decisions, and constitutional requirements. All opinions rendered herein are limited to the existing laws of the State of South Carolina and laws of the United States of America, all as in effect on the date hereof, and we express no opinion as to any other laws, rules, or regulations of such jurisdictions or matters governed by such laws, rules, or regulations; nor do we undertake, by delivery hereof or otherwise, to advise you of any changes in such laws, rules, or regulations. This opinion is made as of the date hereof, and we undertake no (and hereby disclaim any) obligation to advise you of any change in any matter set forth herein. This opinion is limited to the matters expressly set forth herein and no opinion is implied or may be inferred beyond the matters -3- expressly stated herein. This opinion is solely for your benefit in connection with the Loan Agreement and the Guarantee and may not be relied upon in any manner by any other person. Very truly yours, WYCHE, BURGESS, FREEMAN & PARHAM, P.A. By:______________________________ Cary H. Hall, Jr. -4- SCHEDULE 1 Liens NONE SCHEDULE 2 Trademarks, Tradenames, Name Changes, etc. NONE SCHEDULE 3 Litigation NONE EX-10 3 EXHIBIT 10.24 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of June 13, 1997 between NationsBank, N.A., as Lender and Emergent Commercial Mortgage, Inc., as Borrower $5,000,000 TABLE OF CONTENTS
SECTION PAGE 1. DEFINITIONS AND ACCOUNTING TERMS...............................................................................1 1.1 DEFINITIONS.........................................................................................1 1.2 ACCOUNTING TERMS.....................................................................................6 1.3 USE OF DEFINED TERMS.................................................................................6 1.4 SECTION AND EXHIBIT REFERENCES, ETC..................................................................6 2. AMOUNT AND TERMS OF THE LOANS..................................................................................6 2.1 THE LOANS............................................................................................6 2.2 INTEREST AND OTHER CHARGES...........................................................................7 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES............................................................8 2.4 CHARGES..............................................................................................8 2.5 PAYMENT..............................................................................................8 2.6 PAYMENT ON NON-BANKING DAYS..........................................................................9 2.7 EFFECTIVE DATE AND TERMINATION.......................................................................9 2.8 STATEMENTS OF ACCOUNT................................................................................9 3. SECURITY INTERESTS.............................................................................................9 4. CONDITIONS PRECEDENT TO ADVANCES..............................................................................10 4.1 DOCUMENTS...........................................................................................10 4.2 OTHER CONDITIONS PRECEDENT..........................................................................10 5. CLOSING PROCEDURES............................................................................................11 5.1 TRANSFERS OF LOAN DOCUMENTS.........................................................................11 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL..........................................................11 6. GENERAL REPRESENTATIONS AND WARRANTIES........................................................................11 6.1 ORGANIZATION, STANDING, ETC.........................................................................11 6.2 ENFORCEABILITY......................................................................................12 6.3 QUALIFICATION.......................................................................................12 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC......................12 6.5 SUBSIDIARIES; PARENT................................................................................12 6.6 FINANCIAL STATEMENTS................................................................................12 6.7 CHANGES IN FINANCIAL CONDITION......................................................................13 6.8 TAX RETURNS AND PAYMENTS............................................................................13 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC..........................................................13 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC...............................................................13 6.11 LITIGATION, ETC....................................................................................14 -i- 6.12 ADVERSE DEVELOPMENTS...............................................................................14 6.13 DISCLOSURE.........................................................................................14 6.14 MARGIN SECURITIES..................................................................................14 6.15 INVESTMENT COMPANY.................................................................................14 6.16 ERISA..............................................................................................14 6.17 LOCATIONS..........................................................................................15 6.18 SOLVENCY...........................................................................................15 6.19 NAME CHANGE; MERGER................................................................................15 7. AFFIRMATIVE COVENANTS.........................................................................................15 7.1 INSURANCE...........................................................................................15 7.2 TAXES AND LIABILITIES...............................................................................15 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC...............................................................16 7.4 INSPECTION..........................................................................................17 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS............................................17 7.6 USE OF PROCEEDS.....................................................................................17 7.7 NOTICE OF DEFAULT...................................................................................17 7.8 MAINTENANCE OF PROPERTIES...........................................................................17 7.9 NOTICE OF ERISA DEVELOPMENTS........................................................................17 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE.............................................................18 7.11 PAYMENT OF LOANS...................................................................................18 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION................................................18 7.13 TANGIBLE NET WORTH.................................................................................18 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH...................................................18 7.15 INTEREST COVERAGE RATIO............................................................................18 7.16 EGI SUBSIDIARY.....................................................................................18 7.17 COLLATERAL REPORTING...............................................................................18 8. NEGATIVE COVENANTS............................................................................................19 8.1 DEBT 19 8.2 LIENS...............................................................................................19 8.3 GUARANTEES..........................................................................................19 8.4 PLAN LIABILITIES....................................................................................19 8.5 FISCAL YEAR.........................................................................................19 8.6 OTHER TRANSACTIONS..................................................................................19 8.7 MERGER; SUBSIDIARY; ETC.............................................................................20 8.8 SALE OF ASSETS......................................................................................20 8.9 CHANGES IN BUSINESS.................................................................................20 8.10 DIVIDENDS AND REDEMPTIONS..........................................................................20 8.11 LOANS..............................................................................................20 8.12 PLEDGE OF CREDIT...................................................................................20 8.13 INVESTMENTS........................................................................................20 8.14 CAPITAL EXPENDITURES...............................................................................20 9. POWER OF ATTORNEY.............................................................................................21 - ii - 10. REMEDIES.....................................................................................................21 11. MISCELLANEOUS................................................................................................22 11.1 NO WAIVER; CUMULATIVE REMEDIES.....................................................................22 11.2 AMENDMENTS, ETC....................................................................................22 11.3 ADDRESSES FOR NOTICES, ETC.........................................................................22 11.4 COSTS, EXPENSES, AND TAXES.........................................................................23 11.5 COMMERCIAL TRANSACTION.............................................................................23 11.6 SUCCESSORS AND ASSIGNS.............................................................................24 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.........................................................24 11.8 TIME IS OF THE ESSENCE.............................................................................24 11.9 HEADINGS...........................................................................................24 11.10 ENTIRE AGREEMENT..................................................................................24 11.11 SEVERABILITY......................................................................................24 11.12 COUNTERPARTS......................................................................................24 11.13 GOVERNING LAW; CONSENT TO JURISDICTION............................................................24 11.14 WAIVER OF TRIAL BY JURY...........................................................................25
- iii - Exhibits: Exhibit A - - Form of Borrower's Secretary's Certificate (Section 1.1) Exhibit B - - Form of Borrower's CEO's Certificate (Section 1.1) Exhibit C - - Form of Opinion (Section 1.1) Exhibit D - - Form of Escrow Agreement (Section 1.1) Schedules: Schedule 1 - - Liens (Section 8.2) Schedule 2 - - Trademarks, Trade Names, Name Changes, etc. (Sections 6.10 and 6.19) Schedule 3 - - Litigation (Section 6.11) - iv - AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Agreement is made as of the 13th day of June, 1997, between NationsBank, N.A., as successor to NationsBank, N.A. (South) (the "LENDER"), and Emergent Commercial Mortgage, Inc. (the "BORROWER"), a South Carolina corporation. RECITALS: The Borrower and the Lender entered into that certain Loan and Security Agreement dated as of October 10, 1995 (as amended, the "ECM Loan Agreement"), pursuant to which the Lender agreed to finance the Borrower's portfolio of SBA "504 Program" loans. The Borrower and the Lender desire to amend and restate the ECM Loan Agreement to make certain changes, all as more particularly described herein. The Borrower and the Lender therefore agree as follows: 1. DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. The following terms, when capitalized as in this Section 1.1, shall have the following meanings: "ADVANCE": the proceeds of a Loan. "AFFILIATE" of any designated Person: another Person controlling, controlled by, or under common control with such designated Person (but not including the Lender), and shall include (x) the spouse, parents, brothers, sisters, children, and grandchildren of such designated Person, (y) any association, partnership, trust, entity, or enterprise in which such designated Person is a director, officer, or general partner or in which such designated Person together with Affiliates of such designated Person own in the aggregate at least a 10% beneficial interest in assets, profits, or losses, and (z) any Subsidiary of such designated Person. "BANKING DAY": a day for dealings by and between banks, excluding Saturday, Sunday, any legal holiday in Atlanta, Georgia, and any other day on which banking institutions in Atlanta, Georgia are generally closed. "BORROWER'S CEO'S CERTIFICATE": the Certificate of the Borrower's Chief Executive Officer, substantially in the form of Exhibit B. "BORROWER'S SECRETARY'S CERTIFICATE": the Certificate of the Borrower's Secretary, substantially in the form of Exhibit A. "BORROWING BASE": defined in Section 2.1(a). "BORROWING GROUP": EBC, EFC, and the Borrower. "CAPITAL EXPENDITURES": the dollar amount of gross expenditures (including obligations under leases which are required under GAAP to be capitalized for financial reporting purposes) made or incurred for fixed assets, real property, and plant and equipment which are required to be capitalized for financial reporting purposes in accordance with GAAP. "CODE": the Internal Revenue Code of 1986, as amended. "COLLATERAL": all property described in Section 3 hereof, and all the Borrower's other property in which the Lender at any time has a security interest or which at any time are in the Lender's possession or control. "DEFAULT": (x) an event, act, or condition that would be an Event of Default but for the requirement(s) that notice be given or time elapse, or (y) an Event of Default. "EBC": Emergent Business Capital, Inc. "EBC L&SA": the Amended and Restated Loan and Security Agreement, to be entered into after the date hereof, between NationsBank, N.A. and Hibernia, as lenders, NationsBank, N.A., as agent for the lenders, and EBC, in form and substance satisfactory to the Lender. "EBIT": the total earnings of the Borrowing Group and their consolidated Subsidiaries from all sources, excluding extraordinary items, before deducting interest or income tax expense, but after deducting depreciation and amortization expense. "EFC": Emergent Financial Corporation. "EFC L&SA": the Amended and Restated Loan and Security Agreement, dated of even date herewith, between NationsBank, N.A. and Hibernia, as lenders, NationsBank, N.A., as agent for the lenders, and EFC. "EGI": Emergent Group, Inc. "ELIGIBLE LOAN: a commercial loan for which the Borrower holds a first mortgage lien on the property being financed and which (1) is held by the Borrower and funded in accordance with an issued SBA Commitment, (2) remains at all times eligible for SBA funding under that SBA Commitment, including compliance with all budgetary and other conditions, and (3) meets all the -2- Lender's other funding requirements which may be imposed with respect to the loan involved (which may include a takeout purchase commitment from a reliable "504 Program" lender). "ERISA": the Employee Retirement Income Security Act of 1974, as amended. "EVENT OF DEFAULT": any of the following: (1) non-payment, within seven days after the due date, of any amount payable on any of the Obligations; (2) failure to perform any material agreement or meet any obligation of the Borrower or any of its Affiliates contained herein; (3) nonpayment when due of any premium on any insurance policy required to be maintained under Section 7.1 hereof; (4) the existence of a default under any other agreement between the Borrower, EBC or ECM and the Lender or any Affiliate of the Lender's; (5) any statement, representation, or warranty of the Borrower made in writing herein or in any other writing at any time furnished or made by the Borrower to the Lender is untrue in any material respect as of the date furnished or made; (6) suspension of the operation of the Borrower's present business; (7) any Obligor becomes insolvent or unable to pay debts as they mature, admits in writing that it is so, makes a conveyance fraudulent as to creditors under any state or federal law, or makes an assignment for the benefit of creditors, or a proceeding is instituted by or against any Obligor alleging that such Obligor is insolvent or unable to pay debts as they mature, or a petition under any provision of Title 11 of the United States Code (entitled "Bankruptcy"), as amended, is brought by or against any Obligor; (8) entry of any judgment for more than $50,000 against any Obligor; (9) creation, assertion, or filing of any Lien (other than a Permitted Lien) against any of the property of any Obligor; (10) dissolution, merger, or consolidation of any Obligor (other than a merger or consolidation of the Borrower or the Guarantor with or into the Borrower or the Guarantor); (11) termination or withdrawal of any guarantee for any of the Obligations, or the failure for any other reason of any such guarantee or agreement to be enforceable by the Lender in accordance with its terms; (12) transfer of a substantial part of the property of any Obligor; (13) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Borrower or the Guarantor; (14) appointment of a receiver for the Collateral or for any property in which the Borrower has an interest; (15) seizure of the Collateral by any third party; (16) at least 10% (face value) of the Borrower's loan portfolio are at least 90 days past due, and have remained at least 90 days past due for at least 30 days; (17) the Lender in good faith believes that the prospect of payment or performance of the Obligations has been impaired; or (18) the EBC L&SA shall not be effective, and/or all of the conditions precedent to the closing of the EBC L&SA shall not be satisfied or waived by the Lender, on or prior to June 30, 1997. "GAAP": generally accepted accounting principles applied in a manner consistent with the financial statements described in Section 6.6. "GUARANTEE": the document by that name, dated the date of this Agreement, of the Guarantor, in favor of the Lender. "GUARANTOR": EGI. -3- "HEREIN", "HEREOF", "HEREUNDER", etc.: in, of, under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "HIBERNIA": Hibernia National Bank, and its successors and assigns. "INCLUDING": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "INSURANCE": the policy or policies of insurance described in Section 7.1, including all required endorsements thereto. "INTEREST ON SENIOR FUNDED DEBT": the interest on the Obligations and all "Obligations" under the EBC L&SA and EFC L&SA during the period for which computation is being made. "LIEN": any mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind, including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "LOANS": the loan(s) under Section 2.1(a) in the principal amount of up to $5,000,000, plus any Overadvances, made by the Lender to the Borrower under this Agreement. "OBLIGATIONS": all present and future (a) duties, obligations, and liabilities of the Borrower to the Lender under this Agreement, or under any document or agreement executed and delivered pursuant to or in connection with this Agreement, (b) sums owing to the Lender for goods or services purchased by the Borrower from any other firm financed by the Lender, (c) obligations under all notes and contracts of suretyship, guarantee, or accommodation made by the Borrower in favor of the Lender, and (d) all other obligations of the Borrower to the Lender, however and whenever created, arising, or evidenced, whether direct or indirect, through assignment from third parties, absolute, contingent, or otherwise, primary or secondary, now or hereafter existing, or due or to become due. "OBLIGOR": the Borrower, any guarantor, or any other party at any time primarily or secondarily, directly or indirectly liable on any of the Obligations. "OPINION": the legal opinion, of counsel to the Borrower satisfactory to the Lender, substantially in the form of Exhibit C. "OR": at least one, but not necessarily only one, of the alternatives enumerated. "OVERADVANCES": loans by the Lender to the Borrower in excess of those described in Section 2.1(a). -4- "PERMITTED LIEN": a Lien permitted by Section 8.2. "PERSON": any individual, joint venture, partnership, firm, corporation, trust, unincorporated organization, or other organization or entity, or a governmental body or any department or agency thereof. "PLAN": any present or future employee benefit plan (as defined in Section 3 of ERISA) and any trust created thereunder, covered by Title I or Title IV of ERISA, established or maintained for employees of the Borrower or the Guarantor. "PRIME RATE": the rate of interest announced by NationsBank, N.A. from time to time as its "Prime Rate". "PROJECTIONS": the Borrower's forecasted consolidated and consolidating balance sheets, profit-and-loss statements, and cash-flow statements, all prepared on a basis consistent with the Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "REPORTABLE EVENT": as defined in Title IV of ERISA. "SBA": the United States Small Business Administration, an agency of the United States government. "SBA COMMITMENT": the SBA's commitment to purchase a portion of the loans equal to 40% of the cost of the property financed, on a basis whereby the SBA's lien on the property financed is subordinated to the Borrower's lien on that property, upon completion of the construction period for the underlying property. "SECURITIES": any share(s) of beneficial or equity interest or capital stock or any other instrument commonly understood to be a "security", excluding promissory notes issued for money borrowed in commercial transactions. "SOLVENT": has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its debts. "SUBORDINATED DEBT": EBC's debt that is subordinated (as to right and time of payment) to the Obligations under the Subordination Agreement, and any other debt of EBC, the Borrower, or EFC that is subordinated (as to right and time of payment) to such party's obligations to the Lender in a manner satisfactory to the Lender. -5- "SUBORDINATION AGREEMENT": the Amended and Restated Agreement of Subordination and Assignment, dated the date of this Agreement, of Carolina Investors, Inc. and EBC in favor of NationsBank, N.A., as lender and agent, and Hibernia, as lender. "SUBSIDIARY" of any designated corporation: any other corporation more than 20% of the shares of voting stock of which is owned, directly or indirectly, by such designated corporation, including subsidiary of a subsidiary. "TANGIBLE NET WORTH": the total assets of the Borrowing Group and their consolidated Subsidiaries, plus Subordinated Debt, minus Total Liabilities (excluding from the definition of total assets the amount of (a) any write-up in the book value of any asset resulting from a revaluation thereof after December 31, 1992, (b) treasury stock, (c) Receivables and other amounts due from stockholders and other Affiliates, (d) unamortized debt discount and expense and (e) patents, trademarks, trade names, goodwill, deferred charges, organizational expenses and other intangible assets, all determined in accordance with GAAP). "TOTAL LIABILITIES": all obligations of the Borrowing Group and their consolidated Subsidiaries to pay money, excluding Subordinated Debt. 1.2 ACCOUNTING TERMS. All accounting terms used herein shall be construed in accordance with GAAP applied consistently with those principles applied in the preparation of the financial statements referred to in Section 6.6, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. In the event of ambiguities in GAAP, the more conservative principle or interpretation shall be used. 1.3 USE OF DEFINED TERMS. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in Section 1.1, or the term "Agreement", means such agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. 1.4 SECTION AND EXHIBIT REFERENCES, ETC. References to sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. 2. AMOUNT AND TERMS OF THE LOANS 2.1 THE LOANS. (a) REVOLVING LOANS. The Lender agrees to make loans to the Borrower, and the Borrower agrees to borrow from the Lender, upon request of the Borrower from time to time, up to 80% of the Borrower's Eligible Loans (the sum of the Eligible Loans being the "BORROWING BASE"); PROVIDED, that the total amount of all Loans outstanding at any time under this sentence shall not exceed $5,000,000. The amounts of such Loans shall be determined in the sole discretion of the Lender to be consistent with the value of the Eligible Loans, taking into account all fluctuations of the value thereof in light of the Lender's experience and sound business principles. -6- Such determinations shall be subject to the requirements of good faith on the Lender's part, the Borrower's undertakings hereunder, and especially the Borrower's grant to the Lender of a security interest in the Collateral as security for the Loans and all other Obligations of the Borrower to the Lender, which will, of necessity, fluctuate in amount, and to the condition that the Lender at all times be fully secured. To the extent necessary to reduce the total amount of all Loans outstanding to the maximum amount then available under clauses (i) and (ii) of this Section 2.1, the Borrower shall pay to the Lender, on demand, the amount of outstanding Loans in excess of that maximum amount. An Eligible Loan shall be included in the Borrowing Base when the Borrower has provided the Lender with a copy of the related SBA Commitment, the original loan documentation for that loan (to the extent requested by the Lender), and such other documentation as the Lender reasonably requests, by fax or otherwise. (b) OVERADVANCES. The Lender may make Overadvances as, in its sole and absolute discretion, it determines to lend. Any such Overadvances may be evidenced by a written agreement between the Lender and the Borrower, which agreement may provide, at the Lender's option, for interest and fees on such Overadvances in addition to those specified hereunder. Except to the extent otherwise provided in any such agreement, any such Overadvances shall be "Loans", shall be repayable upon demand, and shall in all other respects be subject to the terms and conditions of this Agreement. 2.2 INTEREST AND OTHER CHARGES. The Loans shall bear interest on the average daily net balance thereof, calculated monthly, at a fluctuating rate of interest equal to the Prime Rate. Changes in the rate of interest shall be effected monthly to reflect changes in the Prime Rate, as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Interest shall be due and payable monthly, on the first day of each month, for the preceding month. The final payment of all accrued and unpaid interest shall be due and payable on the date that the outstanding principal amount of the Loans is paid or due and payable in full. After an Event of Default, interest shall also be due and payable upon the Lender's demand from time to time. The Lender shall inform the Borrower of the amount of interest due and payable as of each payment date set forth in the preceding paragraph, and the Borrower shall pay the interest when due or the Lender may, in its discretion, charge such amount to the Borrower's account under this Agreement. As additional consideration for the credit facility established in Section 2.1, the Borrower agrees to pay to the Lender a fee, payable on the first day of each month for the preceding month, equal to the average unused principal portion of the maximum loan facility hereunder (I.E., $5,000,000 minus the average daily principal amount of Loans outstanding) times 0.125% per annum. 7 For interest computation purposes, Borrower's account will be credited for each remittance received on the day that the underlying funds are collected; the day of receipt of funds shall be deemed to be the following Banking Day if the receipt is after the Lender's cutoff time for receipt of funds or if such day is not a Banking Day. If the outstanding principal amount of the Loans becomes due and payable or if any payment of principal or interest is not timely made, or (at the Lender's option) if any Event of Default exists, interest shall accrue on the unpaid principal balance of the Loans or on such defaulted principal payment, from the date that the Loans became so due and payable or that the defaulted payment was not timely made, at a rate of 4% per annum above the Prime Rate. Changes in the rate shall be effected monthly to reflect changes in the Prime Rate as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Such interest shall continue to accrue until the date of payment of all principal and accrued but unpaid interest or such defaulted payment, as applicable, and shall be due and payable upon demand from time to time by the Lender. 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES. Interest on the Loans, and other periodic charges hereunder, shall be computed on the basis of a 360-day year and actual days lapsed. 2.4 CHARGES. The Borrower and the Lender hereby agree that the only charges imposed by the Lender upon the Borrower for the use of money in connection herewith are and shall be the interest described in Section 2.2. All other charges imposed by the Lender upon the Borrower in connection with the Loans, any commitment fees, collection fees, letter of credit fees, facility fees, origination fees, prepayment charges or early termination fees, default charges, late charges, attorneys' fees, and reimbursement for costs and expenses paid by the Lender to third parties, or for damages incurred by Lender, are and shall be deemed to be charges made to compensate the Lender for underwriting or administrative services and costs and other services or costs performed and incurred, and to be performed and incurred, by the Lender in connection with the Loans, and shall under no circumstances be deemed to be charges for the use of money. In no event shall the amount of interest due or payable hereunder exceed the maximum rate of interest allowed by applicable law, and if any such payment is made by the Borrower or received by the Lender, then such excess sum shall be credited as a payment of principal, unless the Borrower notifies the Lender, in writing, that the Borrower elects to have such excess sum returned to it forthwith. It is the express intent hereof that the Borrower not pay and the Lender not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrower under applicable law. 2.5 PAYMENT. All payments by the Borrower shall be made to the Lender at its address referred to in Section 11.3 hereof in lawful money of the United States of America and in immediately available funds. The Borrower shall establish a special collections account, at a bank satisfactory to the Lender (which may be an Affiliate of the Lender), to collect payments on the Borrower's loans and pay them to the Lender. -8- 2.6 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the following Banking Day, and such extension of time shall be included in the computation of interest. 2.7 EFFECTIVE DATE AND TERMINATION. This Agreement shall be effective on the date set forth in the first paragraph of this Agreement, and shall continue in full force and effect until December 29, 2000, at which time all of the Borrower's Obligations hereunder shall be due. If the Borrower terminates this Agreement other than on December 29, 2000 or any subsequent anniversary thereof, the Borrower shall pay to the Lender an early termination fee equal to $25,000 for any termination before December 29, 1998, $17,000 for any termination after December 29, 1998 and before December 29, 1999, and $8,500 for any termination thereafter not on a December 29. Upon the occurrence of an Event of Default, the Lender shall have the right to terminate this Agreement at any time without notice. This Agreement shall automatically terminate upon the termination of the EBC L&SA. Notwithstanding any termination of this Agreement, the Lender shall retain all of its rights and remedies hereunder (including its security interest in the Collateral), and the Borrower shall continue to be bound by all the terms, conditions, and provisions hereof until all of the Obligations of every nature have been fully disposed of, concluded, finally paid, satisfied, and liquidated. 2.8 STATEMENTS OF ACCOUNT. The Lender shall render a statement of account monthly, and, absent manifest error, such statement rendered by the Lender shall bind the Borrower and the Lender (unless the Borrower or the Lender notifies the other in writing to the contrary within 30 days after the date of each statement rendered; and any such notice shall be deemed an objection only to those items specifically objected to therein). 3. SECURITY INTERESTS As security for the full payment and performance of the Obligations, the Borrower hereby grants to the Lender a security interest in all of the following property and interests in property of the Borrower, whether now owned or existing or acquired or arising in the future or in which the Borrower now has or in the future acquires any rights, and wherever located: (a) all right, title, and interest in any loan made by the Borrower, including all related documentation, and all guarantees, collateral, and other security therefor, (b) all of the Borrower's accounts, inventory, general intangibles, instruments, chattel paper, documents, equipment, and other goods, (c) all accessions to, substitutions for, and replacements, products, and proceeds of any of the foregoing, including insurance proceeds and rental payments, and -9- (d) all books and records (including customer lists, credit files, computer programs, print-outs, and other computer materials and records) pertaining to any of the foregoing. The Borrower shall execute and deliver all supplemental documentation that the Lender from time to time requests to perfect or maintain the perfection of the security interest granted in this Section, and shall pay (or reimburse the Lender for) the cost of filing or recording any such documentation, on demand. 4. CONDITIONS PRECEDENT TO ADVANCES 4.1 DOCUMENTS. The determination by the Lender to make Advances is subject to the Lender's having received the following, in form and substance satisfactory to the Lender: (a) the Guarantee, (b) the Borrower's Secretary's Certificate, (c) the Borrower's CEO's Certificate, (d) certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, (e) the Opinion, (f) appropriate UCC-1 financing statements, (g) the documentation described in Section 5.1 for each loan for which an Advance is made, and (h) such other documentation as the Lender reasonably requests. 4.2 OTHER CONDITIONS PRECEDENT. In addition to the foregoing, any obligation of the Lender to make each Advance is subject to the following conditions precedent: (a) the representations and warranties contained in Section 6 (except 6.13, 6.17, and 6.19) hereof shall be correct on and as of the date of the Advances with the same effect as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; (b) since the date of the statements referred to in Section 6.6 hereof, no materially adverse change shall have occurred in the Borrower's business, prospects, condition, affairs, operations, or assets, nor in its right or ability to carry on its operations; (c) no Default shall exist or would result from the Advance; (d) the Lender in its sole discretion determines that such Advance will be fully secured, as provided for in Section 2.1, and will not cause the outstanding balance of the Loans to exceed the limits described in Section 2.1; and (e) in the case of the first Advance, the Lender shall have received from the Borrower a non-refundable $20,000 closing fee. -10- 5. CLOSING PROCEDURES. 5.1 TRANSFERS OF LOAN DOCUMENTS. Before the Lender funds an Advance for an Eligible Loan, the Borrower shall provide the Lender with a copy of the related SBA Commitment, all original loan documentation for that loan (to the extent requested by the Lender), and such other documentation as Lender reasonably requests, by fax or otherwise. The Borrower shall deliver the original of each underlying note to the Lender by the third Banking Day following the closing for the related Eligible Loan. In addition, if the Borrower requests a Loan for which the Borrowing Base would be insufficient without the Lender's having a perfected security interest in the related underlying note, then if and to the extent that the Lender so requests, the Borrower shall execute and deliver to the Lender the underlying note and all other documents relating to that Eligible Loan, and properly executed assignments of each such document, in recordable form acceptable to the Lender in its sole discretion. The originals of all such collateral, loan, and other documents (other than the originals of each underlying note for the related Eligible Loan, which shall be delivered to the Lender in accordance with the previous paragraph) shall be held by the Borrower unless specifically requested by the Lender. The Lender may hold any such specifically-requested documents until the Lender releases its security interest in such Collateral pursuant to Section 5.2 (unless an Event of Default exists, in which case the Lender shall have its right to pursue the rights and remedies). Neither the Lender's execution of this Agreement nor its taking of any action contemplated or permitted hereunder shall constitute or be deemed to be an assumption of any of the Borrower's liabilities or obligations, and the Lender shall not thereby be deemed to have consented to any reporting requirements of, or other regulations by, the SBA. 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL. Upon receipt of payment in full of any Loan, the Lender shall release its security interest in the related loan, and shall return any related note that it holds. 6. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and to make Advances hereunder, the Borrower represents and warrants the following: 6.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of South Carolina, and has all requisite power and authority (corporate and otherwise) to own and operate its properties and to carry on its business as now conducted and proposed to be conducted; and the Borrower has all requisite power and authority (corporate and otherwise) to execute, deliver, and perform its obligations under this Agreement and all other documents executed in connection therewith. 11 6.2 ENFORCEABILITY. This Agreement, and all other documents executed in connection with the Loans, when delivered for value received, shall constitute valid and binding obligations of the Borrower enforceable in accordance with their terms. 6.3 QUALIFICATION. The Borrower is duly qualified, licensed, or domesticated, and in good standing as a foreign corporation duly authorized to do business, in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary, as follows: Alabama, Florida, Louisiana, Mississippi, North Carolina, and Tennessee. 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC. (a) The Borrower is not in violation of any material term of its articles of incorporation or by-laws, and no event, status, or condition has occurred or exists which upon notice or lapse of time, or both, would constitute a violation thereof; (b) to the best of its knowledge, the Borrower is not in violation of any material term of any mortgage, indenture, or agreement relating to outstanding borrowings to which it is a party, or of any judgment, decree, or order to which it is subject, or of any other instrument, lease, contract, or agreement to which it is a party, or of any statute, or governmental rule or regulation applicable to it, and no event, status, or condition has occurred or exists which upon the giving of notice or lapse of time, or both, would constitute a material violation of any such term; (c) the Borrower's execution, delivery, and performance of this Agreement and the other instruments and agreements provided for by this Agreement to which the Borrower is, or is to be, a party, and the carrying out of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of the Borrower (corporate and otherwise) and will not result in any violation of the articles of incorporation or by-laws of the Borrower, or violate or constitute a default under any term of anything described in clause (b) above, or result in the creation of any mortgage, lien, encumbrance or charge upon any of the properties or assets of the Borrower pursuant to any term of anything described in clause (b) above; and (d) there is no term of anything described in clause (b) above which materially adversely affects or in the future may (so far as the Borrower can now foresee) materially adversely affect the Borrower's business, prospects, condition, affairs, operations, properties, or assets. 6.5 SUBSIDIARIES; PARENT. The Borrower has no Subsidiary. EGI owns all the stock of the Borrower. 6.6 FINANCIAL STATEMENTS. The Borrower has furnished the Lender with copies of the fiscal year-end consolidated and consolidating balance sheet of EGI and its consolidated subsidiaries as at December 31, 1996, and the consolidated and consolidating statements of income and of cash flows of such corporations for such fiscal year, which annual financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants; and copies of such financial statements for each month thereafter through ___________, 1997, duly certified by the chief financial officer of EGI. Such financial statements are complete and have been prepared in accordance with GAAP applied on a basis consistent with the accounting principles applied in the preceding fiscal period, and present fairly the financial condition of EGI as at the dates -12- indicated and the results of the operations of EGI for such periods. Such financial statements show all liabilities (direct, indirect, and contingent, including guarantee and surety obligations) of the Borrower and the Guarantor as of the respective dates thereof, except those arising in the ordinary course of business since the date of the last of such financial statements. 6.7 CHANGES IN FINANCIAL CONDITION. Since the date of the annual financial statements referenced in Section 6.6, there has been no change in the assets, liabilities, or financial condition of the Borrower or the Guarantor from that set forth or reflected in the fiscal year-end balance sheet referred to in Section 6.6, other than changes in the ordinary course of business, none of which has been, either in any case or in the aggregate, materially adverse. 6.8 TAX RETURNS AND PAYMENTS. All federal, state, and local tax returns and reports of the Borrower or the Guarantor required to be filed have been filed, and all taxes, assessments, fees, and other governmental charges upon the Borrower or the Guarantor, or upon any of the properties, assets, incomes, or franchises of either, which are due and payable in accordance with such returns and reports, have been paid, other than those presently (a) payable without penalty or interest, or (b) contested in good faith and by appropriate and lawful proceedings prosecuted diligently. The aggregate amount of the taxes, assessments, charges, and levies so contested is not material to the condition (financial or otherwise) and operations of the Borrower or the Guarantor. The charges, accruals, and reserves on the books of the Borrower and the Guarantor in respect of federal, state, and local taxes for all fiscal periods to date are adequate, and the Borrower knows of no unpaid assessment for additional federal, state, or local taxes for any such fiscal period or of any basis therefor. 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC. The Borrower has (a) good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the fiscal year-end balance sheet referred to in Section 6.6, except properties and assets disposed of since the date of such balance sheet in the ordinary course of business, and (b) good and marketable title to its leasehold estates and such properties, assets, and leasehold interests are subject to no covenant, restriction, easement, right, lease, or Lien, other than Permitted Liens. 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC. The Borrower owns or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, and licenses, and rights with respect thereto, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others, and, in each case, subject to no Lien, lease, license, or option, except as specified on Schedule 2. Each such asset or agreement is in full force and effect, and the holder thereof has fulfilled and performed all of its obligations with respect thereto. No event has occurred or exists which permits, or after notice or lapse of time or both would permit, revocation or termination, or which materially adversely affects or in the future may materially adversely affect, the rights of such holder thereof with respect thereto. No other license or franchise is necessary to the operations of the business of the Borrower as now conducted or proposed to be conducted. The Borrower does not do business (and has not done business since the date that it was formed) under any trade names or tradestyles other than those listed on Schedule 2. -13- 6.11 LITIGATION, ETC. Except as specified on Schedule 3, there are no actions, proceedings, or investigations, however described or denominated, pending or (to the knowledge of the Borrower) threatened (or any basis therefor known to the Borrower) which, either in any case or in the aggregate, might result in any materially adverse change in the Borrower's or the Guarantor's business, prospects, condition, affairs, operations, properties, or assets, or in its right or ability to carry on its operations as now conducted or proposed to be conducted, or might result in any material liability on the part of the Borrower or the Guarantor, and none which questions the validity of this Agreement or any of the other instruments or agreements provided for by this Agreement or of any action taken or to be taken in connection with the transactions contemplated hereby or thereby. 6.12 ADVERSE DEVELOPMENTS. Since the date of the latest financial statements referred to in Section 6.6, neither the financial condition, business operations, affairs, or prospects of the Borrower or the Guarantor, nor the properties or assets of either, have been materially adversely affected in any way as the result of any legislative or regulatory change, or any revocation, amendment, or termination, or any pending or threatened such action, or any franchise or license or right to do business, or any fire, explosion, flood, drought, windstorm, earthquake, accident, casualty, labor trouble, riot, condemnation, requisition, embargo or Act of God or the public enemy or of armed forces, or otherwise, whether or not insured against. 6.13 DISCLOSURE. To the best of the Borrower's knowledge, neither this Agreement nor the financial statements referred to in Section 6.6 nor any other document, certificate or statement furnished to Lender by or on behalf of the Borrower or the Guarantor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 6.14 MARGIN SECURITIES. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of the Loans has been or will be used, directly or indirectly, to purchase or carry any margin securities within the meaning of Regulation U. 6.15 INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.16 ERISA. The Borrower, the Guarantor, and each Plan is in compliance with those portions of ERISA and the Code pertaining to each Plan. No Plan that is subject to the minimum funding standards of ERISA or the Code has incurred any accumulated funding deficiency within the meaning of ERISA or the Code. Neither the Borrower nor the Guarantor has incurred, and no facts lead the Borrower to believe it or the Guarantor will incur, any liability to the Pension Benefit -14- Guaranty Corporation in connection with any Plan. The assets of each Plan that is subject to Title IV of ERISA are sufficient to provide the benefits under such Plan which the Pension Benefit Guaranty Corporation would guarantee the payment thereof if such Plan terminated, and are also sufficient to provide all other benefits due under the Plan. No Reportable Event has occurred and is continuing with respect to any Plan. No Plan nor any trust created under a Plan, nor any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which would subject any Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust, to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code. Neither the Borrower nor the Guarantor is required to contribute to or is contributing to a "multiemployer pension plan" (as defined in the Multiemployer Pension Plan Amendments Act of 1980), and neither the Borrower nor the Guarantor has any "withdrawal liability" (as defined in such Act) to any multiemployer pension plan. 6.17 LOCATIONS. The Borrower's principal place of business and chief executive office is located at its address specified in Section 11.3. 6.18 SOLVENCY. The Borrower is Solvent. 6.19 NAME CHANGE; MERGER. During the past five years, the Borrower has not changed its corporate name or been party to a merger or consolidation, except as specified in Schedule 2. 7. AFFIRMATIVE COVENANTS The Borrower covenants, for so long as any Loan is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 7.1 INSURANCE. The Borrower shall insure its property against all risks to which it is exposed, including loss, damage, fire, theft, and all other such risks, and in such amounts, as would be prudent for similar businesses similarly situated, including loss, damage, fire, theft, and all other such risks, and in such amounts, with such companies, under such policies, and in such form as shall be satisfactory to the Lender. In addition, the Borrower will maintain comprehensive public liability and worker's compensation insurance and such other insurance against loss or damage as are customarily carried by corporations similarly situated, with reputable insurers, in such amounts, with such deductibles, and by such methods as shall be adequate and in any event in amounts of not less than the amounts generally maintained by other companies engaged in similar businesses. 7.2 TAXES AND LIABILITIES. The Borrower shall pay and discharge, when due, all taxes, assessments, and governmental charges or levies imposed upon it or its income or profits, or against its properties, and all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; PROVIDED, that the Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim so long as it is being contested in good faith and by appropriate -15- and lawful proceedings diligently pursued and with respect to which adequate reserves have been set aside on its books. 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC. The Borrower will deliver to Lender: (a) within 30 days after the end of each of the first 11 months in each fiscal year of the Borrower a consolidating balance sheet of the Borrowing Group and their consolidated subsidiaries (including the Borrower), as at the end of such period and statements of income and of cash flows of such corporations for such period and for the year-to-date period then ended, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, in form and detail as reasonably required by the Lender, and certified as complete and correct by the chief financial officers of the Borrowing Group, together with a certificate by such officers stating that, as of the date of such certification, no Default exists (or, if any Default exists, specifying the nature thereof and what action the Borrower has taken, is taking or proposes to take with respect thereto); (b) within 90 days after the end of each fiscal year, a consolidated balance sheet of EGI and a consolidating balance sheet of EGI and its consolidated subsidiaries (including the Borrower) as at the end of such fiscal year, and statements of profit and loss, shareholders' equity, and changes in cash flows of such corporations for such year, setting forth in each case in comparative form the figures for the previous fiscal year in form and detail as reasonably required by the Lender, and accompanied by an unqualified report and opinion on such financial statements (including on the supplemental schedules) from KPMG Peat Marwick LLP (or other certified public accountants satisfactory to the Lender), which report and opinion shall be prepared in accordance with GAAP, together with a certificate by the chief financial officer of EGI of the character specified in Section 7.3(a), and a certificate by such accountants stating whether or not their examination has disclosed the occurrence or existence of any Default, and, if their examination has disclosed a Default, specifying the nature and period of existence thereof, and demonstrating as at the end of such accounting period in reasonable detail compliance during such accounting period with Sections 6.18, 7.6, 7.13, 7.14, 7.15, 8.10, 8.11, 8.13, and 8.14; (c) copies of all other statements or reports prepared by or supplied to the Borrower by its accountants or auditors reflecting the financial position of the Borrower; (d) within 30 days after the end of each fiscal year, Projections for the next three years, year-by-year; (e) within 90 days after the end of each fiscal year, financial statements, of the type described in Section 7.3(b), for the Guarantor; and (f) with reasonable promptness, such other data and information as the Lender from time to time reasonably requests. -16- 7.4 INSPECTION. The Borrower will permit authorized representatives designated by the Lender (a) to visit and inspect any of the properties of the Borrower, including its books and records (and to make extracts therefrom), and to discuss its affairs, finances, and accounts with its officers, directors, employees, and accountants, all at such reasonable times and as often as the Lender reasonably requests, and (b) to attend the Borrower's credit committee meetings. The Borrower will at all times keep accurate and complete records with respect to the Collateral. 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS. The Borrower shall at all times preserve and maintain in full force and effect its corporate existence, powers, rights, licenses, permits, and franchises in the jurisdiction of its incorporation, and shall operate in full compliance with all applicable laws, statutes, regulations, certificates of authority, and orders in respect of the conduct of its business, and shall qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or appropriate in view of its business and operations. 7.6 USE OF PROCEEDS. The proceeds of the Loans will be used solely for repaying existing debt, and for general corporate purposes. No part of the proceeds will be used to cause a violation of Section 6.14. 7.7 NOTICE OF DEFAULT. The Borrower shall promptly notify the Lender in writing upon the occurrence or existence of any known Default, and shall provide to the Lender with such written notice a detailed statement by a responsible officer of the Borrower of all relevant facts and the action being taken or proposed to be taken by the Borrower with respect thereto. 7.8 MAINTENANCE OF PROPERTIES. The Borrower shall maintain or cause to be maintained in good repair, working order, and condition all properties used or useful in its business, and from time to time will make or cause to be made all appropriate repairs, renewals, and replacement thereof. The Borrower will not do or permit any act or thing which might impair the value or commit or permit any waste of its properties or any part thereof or permit any unlawful occupation, business, or trade to be conducted on or from any of its properties. 7.9 NOTICE OF ERISA DEVELOPMENTS. As soon as possible and in any event within 30 days after the Borrower knows or has reason to know of any Reportable Event or "prohibited transaction" (as defined in Section 6.16) with respect to any Plan or that the Pension Benefit Guaranty Corporation or the Borrower has instituted or will institute proceedings under ERISA to terminate a Plan subject to Title IV of ERISA, or a partial termination of a Plan has or is alleged to have occurred, or any litigation regarding a Plan or naming the trustee of a Plan or the Borrower or the Guarantor with respect to a Plan is threatened or instituted, the Borrower shall provide to the Lender the written statement of the chief financial officer of the Borrower setting forth details of such Reportable Event, prohibited transaction, termination proceeding, partial termination, or litigation and the action being or proposed to be taken with respect thereto, together with copies of the notice of such Reportable Event or any other notices, applications, or forms submitted to the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any notices or correspondence received from the Pension -17- Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any pleadings, notices, or other documents relating to such litigation. 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE. The Borrower shall promptly give to the Lender written notice (a) of all threatened or actual actions, suits, investigations, or proceedings by or before any court, arbitrator, or governmental department, commission, board, bureau, agency or other instrumentality (state, federal, or foreign), affecting the Borrower or the Guarantor or the rights or other properties of the Borrower or the Guarantor, except any litigation or proceedings which is not likely to affect the financial condition of the Borrower or the Guarantor or to impair the right or ability of the Borrower or the Guarantor to discharge the Obligations; (b) of any materially adverse change in the condition (financial or otherwise) of the Borrower or the Guarantor; and (c) of any seizure or levy upon any part of any of the Borrower's or the Guarantor's properties under any process or by a receiver. 7.11 PAYMENT OF LOANS. The Borrower shall punctually pay the principal and interest on the Loans, and all other sums falling due hereunder or under any other documents executed in connection with the Loans, in accordance with the terms hereof and thereof. 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION. The Borrower shall notify the Lender immediately of each change in the Borrower's corporate name and trade names, in the location of the Borrower's principal place of business, in each location where any of the Collateral is kept, and the office where the Borrower's books and records are kept. 7.13 TANGIBLE NET WORTH. The Borrowing Group shall maintain at all times a Tangible Net Worth of not less than $8,000,000 during 1997, and continuing to increase by $1,000,000 each fiscal year thereafter. 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. The Borrowing Group shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 6 to 1. 7.15 INTEREST COVERAGE RATIO. The Borrowing Group shall maintain (x) for the four-quarter period concluding at the end of each of the first three fiscal quarters in each fiscal year of the Borrowing Group, a ratio of EBIT to Interest on Senior Funded Debt of at least 1.15 to 1, and (y) for the four-quarter period concluding at the end of each fiscal year of the Borrowing Group, a ratio of EBIT to Interest on Senior Funded Debt of at least 1.5 to 1. 7.16 EGI SUBSIDIARY. The Borrower shall at all times be wholly-owned Subsidiary of EGI. 7.17 COLLATERAL REPORTING. The Borrower shall provide to the Lender, on a weekly basis, a borrowing base certificate in form acceptable to the Lender. The Borrower shall provide to the Lender such other collateral reports as the Lender may request from time to time. -18- 8. NEGATIVE COVENANTS. The Borrower covenants, for so long as any of the Loans is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 8.1 DEBT. The Borrower will not obtain or attempt to obtain from any party (other than for the purpose of repaying the Obligations in full) any loans, advances, or other financial accommodations or arrangements other than (a) the Obligations, (b) debt underlying any purchase money security interest permitted by Section 8.2 not to exceed, in aggregated principal amount, $100,000 minus any such debt owed by EBC or EFC at any one time outstanding, (c) unsecured borrowings not to exceed in the aggregate $500,000 minus any such debt owed by EBC or EFC at any one time outstanding, (d) unsecured trade credit, incurred in the ordinary course of business, having commercially customary terms, and (e) borrowings from EBC, EFC, EGI or Carolina Investors, Inc. that are fully subordinated to the Obligations. 8.2 LIENS. The Borrower shall not create, incur, assume, or suffer to exist any Lien of any kind upon any of its property or assets (including the Collateral), whether now owned or hereafter acquired, except (a) Liens in favor of the Lender; (b) Liens existing on the date hereof and specified on Schedule 1; (c) Liens on property securing all or part of the purchase price of such property if (1) such Lien is created contemporaneously with the acquisition of such property, (2) such Lien attaches only to the specific item(s) of property so acquired, (3) such Lien secures only the debt incurred to acquire such property, and (4) the debt secured by such Lien is permitted by Section 8.1; and (d) Liens for taxes, or for other claims, that are not then due. 8.3 GUARANTEES. The Borrower shall not guarantee, endorse, become surety with respect to, or otherwise become directly or contingently liable for or in connection with the obligations of any other Person, except by endorsement of negotiable instruments for deposit or collection and similar transactions in the ordinary course of business. 8.4 PLAN LIABILITIES. The Borrower shall not permit the aggregate present value of accrued benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis, or permit the aggregate present value of vested benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis. 8.5 FISCAL YEAR. The Borrower will not change its fiscal year from a year ending on December 31 without prior written notice to the Lender. 8.6 OTHER TRANSACTIONS. The Borrower will not engage in any transaction with any of its officers, directors, employees, or Affiliates, except for an "arms-length" transaction on -19- terms no more favorable to the other party than would be granted to an unaffiliated Person, which transaction shall be approved by its disinterested directors and shall be disclosed in a timely manner to the Lender before being consummated. 8.7 MERGER; SUBSIDIARY; ETC. The Borrower will not merge or consolidate with any other corporation, form or acquire any Subsidiary, or issue any share of capital stock. 8.8 SALE OF ASSETS. The Borrower will not sell, lease or otherwise transfer all or any substantial part of its assets material to its operations, except in the ordinary course of its business; PROVIDED, that it may in any calendar year dispose of items of equipment having an aggregate market value of not more than $50,000, minus any such equipment disposed of by EBC or EFC, if the Borrower uses the proceeds of such disposition to acquire property of a similar nature. 8.9 CHANGES IN BUSINESS. The Borrower will not engage in any business other than the business presently conducted by it on the date of this Agreement and business of substantially the same type or directly related thereto. 8.10 DIVIDENDS AND REDEMPTIONS. The Borrower will not declare or pay any dividend (other than a dividend payable solely in common stock of the Borrower) on any share of any class of its capital stock, or apply any of its property or assets to the purchase, redemption, or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower. 8.11 LOANS. The Borrower will not make any loans or advances to or extend any credit to any Person except (a) the extension of trade credit in the ordinary course of business, (b) advances to employees not to exceed to any one employee a total of $5,000 minus any advances to such employee by EBC or EFC, and (c) loans to Guarantor. 8.12 PLEDGE OF CREDIT. The Borrower will not pledge the Lender's credit for any purpose whatsoever. 8.13 INVESTMENTS. The Borrower shall not purchase, acquire, or otherwise invest in any Person except: (a) Eligible Loans, (b) direct obligations of the United States of America maturing within one year from the acquisition thereof, (c) certificates of deposit issued by, or investment accounts in, banks or financial institutions having a net worth of not less than $50,000,000, (d) commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (e) overnight repurchase agreements issued by the Lender or any corporate Affiliate of the Lender's, or (f) assets received from foreclosing on a loan. 8.14 CAPITAL EXPENDITURES. The Borrowing Group shall not make or incur Capital Expenditures in excess of $500,000 during any fiscal year of the Borrower, unless the Lender gives its prior written consent (which shall not be unreasonably withheld). -20- 9. POWER OF ATTORNEY. The Borrower hereby appoints and constitutes the Lender as its attorney-in-fact to do any of the following if an Event of Default exists: to receive, open, and dispose of all mail addressed to the Borrower pertaining to Collateral (or appearing to the Lender possibly to pertain to Collateral); to notify the postal authorities to change the address and delivery of mail addressed to the Borrower to such address as the Lender shall designate; to endorse the Borrower's name upon any notes, acceptances, checks, drafts, money orders, and other forms of payment that come into the Lender's possession, and to deposit or otherwise collect the same; to sign the Borrower's name on any document relating to any Collateral; to execute in the name of the Borrower any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this Agreement. The Borrower hereby waives notice of presentment, protest, and dishonor of any instrument so endorsed by the Lender. All the Lender's acts as attorney-in-fact are hereby authorized, ratified, and approved by the Borrower, and the Borrower agrees that, as attorney-in-fact, the Lender shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law, except to the extent of loss or damage caused directly and primarily by the Lender's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable so long as this Agreement remains in effect or any of the Obligations remains outstanding. 10. REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, the entire outstanding principal amount of the Loans, together with all accrued but unpaid interest thereon, and all other of the Obligations shall, at the option of the Lender, immediately become absolute and due and payable, without presentation, demand of payment, protest, notice for demand of payment, protest and notice of nonpayment, or any other notice of any kind with respect thereto, all of which are hereby expressly waived by the Borrower to the full extent permitted by law. The Lender may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and other applicable law in Georgia or any other applicable jurisdiction. The Borrower agrees, after the occurrence of any Event of Default, immediately to assemble at the Borrower's expense all the Collateral at a convenient place acceptable to the Lender, and to surrender such property to the Lender. The Borrower agrees to pay all costs that the Lender pays or incurs to collect the Obligations or enforce its rights hereunder. The Borrower agrees that the Lender may charge the Borrower's account for, and that the Borrower will pay on demand, all costs and expenses, including 15% of the total amount involved as attorneys' fees (not to exceed the amount of attorneys' fees actually incurred), incurred: (i) to liquidate any Collateral, (ii) to obtain or enforce payment of any Obligations, or (iii) to prosecute or defend any action or proceeding either against the Lender or against the Borrower concerning any matter growing out of or connected with this Agreement or any Receivable or any Obligation. The Borrower agrees that the Lender may apply any proceeds from disposing of the Collateral first to any security interest(s), lien(s), or encumbrance(s) prior to the Lender's security interest. -21- The Lender shall be entitled to hold or set off any sums and all other property of the Borrower's, at any time to the credit of the Borrower or in the possession of the Lender, whether by pledge or otherwise, or upon or in which the Lender may have a lien or security interest. Recourse to security shall not at any time be required, and the Borrower shall at all times remain liable for the repayment to the Lender of all Obligations in accordance with their terms, regardless of the existence or non-existence of any Event of Default. 11. MISCELLANEOUS. 11.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Lender in exercising any right, power, or remedy hereunder, or under any other document or agreement given by the Borrower or received by the Lender in connection herewith, shall operate as a waiver thereof, and no waiver shall be valid unless in writing signed by the Lender (and then only to the extent therein stated); nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy hereunder or thereunder. The remedies herein and therein provided are cumulative and not exclusive of any remedies provided by law or in equity. 11.2 AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of this Agreement or of any other document or agreement given by the Lender or received by the Borrower in connection herewith, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless it is in writing and signed by the Lender (and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given). No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 11.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, and other communications provided for hereunder, other than routine communications in the ordinary course of business, shall be in writing (including telecopies) and mailed, telecopied, or delivered as follows: if to the Borrower: Emergent Commercial Mortgage, Inc. 15 S. Main Street, Suite 750 Greenville, South Carolina 29601 Attention: Kevin J. Mast Fax: (803) 271-8374 -22- with a copy to: Cary H. Hall, Jr. Wyche, Burgess, Freeman & Parham 44 East Camperdown Way Greenville, South Carolina 29601 Fax: (803) 235-8900 if to the Lender: NationsBank, N.A. Business Credit Division P. O. Box 3406 Atlanta, Georgia 30302-3406 Attention: John F. Bohan Fax: (404) 607-6439 or, as to each party, at such other address as it designates in a written notice to the other party complying as to the delivery with the terms of this Section. Except as otherwise expressly provided in this Agreement, all such notices, requests, demands, and other communications shall, when mailed or telecopied, be effective two Banking Days after being deposited in the mails (postage paid) or when sent over a telecopier owned or operated by a party hereto with an answerback response set forth on the sender's copy of the document, addressed as aforesaid, and otherwise shall be effective upon receipt. 11.4 COSTS, EXPENSES, AND TAXES. The Borrower shall pay to the Lender, on demand, all costs and expenses paid or incurred by the Lender in connection with the preparation, reproduction, execution, delivery, administration, or enforcement of this Agreement and other instruments and documents from time to time delivered in connection with this Agreement, including the fees and expenses of counsel for the Lender, and in connection with the Lender's initial evaluation of the line of credit contemplated by this Agreement (including travel and field exam expenses). In addition, the Borrower shall pay any and all stamp and other taxes and recording and filing fees payable or determined to be payable in connection with the execution and delivery of this Agreement and all other instruments and documents from time to time delivered in connection with this Agreement, and shall save and hold harmless the Lender from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes or fees. 11.5 COMMERCIAL TRANSACTION. THE BORROWER HEREBY ACKNOWLEDGES THAT THE OBLIGATIONS AROSE OUT OF A "COMMERCIAL TRANSACTION" (AS DEFINED IN O.C.G.A. ss. 44-14-260(1), CONCERNING FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY), AND AGREES THAT AFTER ANY EVENT OF DEFAULT (AS "Event of Default" IS DEFINED IN SECTION 1.1), -23- THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OR HEARING. THE BORROWER KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE OR POSTING OF A BOND BY THE LENDER PRIOR TO SEIZURE BY THE LENDER (OR THE LENDER'S TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST) OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE BORROWER AS A "WAIVER" AS DEFINED IN O.C.G.A. ss. 44-14-260(3) (RELATING TO FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY). 11.6 SUCCESSORS AND ASSIGNS. All of the terms of this Agreement, and each of the documents and agreements executed and delivered pursuant to this Agreement, shall bind, benefit, and be enforceable by the successors and assignees of the parties hereto, whether so expressed or not. The Borrower shall not assign or transfer this Agreement, or any of its rights hereunder, without the prior written consent of the Lender. 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, covenants, and agreements contained herein or made in writing by the Borrower in connection herewith shall survive the execution and delivery of this Agreement and any and all other documents and instruments relating to or arising out of any of the foregoing. 11.8 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 11.9 HEADINGS. The headings in this Agreement are for convenience of reference only, and are not a substantive part of the agreement. 11.10 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 11.11 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. In case any one or more of the provisions in this Agreement shall for any reason be held to be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.12 COUNTERPARTS. This Agreement may be executed in separate counterparts. 11.13 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS SPECIFICALLY STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF GEORGIA -24- (DISREGARDING ANY CONFLICTS-OF-LAWS RULE THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION). THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN ATLANTA, GEORGIA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR AGREEMENTS DESCRIBED OR CONTEMPLATED HEREIN, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH UNITED STATES FEDERAL OR STATE COURT. SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED ON THE BORROWER IN ANY SUCH ACTION OR PROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWER IN ACCORDANCE WITH SECTION 11.3 HEREOF. 11.14 WAIVER OF TRIAL BY JURY11.14 WAIVER OF TRIAL BY JURY. THE BORROWER AND THE LENDER EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO TRANSACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS DESCRIBED OR CONTEMPLATED HEREIN. -25- IN WITNESS WHEREOF, the Borrower and the Lender have executed this Loan and Security Agreement. EMERGENT COMMERCIAL MORTGAGE, INC. [Seal] By: (Signature Illegible) Title: CEO Attest: By: (Signature Illegible) Secretary Accepted this 13th day of June, 1997, in Atlanta, Georgia. NATIONSBANK, N.A. By: (Signature Illegible) Title: VP EXHIBIT A BORROWER'S SECRETARY'S CERTIFICATE FOR THE BENEFIT OF NATIONSBANK, N.A. I, Kevin J. Mast, Secretary of Emergent Commercial Mortgage, Inc. (the "BORROWER"), a South Carolina corporation, hereby certify that: 1. Attached hereto as Exhibit 1 is a certified copy of the articles of incorporation of the Borrower as originally filed, together with all amendments thereto. 2. Attached hereto as Exhibit 2 is a true and correct copy of the by-laws of the Borrower. Those by-laws have not been amended, modified, or revoked, and are in full force and effect as of the date hereof. 3. Attached hereto as Exhibit 3 is a good standing certificate for the Borrower issued by the South Carolina Secretary of State on ______________, 1997. 4. The Borrower has since the date of the certificate referred to in paragraph 3 above through the date hereof remained in good standing under the laws of the state of South Carolina. 5. No suit or proceeding for the dissolution or liquidation of the Borrower has been instituted or is now threatened. 6. Attached hereto as Exhibit 4 is a true and complete copy of resolutions of the Board of Directors of the Borrower, adopted at a meeting duly called and held on ______________, 1997, at which meeting a quorum for the transaction of business was present and acting throughout. The corporate action in adopting those resolutions was duly taken at that meeting in accordance with the provisions of law and of the Borrower's articles of incorporation and by-laws, and those resolutions are now in full force and effect and have not been modified in any respect. 7. The resolutions referred to in paragraph 6 authorized the Borrower and its officers referred to therein to execute and deliver, and to do all things necessary or appropriate for the payment and performance of all the Borrower's obligations under, the Amended and Restated Loan and Security Agreement (the "AGREEMENT") dated as of __________________, 1997, between NationsBank, N.A. (the "LENDER") and the Borrower, and all certificates, agreements and other documents to be executed and delivered to the Lender by the Borrower pursuant to the Agreement, and pursuant to the specific resolutions referred to in paragraph 6. 8. The following persons have been duly elected, have duly qualified, as of the date of the execution of the Agreement were, and on the date hereof are, officers of the Borrower, holding the offices set opposite their names below, and the signatures set opposite their names below are their genuine signatures: Name Title Signature Keith B. Giddens Chief Executive Officer __________________ Kevin Mast Executive Vice __________________ Pres., Chief Financial Officer, Secretary and Treasurer A. Scott Lining Senior Vice President __________________ and Controller IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the Borrower's corporate seal on _________________, 1997. __________________ Secretary [Seal] - 2 - EXHIBIT 4 EMERGENT COMMERCIAL MORTGAGE, INC. ---- BOARD OF DIRECTORS' RESOLUTIONS ---- RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to borrow from NationsBank, N.A. ("NATIONSBANK"), from time to time, on behalf of this Corporation, such sums as they or any of them may deem necessary or desirable in connection with the operation of the business of this Corporation, upon such terms and conditions as shall be obtained through negotiation with NationsBank, and to execute one or more or financing agreements and promissory notes in respect thereto in the name of this Corporation for the payment of such amounts so borrowed, and further to extend, renew, renegotiate, refinance, or otherwise modify such terms and conditions by agreement with NationsBank. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to request, from time to time, on behalf of this Corporation, as they deem necessary or desirable for the operation of the business of this Corporation, that NationsBank make advances and overadvances to this Corporation, such advances and overadvances to become subject to the terms and conditions of any agreement with regard to the loan financing of accounts receivable existing at the time of such request or any modification, extension, renewal, or renegotiation thereof. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed, from time to time, on behalf of this Corporation, to secure any such loans, advances, overadvances, or other indebtedness to NationsBank however arising, by pledging, or by granting full lien rights and full security title and security interest in and to, any and all of the assets of this Corporation, both real and personal, and such officers are jointly and severally authorized to execute any and all instruments necessary or desired by NationsBank in any manner as may now or hereafter be recognized by the laws of the United States or any state, or of any foreign state. FURTHER RESOLVED, that any such officers of this Corporation be and are hereby jointly and severally authorized and directed, on behalf of this Corporation, to do such other things and to execute such other documents as may be necessary or desirable to effect the foregoing transactions, including the execution of financing statements and such other notices or instruments as may be necessary or requested by NationsBank. FURTHER RESOLVED, that all acts and deeds of any officer of this Corporation heretofore performed on behalf of this Corporation in entering into, executing, performing, carrying out, or otherwise pertaining to the arrangements and intentions authorized by these resolutions be and they hereby are ratified, approved, confirmed, and declared binding upon this Corporation. FURTHER RESOLVED, that the Secretary of this Corporation shall certify to NationsBank the names of the presently duly elected and qualified officers of this Corporation and shall from time to time hereafter as each change in identity of those officers is made, immediately certify such change to NationsBank, and NationsBank shall be fully protected in relying on such certification(s) (or the absence thereof), and shall be indemnified and saved harmless by this Corporation from any claim, demand, expense, loss, or damage resulting from or growing out of honoring the signature of any officer so certified or for refusing to honor any signature not so certified. FURTHER RESOLVED, that the foregoing resolutions shall remain in full force and effect until the close of business on the banking day after written notice of their amendment or rescission shall have been received by NationsBank and that receipt of such notice shall not affect any action taken by NationsBank prior thereto. FURTHER RESOLVED, that the Secretary of this Corporation be, and hereby is, authorized and directed to certify to NationsBank the foregoing resolutions and that the provisions thereof are in accordance with the provisions of law and of the articles of incorporation and by-laws of this Corporation. -2- EXHIBIT B BORROWER'S CEO'S CERTIFICATE FOR THE BENEFIT OF NATIONSBANK, N.A. I, Keith B. Giddens, Chief Executive Officer of Emergent Commercial Mortgage, Inc. (the "BORROWER"), a South Carolina corporation, do hereby certify, pursuant to Section 4.1 of the Amended and Restated Loan and Security Agreement (the "AGREEMENT") between NationsBank, N.A. (the "LENDER") and the Borrower, dated as of __________________, 1997, that Kevin J. Mast has been duly elected, has duly qualified, as of the date of the execution of the Agreement was, and on the date hereof is, the Secretary of the Borrower, and that the signature appearing below is a true specimen of his signature. Kevin J. Mast, Secretary __________________, 1997. Keith B. Giddens, Chief Executive Officer EXHIBIT C [To Be Retyped on Letterhead of Counsel to the Borrower] ________________, 1997 NationsBank, N.A. P.O. Box 3406 Atlanta, Georgia 30302-3406 Re: Emergent Commercial Mortgage, Inc. Ladies and Gentlemen: We have acted as counsel to Emergent Commercial Mortgage, Inc. (the "BORROWER"), a South Carolina corporation, in connection with its execution and delivery of the _______________, 1997 Amended and Restated Loan and Security Agreement (the "LOAN AGREEMENT") between it and you, and certain related documents. Unless otherwise specified in this opinion letter, the terms used herein have the same meanings as in the Loan Agreement. We also have acted as counsel to Emergent Group, Inc. in connection with its execution and delivery of the Guarantee. In so acting, we have examined the Loan Agreement and the Guarantee, and originals or copies of all other documents that we deemed relevant and necessary as a basis for the opinions hereinafter set forth. Based upon the foregoing, we are of the opinion that: (1) The Borrower is a corporation duly organized and validly existing in good standing under the laws of South Carolina, and has all requisite power and authority to conduct its business, to own and operate its properties, and to execute, deliver, and perform all of its obligations under the Loan Agreement. The Borrower has no Subsidiary. The Borrower is duly qualified, licensed, or domesticated and in good standing as a foreign corporation duly authorized to do business in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary (as set forth in Section 7.3 of the Loan Agreement). (2) The Borrower's execution, delivery, and performance of the Loan Agreement have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of shareholders of the Borrower or violate the articles of incorporation, by-laws, or Securities of the Borrower, (b) violate any provision of any law, rule, or regulation (including Regulation X of the Board of Governors of the Federal Reserve System) of the United States or of South Carolina, or, to the best of our knowledge, any order, judgment, injunction, decree, determination, or award of any court, arbitrator, or governmental department, agency, or other instrumentality, (c) to the best of our knowledge, result in a breach of or constitute a default under any agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (d) result in, or require, to the best of our knowledge, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Borrower (other than the Liens created by the Loan Agreement). To the best of our knowledge, the Borrower is not in violation of any provision of any of the items described in clause (b) of this paragraph or in default under any provision of any of the items described in clause (c) of this paragraph. (3) No authorization, consent, approval, license, or exemption of, or filing or registration with, any court or governmental department, agency, or other instrumentality of the United States or of South Carolina is or will be necessary to the Borrower's valid execution, delivery, or performance of the Loan Agreement or for the payment to the Lender of all sums due and payable thereunder. (4) The Loan Agreement has been duly executed and delivered by the Borrower, and constitute the Borrower's legal, valid, and binding obligation, enforceable against the Borrower in accordance with its terms. (5) To the best of our knowledge, there are no actions, suits, or proceedings pending or threatened against or affecting the Borrower of the Guarantor or the properties of the Borrower or the Guarantor before any court, arbitrator, or governmental department, commission, board, bureau, agency, or other instrumentality (state, federal, or foreign) which, if determined adversely to the Borrower or the Guarantor, would have a materially adverse effect on the financial condition, properties, or operations of the Borrower or the Guarantor, or create a Lien on any property of the Borrower or the Guarantor. (6) You should perfect all the security interests granted under the Loan Agreement (in Collateral for which a security interest can be perfected by filing UCC-1 financing statements) by filing a UCC-1 financing statement in the attached form with the South Carolina Secretary of State. Upon the filing of such financing statement, you will have a perfected first-priority security interest in such Collateral, and no further recording or filing in South Carolina or any other jurisdiction is necessary or advisable in order to establish and perfect such first-priority security interest. -2- (7) The Guarantee has been duly authorized, executed, and delivered by the Guarantor, and constitutes the Guarantor's legal, valid, and binding obligations, enforceable against the Guarantor in accordance with its terms. This opinion is limited to the laws of the United States and of South Carolina. The opinions in paragraphs nos. 4 and 7 are given as if the laws of South Carolina governed the Loan Agreement and the Guarantee, despite their express choice of Georgia law as the law governing their construction and interpretation. No opinion is given as to the validity of the choice of law in the Loan Agreement and the Guarantee. Our opinions set forth herein as to the validity, binding effect, and enforceability of the Loan Agreement and the Guarantee are specifically qualified to the extent that the validity, binding effect, or enforceability of any obligations of the Borrower and the Guarantor thereunder or the availability or enforceability of any of the remedies provided therein, may be subject to or limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, and other statutory or decisional laws, heretofore or hereafter enacted or in effect, affecting the rights of creditors generally to the extent the same may constitutionally be applied including, without limitation, decisional or statutory law concerning recourse by creditors to security in the absence of notice of a hearing; (ii) the exercise of judicial or administrative discretion in accordance with general equitable principles; (iii) the possible unenforceability of any provision requiring or in effect requiring that waivers or amendments of any provision of the Loan Agreement or the Guarantee, or any related document, may be effected only in writing; (iv) the possible unenforceability of provisions imposing increased interest rates or late payment charges upon delinquency in payment or default, to the extent that any such provision is deemed a "penalty"; (v) limitations imposed by rules and statutes regarding forum, venue, pleading, service of process, qualification to do business, and statutes of limitation; or (vi) limitations on the availability or enforceability of the remedies of specific performance or injunctive relief and of waivers contained in the Loan Agreement or the Guarantee, all of which may be limited by equitable principles or applicable laws, rules, regulations, court decisions, and constitutional requirements. All opinions rendered herein are limited to the existing laws of the State of South Carolina and laws of the United States of America, all as in effect on the date hereof, and we express no opinion as to any other laws, rules, or regulations of such jurisdictions or matters governed by such laws, rules, or regulations; nor do we undertake, by delivery hereof or otherwise, to advise you of any changes in such laws, rules, or regulations. -3- This opinion is made as of the date hereof, and we undertake no (and hereby disclaim any) obligation to advise you of any change in any matter set forth herein. This opinion is limited to the matters expressly set forth herein and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion is solely for your benefit in connection with the Loan Agreement and the Guarantee and may not be relied upon in any manner by any other person. Very truly yours, WYCHE, BURGESS, FREEMAN & PARHAM, P.A. By: Cary H. Hall, Jr. SCHEDULE 1 Liens NONE SCHEDULE 2 Trademarks, Tradenames, Name Changes, etc. NONE SCHEDULE 3 Litigation NONE EX-10 4 EXHIBIT 10.25 CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT Dated July _, 1997 Reference is made to (x) the Interim Warehouse and Security Agreement, dated as of March 4, 1997, as amended (the "Interim Warehouse Agreement"), between Prudential Securities Credit Corporation (the "Lender"), Emergent Mortgage Corp. (the "Borrower") and Emergent Group, Inc. (the "Guarantor"), (y) the Secured Note, dated as of March 4, 1997, as amended (the "Note"), from the Borrower to the Lender and (z) the Guarantee, dated as of March 4, 1997, as amended (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. (a) The maximum loan amount of "$125,000,000" referenced in the recitals and in the first sentence of Section l(A)(1) of the Interim Warehouse Agreement and referenced in the Note and Guarantee is hereby deleted and replaced by "$175,000,000" . (b) The second sentence in Section 1(A)(3) is hereby deleted in its entirety and replaced with the following: The interest rate shall be (except as otherwise provided in Section 1(F) or Section 11(D) hereof) LIBOR + 1.45%, and shall be reset on each business day. (c) The definition of "Maturity Date" in Section (1)(B)(2) and in the Note and Guarantee is hereby deleted in its entirety and replaced with the following: Maturity Date means the earlier of (i) September 30, 1997, and (ii) the date of the Securitization; provided, however, that (x) if the Securitization occurs prior to September 30, 1997 and (y) the securitization includes a pre-funding feature, then the Maturity Date shall be extended to the earlier to occur of (A) November 30, 1997 and (B) the end of any pre-funding period with respect to the Securitization. If the Securitization does contain a pre-funding feature and the Maturity Date is so extended, the maximum loan amount following the Securitization will be, as of any day prior to the Maturity Date, the amount on deposit in the pre-funding account. (d) Section 4(C)(1) of the Interim Warehouse Agreement is hereby deleted in its entirety and replaced with the following: 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 $15,000,000. (e) Section 4(C)(2) of the Interim Warehouse Agreement is hereby deleted in its entirety and replaced with the following: 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 $55,000,000. (f) The following paragraph is hereby added as a new Section 4(C)(b) the Interim Warehouse Agreement: 6. The Borrower shall maintain Subordinated Debt with Carolina Investors, Inc. ("Carolina") and/or the Guarantor in an amount not less than $40,000,000. (g) All references to Bankers Trust Company of California, N.A. in the Interim Warehouse Agreement are hereby deleted and replaced with references to First Union National Bank, and all references to the Custodial Agreement dated as of March 4, 1997 among the Lender, the Borrower and Bankers Trust Company of California, N.A. are hereby deleted and replaced with references to the Custodial Agreement, dated as of July _, 1997 among the Lender, the Borrower and First Union National Bank, as custodian. (h) The following paragraph is hereby added as a new Section 4(E) to the Interim Warehouse Agreement: E. For the period of 180 days following the Maturity Date, Carolina and/or the Guarantor, as the case may be, shall not call or make a demand on the promissory note made by the Borrower in favor of Carolina and/or the Guarantor representing the Subordinated Debt. (i) The following paragraph is hereby added as a new Section lO(H) to the Interim Warehouse Agreement: H. A breach by Carolina of the covenant set forth in Section 4(E). 2 Section 2. As amended by Section 1, all provisions of the Interim Warehouse Agreement, the Note and the Guarantee, as heretofore amended, 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. 3 IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year first above written. EMERGENT MORTGAGE CORP. By: /s/ Kevin J. Mast Name: Kevin J. Mast Title: VP & Treasurer EMERGENT GROUP, INC. By: /s/ Kevin J. Mast Name: Kevin J. Mast Title: VP & Treasurer PRUDENTIAL SECURITIES CREDIT CORPORATION By: Name: Title: CAROLINA INVESTORS, INC. By: /s/ Kevin J. Mast Name: Kevin J. Mast Title: VP & Treasurer 4 APPROVAL AS TO LEGALITY I, William Crawford, counsel to the Borrower and the Guarantor hereby confirm that: (j) I delivered, on March 4, 1997, the opinion letter, a copy of which is attached hereto (the "Opinion Letter") relating to the Interim Warehouse Agreement, the Note and the Guarantee. (k) 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. (l) 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, _______________________________________ William Crawford, Esq. Dated: July __, 1997 5 CUSTODIAL AGREEMENT CUSTODIAL AGREEMENT DATED AS OF JULY _, 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, DE 19801 (the "Lender"), FIRST UNION NATIONAL BANK, a national banking association having an address at 9639 Dr. Perry Road, Suite 124, Ijamsville, MD 21754 (the "Custodian") and EMERGENT MORTGAGE CORP., a South Carolina corporation having an address at 50 Datastream Plaza, Suite 201, Greenville, South Carolina 29605 (the "Borrower"). A. The Borrower is the owner of certain Mortgage Loans; and B. The Lender has agreed to provide interim financing for the Mortgage Loans pursuant to the Interim Warehouse and Security Agreement; and C. The Borrower shall grant to the Lender a first priority security interest in the Mortgage Loans and in the documents listed in Section 2 for the purposes of securing the due and punctual payment of all amounts due from the Borrower to the Lender according to the terms and provisions of the Interim Warehouse and Security Agreement and the Secured Note given pursuant thereto; and D. The Custodian is a financial institution regulated by the Office of the Comptroller of the Currency; and E. The Borrower intends to deliver to the Custodian the Mortgage Notes for the Mortgage Loans, along with certain other documents specified in this Agreement (collectively, the "Collateral"), and the Lender desires that the Custodian take possession of the Collateral as the custodian for, and bailee of, the Lender in accordance with the terms and conditions of this Agreement in order to perfect the Lender's security interest in the Collateral; and F. The Lender may from time to time pledge the Mortgage Loans and the related Custodian's Mortgage Files in accordance with the terms and conditions of this Agreement as collateral for such Pledged Mortgage Loans and desires to have the Custodian act as bailee of, and agent for, the pledgee of such Mortgage Loans and the related Custodian's Mortgage Files in accordance with the terms and conditions of this agreement. The parties, intending to be legally bound, hereby agree as follows: 1. Definitions. In addition to the terms defined elsewhere in this Agreement or in the Interim Warehouse and Security Agreement, the following terms shall have the following meanings when used in this Agreement: "Assignment of Mortgage" shall have the meaning set forth in Section 2(c) hereof. "Authorized Representative" shall have the meaning set forth in Section 19 hereof. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in New York City or Maryland are authorized or obligated by law or executive order to be closed. "Certification" shall have the meaning set forth in Section 3. "Collateral" shall have the meaning set forth in the Recitals. "Custodian's Mortgage Files" means, with respect to a Mortgage Loan, those documents listed in Section 2 of this Agreement that are delivered to the Custodian and all documents subsequently delivered to the Custodian pursuant to the last sentence of Section 2. "Cut-Off Date" means, as of any date, the close of business on the date set forth in the related Mortgage Loan Schedule. 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. "Deficiency" means a failure of a document to correspond to the information on the Mortgage Loan Schedule or the absence of a required document from a Custodian's Mortgage File pursuant to Section 2. "Final Certification" shall have the meaning set forth in Section 3. "Initial Certification" shall have the meaning set forth in Section 3. 2 "Interim Warehouse and Security Agreement" means, with respect to any Mortgage Loans, the interim warehouse and security agreement (as the same may be amended or supplemented from time to time) between the Lender, the Guarantor and the Borrower pursuant to which the Lender agrees to provide interim funding to the Borrower to purchase such Mortgage Loans. The Lender agrees to furnish to the Custodian a copy of any agreement which is intended to serve as an "Interim Warehouse and Security Agreement" for purposes of this Agreement, including any supplements or amendments thereto. "Maturity Date" means the date specified as the maturity date in the Interim Warehouse and Security Agreement. 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 in accordance with the Interim Warehouse and Security Agreement. "Mortgage" means the mortgage, deed of trust, or other instrument creating a first (or second, if applicable) lien on the Mortgage Property. "Mortgage Loan" means fixed-rate, closed-end, first (or second, if applicable) mortgage loans delivered to the Custodian hereunder and pledged to the Lender pursuant to the Interim Warehouse and Security Agreement. "Mortgage Loan Schedule" means the schedule of Mortgage Loans to be delivered to the Custodian on the date of delivery to the Custodian of the Custodian's Mortgage Files, in both (a) hard copy (only if requested by the Custodian or the Lender) and (b) floppy disk or via modem, to be annexed hereto as Exhibit 10, such schedule setting forth the following information with respect to each Mortgage Loan: (i) the loan number and name of the Mortgagor; (ii) the address and zip code of the Mortgaged Property; (iii) the date of origination (date indicated on Mortgage Note); (iv) the original stated maturity date; (v) the principal balance at origination; (vi) the first payment date; (vii) the type of Mortgage Property; (viii) the monthly payment in effect as of the Cutoff Date; 3 (ix) the principal balance as of the cut-off date as used in determining the cut-off date principal balance; (x) the loan-to-value ratio at origination; (xi) the interest rate at origination; (xii) the occupancy status; (xiii) the appraised value of the Mortgage Property at origination; (xiv) if such Mortgage Loan is a "balloon loan," the amortization terms; (xv) the lien priority; and (xvi) the credit rating given such mortgage loan by the Borrower. "Mortgage Note" means the note or other evidence of indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage Loan. "Mortgage Property" means the underlying property securing a Mortgage Loan, consisting of a fee simple estate in a single contiguous parcel of land improved by a residential dwelling. "Mortgagor" means the obligor on a Mortgage Note. "Notice of Default" means a notice of default delivered by a Pledgee to the Borrower and the Custodian stating that a default by the Lender has occurred under a Security Agreement. "Notice of Pledge" means a notice of pledge of Mortgage Loans and related Custodian's Mortgage Files held by the Custodian delivered to the Custodian and the Borrower, substantially in the form of Exhibit 5 to this Agreement. "Person" means any individual, corporation, limited liability company, estate, partnership, joint venture, association, joint stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof. "Pledged Mortgage Loans" means those and the related Custodian's Mortgage Files that are the subject of a Notice of Pledge delivered to the Custodian and not released pursuant to a Release of Pledge. 4 "Pledgee" means a Person to which Mortgage Loans and related Custodian's Mortgage Files have been pledged, sold pursuant to a repurchase facility, participated or otherwise hypothecated pursuant to a Security Agreement. "Release of Pledge" means a release of the security interest in, and lien upon, or a repurchase or other hypothecation back to the Lender of Pledged Mortgage Loans, substantially in the form of Exhibit 6 to this Agreement. "Request for Release and Receipt of Document" shall have the meaning set forth in Section 7. "Secured Note" means the secured note executed by the Borrower in favor of the Lender in connection with the Interim Warehouse and Security Agreement. "Security agreement" means an agreement (which may be a separate agreement or included in a credit, loan or other agreement) between the Lender and a Pledgee pursuant to which the Lender grants to such Pledgee a security interest in, and lien upon, or agrees to purchase and repurchase, or purchase a participation in, or otherwise hypothecate, the Mortgage Loans and related Custodian's Mortgage Files held by the Custodian, or a repurchase or other hypothecation back to the Lender. 2. Delivery of Custodian's Mortqaqe Files. The Borrower hereby certifies that it shall deliver and release to the Custodian as custodian for, and bailee of, the Lender the following documents pertaining to each of the Mortgage Loans identified in a Mortgage Loan Schedule, a copy of which Mortgage Loan Schedule shall be provided to the Custodian on computer readable disk or electronically via modem by the Borrower: (a) The original Mortgage Note, endorsed, "Pay to the order of , without recourse" and signed in the name of the Borrower by an authorized officer. In the event that the Mortgage Loan was acquired by the Borrower in a merger, the endorsement must be by "(the Borrower), successor by merger to (name of predecessor)"; and in the event that the Mortgage Loan was acquired or originated by the Borrower while doing business under another name, the endorsement must be by "(the Borrower), formerly known as (previous name)" together with all intervening endorsements showing a complete chain of endorsement from the originator to the Borrower; (b) The original Mortgage, with evidence of recording thereon (if the original Mortgage has not been returned from the recording office, a certified copy thereof, the original to be delivered to the Custodian forthwith after 5 return) and the original recorded power of attorney, if the Mortgage was executed pursuant to a power of attorney, with evidence of recording thereon; (c) The original assignment of Mortgage (hereinafter the "Assignment of Mortgage"), in blank, which assignment shall be in form and substance acceptable for recording in the state or other jurisdiction where the Mortgage Property is located. In the event that the mortgage Loan was acquired by the Borrower in a merger, the Assignment of Mortgage must be by "(the Borrower), successor by merger to (name of predecessor)"; and in the event that the Mortgage Loan was acquired or originated by the Borrower while doing business under another name, the assignment of mortgage must be by "(the Borrower), formerly known as (previous name)". Subject to the forgoing, and where permitted under the applicable laws of the jurisdiction where the Mortgaged Property is located; (d) The original recorded intervening assignment or assignments of the Mortgage, if any, showing a complete chain of assignment from the originator to the Borrower or if the original recorded assignment has not been returned from the applicable recording office, a copy certified by the Borrower; (e) The original policy of title insurance, or with respect to any Mortgage Loan if such policy has not yet been delivered by the insurer, the title commitment or title binder to issue same (which may be a copy); and (f) Originals of all assumption, consolidation, extension, modification or waiver agreement(s), if any, with evidence of recording thereon (or, if any original has not been returned from the recording office, a copy thereof, the original to be delivered to the Custodian forthwith after return unless such original is retained by such recording office). The Custodian shall be entitled to rely upon each Mortgage Loan Schedule provided by the Borrower as the conclusive schedule in its review, pursuant to Sections 3 and 17(b) hereof, of the Custodian's Mortgage Files delivered to it by the Borrower. From time to time, the Borrower shall forward to the Custodian for inclusion in the appropriate Custodian's Mortgage File any additional original loan documents evidencing any assumption, consolidation, extension, modification or waiver of a Mortgage Loan approved by the Borrower and any original documents returned from the applicable recording or filing offices. 3. Certification. Within three (3) Business Days after the delivery to the Custodian of the Custodian's Mortgage Files, the Custodian shall ascertain that all 6 documents referred to in Section 2 of this Agreement are in its possession, and shall deliver to the Lender (and a copy to the Borrower) a Certification, in substantially the form of Exhibit 1, to the effect that, as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in full and except as described on the attached exception report): (i) all documents required to be delivered to it pursuant to Section 2 of this Agreement are in its possession; (ii) such documents have been reviewed by it and have not been mutilated, damaged, torn or otherwise physically altered and relate to such Mortgage Loan identified in the Mortgage Loan Schedule; (iii) based on its examination and only as to the foregoing documents, the information set forth in items (i), (ii), (iii), (iv), (v) and (xi) of the definition of Mortgage Loan Schedule respecting such Mortgage Loan accurately reflects the information on the Mortgage Loan Schedule; and (iv) each Mortgage Note has been endorsed as provided in Section 2 of this Agreement (the "Certification"). 4. Deficiencies in custodian's mortgage files. (a) If the Certification discloses that any of the documents enumerated in Section 2 (other than the agreements called for under Section 2(f)) are missing or discloses any Deficiencies in the documents included in any Custodian's Mortgage Files delivered to the Custodian, then the Lender shall promptly notify the Custodian, in the form of Exhibit 8, that (1) the Borrower shall deliver the missing documents noted in the Certification to the Custodian within five (5) Business Days, (2) the Lender has waived the Deficiencies noted in the Certification, (3) the Borrower shall cure the Deficiencies within five (5) Business Days, or (4) the Borrower shall substitute another Mortgage Loan for the deficient Mortgage Loan and shall deliver to the Custodian the Custodian's Mortgage File with respect to the substituted Mortgage Loan. (b) If the Lender's notice pursuant to Section 4(a) above states that the Borrower shall take either of the actions specified in clauses (1) or (3) of subsection (a) above and the Borrower fails to take such actions within five (5) Business Days after the Custodian's receipt of such notice, then the Custodian shall notify the Lender and the Borrower of such failure and release or retain the deficient Custodian's Mortgage File in accordance with the written instructions of the Lender in the form of Exhibit 8. (c) If the Lender's notice pursuant to Section 4(a) above states that the Borrower shall take the actions specified in clause (4) of subsection (a) above, then the Custodian shall return the deficient Custodian's Mortgage File to the Borrower in exchange for delivery to it of the Custodian's Mortgage File to be substituted therefor. If the Borrower fails to deliver the substituted Custodian's Mortgage File to the Custodian within five (5) Business Days after the 7 Custodian's receipt of such notice, then the Custodian shall notify the Borrower of such failure and release or return the Custodian's Mortgage File in accordance with the written instructions of the Lender in the form of Exhibit 8. (d) Within five (5) Business days after receipt by the Custodian of any additional documents pursuant to Section 4(a), the Custodian shall review such documents and deliver to the Lender and the Borrower an exception report listing any Deficiencies with respect to such documents. If the notification shall indicate any remaining Deficiencies with respect to such additional documents, the provisions of this Section 4 shall again be followed. (e) Within two (2) Business Days of the last Business Day of each calendar month, the Custodian shall deliver to the Lender and the Borrower a revised exception report with respect to all of the Custodian's mortgage files. If the revised exception report shall indicate any remaining Deficiencies in any of the Custodian's Mortgage Files, the provisions of this Section 4 shall again be followed. 5. Pledqe or Other Hypothecation of Mortgage Loans. (a) The Custodian hereby agrees to recognize and record on the Mortgage Loan Schedule a pledge or other hypothecation of Mortgage Loans and the related Custodian's Mortgage Files to a Pledgee in accordance with the provisions of a Notice of Pledge delivered to the Custodian by the Lender. Upon its receipt of a Notice of Pledge, the Custodian shall reflect on the Mortgage Loan Schedule that the Pledgee identified in the Notice of Pledge has an interest in the Pledged Mortgage Loans that are subject to the Notice of Pledge. (b) Upon receipt by the Custodian of a Release of Pledge from a Pledgee, the Custodian shall reflect on the Mortgage Loan Schedule that the Mortgage Loans that are the subject of the Release of Pledge are no longer subject to lien or interest. (c) In no event shall the term of any such pledge or other hypothecation extend beyond the Maturity Date. 6. Obliqations of the Custodian. (a) The Custodian shall segregate and maintain continuous custody of all items constituting the Custodian's Mortgage Files in secure, fireproof facilities in accordance with customary standards for such custody. In any event, the Mortgage Note and Assignment of Mortgage shall be maintained in fireproof facilities. The Custodian shall reflect on its master data processing records that each Custodian's Mortgage File is being held by the Custodian exclusively as custodian for, and bailee of, the Lender. The Custodian makes no representations 8 as to and shall not be responsible to verify (i) the validity, legality, enforceability, sufficiency, due authorization or genuineness of any document in each Custodian's Mortgage File or of any of the Mortgage Loans or (ii) the collectability, insurability, effectiveness or suitability of any mortgage Loan. (b) With respect to the documents constituting each Custodian's Mortgage File that are delivered to the Custodian, the Custodian shall (i) act exclusively as the custodian for, and the bailee of, the Lender, (ii) hold all documents constituting such Custodian's Mortgage File received by it for the exclusive use and benefit of the Lender, and (iii) make disposition thereof only in accordance with the terms of this Agreement or with written instructions furnished by the Lender. Notwithstanding the foregoing, upon delivery to the Custodian of a Notice of pledge, the custodian shall thereafter hold the Custodian's Mortgage Files that are the subject of such Notice of Pledge as bailee of, and agent for, the Pledgee identified in such Notice until (a) the Custodian receives from the Pledgee a Release of Pledge with respect to such Custodian's Mortgage Files or (b) the related Custodian's Mortgage Files are released or transferred pursuant to the provisions of this Agreement. Upon delivery to the Custodian of a Notice of Pledge and until receipt of a Release of Pledge by the Custodian, the Lender's interest in the Pledged Mortgage Loans shall be subject and subordinate to the interest and rights of the Pledgee of such Pledged Mortgage Loans, and the Custodian shall make disposition of the related Custodian's Mortgage Files only in accordance with the terms of this Agreement or with written instructions furnished by the Pledgee. (c) The Lender, upon the release of the Mortgage Loans from the lien of the Interim Warehouse and Security Agreement, shall notify the Custodian in writing in the form of Exhibit 9 with respect to such release, and the Custodian shall then deliver the Custodian's Mortgage Files relating to the Mortgage Loans to the Borrower or the Borrower's designee. No such notice shall be effective as to Pledged Mortgage Loans if a Notice of Pledge shall be in effect unless the Pledgee of such Pledged Mortgage Loans shall also have signed such notice delivered to the Custodian, which signature of the Pledgee shall not be unreasonably withheld. (d) In the event that (i) the Lender, the borrower, a Pledgee or the Custodian shall be served by a third party with any type of levy, attachment, writ or court order with respect to any Custodian's Mortgage File or a document included within a Custodian's Mortgage File or (ii) a third party shall institute any court proceeding by which any 9 Custodian's Mortgage File or a document included within a Custodian's Mortgage File shall be required to be delivered otherwise than in accordance with the provisions of this Agreement, the party or parties receiving such service shall promptly deliver or cause to be delivered to the other parties to this Agreement and any Pledgees that have an interest in the related Mortgage Loans copies of all court papers, orders, documents and other materials concerning such proceedings. The Custodian shall continue to hold and maintain all the Custodian's Mortgage Files that are the subject of such proceedings pending a final order of a court of competent jurisdiction permitting or directing disposition thereof. Upon final determination of such court, the Custodian shall dispose of such Custodian's Mortgage File or a Document included within such Custodian's Mortgage File as directed by such determination or, if no such determination is made, in accordance with the provisions of this Agreement. Expenses of the Custodian incurred as a result of such proceedings shall be borne by the Borrower. The parties hereby acknowledge that, from time to time, the Custodian and/or its affiliates has entered into or may enter into financing arrangements with the Borrower and/or its affiliates, and in accordance with such financing arrangements may act as custodian and/or bailee of the collateral related thereto. Notwithstanding any such financing arrangement, by execution of this Agreement, (i) the Custodian hereby agrees to act exclusively as the custodian for, and the bailee of, the Lender with respect to the Custodian's Mortgage Files, (ii) the Custodian hereby waives and releases any lien, charge, security interest, ownership interest or encumbrance on or with respect to a Mortgage Loan in favor of the Custodian or any of its affiliates, and (iii) the Custodian hereby waives any right to set-off by the Custodian or any of its affiliates or any other third party claiming through the Custodian with respect to the Mortgage Loans or the related Custodian's Mortgage File. In furtherance of the foregoing, the Custodian shall not pledge, encumber, hypothecate, transfer, dispose of, or otherwise grant to itself, any of its affiliates or any third party any interest in the Mortgage Loans or the related Custodian's Mortgage File. 7. Release of Custodian's Mortgage File. From time to time and as appropriate for the foreclosure or servicing of any of the Mortgage Loans, the Custodian is hereby authorized, upon receipt of a written request and receipt of the Borrower acknowledged by the Lender and, if a pledge is then in effect, the Pledgee (which request shall not be unreasonably withheld by the Pledgee), in substantially the form annexed as Exhibit 3 (a "Request for Release and Receipt 10 of Documents"), to release to the Borrower by the close of business two Business Days following such request, the related Custodian's Mortgage File or the documents from a Custodian's Mortgage File set forth in such request and receipt. All documents so released to the Borrower shall be held by the Borrower in trust for the benefit of the Lender (and, if a Notice of Pledge is then in effect with respect to such Custodian's Mortgage File, such Pledgee, as its interest may appear) in accordance with the Interim Warehouse and Security Agreement. The Borrower shall return to the Custodian each and every document previously requested from the Custodian's Mortgage File when the Borrower's need therefore in connection with such foreclosure or servicing no longer exists, unless the Mortgage Loan shall be liquidated, in which case, upon receipt of a certification to this effect from the Borrower to the Custodian in substantially the form annexed as Exhibit 3, the Borrower's prior receipt shall be returned by the Custodian to the Borrower. The Lender agrees to acknowledge, within one Business Day of receipt, any Request for Release and Receipt of Documents properly completed and submitted by the Borrower, and not unreasonably to withhold any such acknowledgement. 8. Release Upon Redelivery or Payment. Upon the redelivery of any Mortgage Loan pursuant to the Interim Warehouse and Security Agreement or the payment in full of any Mortgage Loan, which shall be evidenced by the delivery to the Custodian of a Request for Release and Receipt of Documents executed by the Borrower and acknowledged by the Lender and, if a pledge is then in effect, the Pledgee (which acknowledgement shall not be unreasonably withheld by the Pledgee), the Custodian shall promptly release the Custodian's Mortgage File to the Borrower. 9. Fees and Expenses of the Custodian. It is understood that the Custodian will charge the Borrower such fees for its services, and shall be entitled to reimbursement from the Borrower for expenses, under this Agreement as are set forth on the separate fee letter submitted to the Borrower by the Custodian. 10. Examination of Custodian's Mortgage Files. Upon reasonable prior written notice to the Custodian (but no less than one Business Day), (a) the Lender and its authorized representatives and (b) if a Notice of Pledge is then in effect, the Pledgee and its authorized representatives, will be permitted during normal business hours to examine the Custodian's Mortgage Files, documents, records and other papers in the possession, or under the control, of the Custodian relating to any or all of the Mortgage Loans (except that, in the case of an examination by a Pledgee, access shall be limited to those Custodian's Mortgage Files that are pledged to such Pledgee). 11 11. Transfer of Custodian's Mortqaqe Files Upon Termination. If (a) the Custodian is furnished with written notice and satisfactory evidence from the Lender that the Interim Warehouse and Security Agreement has been terminated as to any or all of the Mortgage Loans, and (b) there shall not then be in effect a Notice of Pledge delivered to the Custodian with respect to such Mortgage Loans, the Custodian shall, upon written request of the Lender release to such Persons as the Lender shall designate such Custodian's Mortgage Files relating to such Mortgage Loans as the Lender shall request and the Custodian shall endorse the Mortgage Notes only as, and if, the Lender shall request in writing. If, however, a notice of pledge is then in effect with respect to any Pledged Mortgage Loans, the rights of the Lender under this Section 11 shall be exercisable only by the pledgee with respect to such Pledged Mortgage Loans, which release shall not be unreasonably withheld by the pledgee. 12. Insurance of the Custodian. The Custodian shall, at its own expense, maintain at all times during the term of this Agreement and keep in full force and effect (a) fidelity insurance, (b) theft of documents insurance, and (c) forgery insurance. All such insurance shall be in amounts, with standard coverage and subject to deductibles, as are customary for similar insurance typically maintained by banks that act as custodian in similar transactions. 13. Periodic Statements. Within 30 days after the written request of the Lender or a Pledgee, if there shall then be in effect a Notice of Pledge, the Custodian shall provide to the Lender and such Pledgee a list of all the Mortgage Loans for which the Custodian holds a Custodian's Mortgage File pursuant to this Agreement (except that, in the case of a Pledgee, the list shall be limited to the Pledged Mortgage Loans pledged to such Pledgee). Such list may be in the form of a copy of the Mortgage Loan Schedule with manual deletions to specifically denote any Mortgage Loans paid off, liquidated, released or redelivered since the date of this Agreement. 14. Copies of Mortgage Documents. Within ten Business Days after the written request and at the expense of the Lender, or a Pledgee, with respect to Pledged Mortgage Loans, the Custodian shall provide the Lender or the Pledgee, as the case may be, with copies of the documents in the Custodian's Mortgage Files (except that, in the case of a Pledgee, the documents shall be limited to those related to the Pledged Mortgage Loans pledged to such Pledgee). 15. Resignation by and Removal of the Custodian: Successor Custodian. (a) The Custodian may at any time resign and terminate its obligations under this Agreement upon 12 at least 30 days prior written notice to the Borrower, the Lender and each Pledgee, if any. Promptly after receipt of notice of the Custodian's resignation, the Borrower shall appoint, by written instrument, a Successor Custodian, subject to prior written approval by the Lender. If the Borrower fails to appoint a successor within 30 days, the Lender shall appoint a successor custodian. If both the Borrower and the Lender fail to appoint a successor custodian pursuant to the terms hereof, the Custodian may petition a court of competent jurisdiction to appoint a successor custodian. One original counterpart of such instrument of appointment shall be delivered to the Borrower, the Custodian and the successor custodian. The Lender shall give written notice of such appointment to each Pledgee. (b) The Lender, with or without cause, upon at least 30 days' written notice to the Custodian, may remove and discharge the Custodian (or any successor custodian thereafter appointed) from the performance of its obligations under this Agreement. A copy of such notice shall be delivered to each of the Borrower and each Pledgee, if any. Promptly after the giving of notice of removal of the Custodian, the Lender shall appoint, by written instrument, a successor custodian. One original counterpart of such instrument of appointment shall be delivered to each of the Borrower, and to each of the Custodian and the successor custodian. The Lender shall give written notice of such appointment to each Pledgee. (c) No resignation or removal of the Custodian and no appointment of a successor custodian under this Section 15 shall become effective until the acceptance of a successor custodian hereunder. (d) In the event of any such resignation or removal, the Custodian shall promptly transfer to the successor custodian, as directed in writing by the Lender, all of the Custodian's Mortgage Files being administered pursuant to this Agreement and, to the extent (if any) and in the manner directed by the Lender, the Custodian shall complete the endorsements on the Mortgage Notes at the expense of the Borrower. 16. Indemnity. The Borrower agrees to indemnify and hold harmless the Custodian against any and all claims, losses, liabilities, damages or expenses (including, but not limited to, attorneys' fees, court costs and costs of investigation) of any kind or nature whatsoever arising out of or in connection with this Agreement that may be imposed upon, incurred by or asserted against the Custodian; crovided, however, that this Section shall not relieve the Custodian from liability for its express obligations hereunder, willful misfeasance, bad faith or gross negligence. The Custodian hereby acknowledges that if it, in bad faith, fails to follow 13 the express terms of this Agreement which results in a loss or liability to the Lender or the Borrower, such failure shall be deemed to constitute gross negligence on the part of the Custodian hereunder except insofar as any such failure may be excused (a) by the provisions of Section 17 hereof or (b) by the need for the Custodian to follow any contrary orders or instructions received by it from any court having jurisdiction, Federal or State banking authorities or other government or regulatory bodies having jurisdiction over the Custodian. The provisions of this Section 16 shall survive the resignation or removal of the Custodian and the termination of this Agreement. 17. Limitation of Liability. (a) The Custodian shall not be liable to the Borrower, the Lender, any Pledgee or any other Person with respect to any action taken or not taken by it in good faith in the performance of its obligations under this Agreement. The obligations of the Custodian shall be determined solely by the express provisions of this Agreement. No representation, warranty, covenant, agreement, obligation or duty of the Custodian shall be implied with respect to this Agreement or the Custodian's services hereunder. (b) In the Custodian's review of documents pursuant to Section 3 of this Agreement, the Custodian shall be under no duty or obligation to inspect, review or examine the Custodian's Mortgage Files to determine that the contents thereof are genuine, enforceable or appropriate for the represented purpose or that they have been actually recorded or that they are other than what they purport to be on their face. (c) The Custodian may rely, and shall be protected in acting or refraining to act, upon and need not verify the accuracy of, any (i) oral instructions from any Persons the Custodian believes to be authorized to give such instructions, who shall only be, with respect to the Borrower and to the Lender, Persons the Custodian believes in good faith to be Authorized Representatives, and (ii) any written instruction, notice, order, request, direction, certificate, opinion or other instrument or document believed by the Custodian to be genuine and to have been signed and presented by the proper party or parties, which, with respect to the Borrower and to the Lender, shall mean signature and presentation by Authorized Representatives whether such presentation is by personal delivery, express delivery or facsimile. (d) The Custodian may consult with counsel nationally recognized in the area of commercial transactions and reasonably acceptable to the Lender with regard to legal questions arising out of or in connection with this Agreement, and the advice or opinion of such counsel shall be full and 14 complete authorization and protection in respect of any action taken, omitted or suffered by the Custodian in reasonable reliance, in good faith, and in accordance therewith. (e) No provision of this Agreement shall require the Custodian to expend or risk its own funds or otherwise incur financial liability in the performance of its duties under this Agreement if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity is not reasonably assured to it. (f) The Custodian shall not be responsible or liable for, and makes no representation or warranty with respect to, the validity, adequacy or perfection of any lien upon, or security interest in, any Mortgage Loans or Custodian's Mortgage Files purported to be granted at any time to the Lender or a Pledgee. 18. Term of Aqreement. This Agreement shall be terminated upon (a) the final payment or other liquidation (or advance with respect thereto) of the last Mortgage Loan in the Custodian's Mortgage Files, (b) the disposition of all property acquired upon foreclosure or deed in lieu of foreclosure of any Mortgage Loan in the Custodian's Mortgage Files, and the final remittance of all funds due the Lender under all Interim Warehouse and Security Agreements or (c) the delivery to a Pledgee or its designee of all of the Custodian's Mortgage Files following a Notice of Default. If either of the circumstances described in clause (a) or clause (b) of this Section 18 shall occur, promptly after written notice from the Borrower and the Lender to the Custodian to such effect, all documents remaining in the Custodian's Mortgage Files shall be delivered to, or at the direction of, the Borrower. 19. Authorized Representatives. The names of the officers of the Borrower and of the Lender who are authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of the Borrower and on behalf of the Lender ("Authorized Representatives") are set forth on Exhibit 4, along with the specimen signature of each such officer. From time to time, the Borrower and the Lender may, by delivering to the Custodian a revised exhibit, change the information previously given, but the Custodian shall be entitled to rely conclusively on the last exhibit until receipt of a superseding exhibit. 20. 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 15 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, South Carolina 29602 If to the Custodian: First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger Phone Number: (301) 874-6050 Fax Number: (301) 874-2002 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 16 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) 778-1397 Fax Number: (212) 778-7401 If to any Pledgee: At the address specified in the applicable Notice of Pledge. 21. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflict of laws applied in the state of New York. 22. Assignment. No party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express written consent of the other parties, except as otherwise set forth in this Agreement. 23. Counterparts. For the purpose of facilitating the execution of this Agreement and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original and together shall constitute and be one and the same instrument. 24. Headinqs. The Section headings are not part of this Agreement and shall not be used in its interpretation. 25. Use of Words. The definitions set forth in this Agreement include both the singular and plural. 26. Transmission of Custodian's Mortgaqe Files. Written instructions as to the method of shipment and shipper(s) the Custodian is directed to utilize in connection with transmission of mortgage files and loan documents in the performance of the Custodian's duties hereunder shall be delivered by the Borrower to the Custodian prior to any shipment of any mortgage files and loan documents hereunder. The Borrower will arrange for the provision of such services at its sole cost and expense (or, at the Custodian's option, reimburse the Custodian for all costs and expenses incurred by the Custodian consistent with such instructions) and will maintain such insurance against loss or damage to mortgage files and loan documents as the Borrower deems appropriate. Without limiting the generality of the provisions of Section 16 above, it is expressly agreed that in no event shall the Custodian have any liability for any losses or damages to any 17 Person, including, without limitation, the Borrower or the Lender, arising out of actions of the Custodian consistent with instructions of the Borrower or the Lender. [Signature Page Follows] 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. EMERGENT MORTGAGE CORP., as Borrower By: /s/ Kevin J. Mast Name: Kevin J. Mast Title: VP & Treasurer FIRST UNION NATIONAL BANK, as Custodian By: Name: Title: PRUDENTIAL SECURITIES CREDIT CORPORATION, as Lender By: Name: Title: EXHIBIT 1 Certification Prudential Securities Credit Corporation One Seaport Plaza Treasury Department ATTN: MS. Elizabeth Castagna Re: Custodial Agreement (the "Custodial Agreement") dated as of July _, 1997, among Prudential Securities Credit Corporation ("Lender"), Emergent Mortgage Corp. ("Borrower") and First Union National Bank ("Custodian") Ladies and Gentlemen: In accordance with the provisions of section 3 of the above-referenced Custodial Agreement, the undersigned, as the Custodian, hereby certifies that as to each Mortgage Loan listed on the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or any Mortgage Loan listed on the attachment hereto) it has reviewed the Custodian's Mortgage Files and has determined that (except as described on the attached exception report) (i) all documents required to be delivered to it pursuant to Section 2 of the Custodial Agreement are in its possession; (ii) such documents have been reviewed by it and have not been mutilated, damaged, torn or otherwise physically altered and relate to such Mortgage Loan; (iii) based on its examination and only as to the foregoing documents, the information set forth in items (i), (ii), (iii), (iv), (v) and (xi) of the definition of Mortgage Loan Schedule respecting such Mortgage Loan accurately reflects the information on the Mortgage Loan Schedule; and (iv) each Mortgage Note has been endorsed as provided in Section 2 of the Custodial Agreement. The Custodian makes no representations as to and shall not be responsible to verify (i) the validity, legality, enforceability, sufficiency, due authorization or genuineness of any of the documents contained in each Custodian's Mortgage File or of any of the Mortgage Loans or (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan. Capitalized words used herein shall have the respective meanings assigned to them in the above-captioned Custodial Agreement. FIRST UNION NATIONAL BANK, as Custodian By: Print Name: Title: cc: Emergent Mortgage Corp. 2 Exception Report 3 EXHIBIT 2 [Reserved] EXHIBIT 3 REQUEST FOR RELEASE AND RECEIPT OF DOCUMENTS First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger Re: Custodial Agreement (the "Custodial Agreement") dated as of July _, 1997 among Prudential Securities Credit Corporation ("Lender"), Emergent Mortgage Corp. ("Borrower") and First Union National Bank ("Custodian") In connection with the administration of the Mortgage Loans held by you as the Custodian for the Lender, we request the release of the (Custodian's Mortgage File/specify documents) for the Mortgage Loan described below, for the reason indicated. Mortgagor's Name, Address & Zip Code: Mortgage Loan Number: Reason for Requestinq Documents (check one) _____ 1. Mortgage Loan Paid in Full _____ 2. Mortgage Loan Redelivered Pursuant to Section 8 of the Custodial Agreement _____ 3. Mortgage Loan Liquidated by __________________________________ _____ 4. Mortgage Loan in Foreclosure _____ 5. Mortgage Loan substituted with alternate Mortgage Loan to be delivered to the Custodian with a revised Mortgage Loan Schedule indicating substitutions _____ 6. Other (explain) EMERGENT MORTGAGE CORP. By: Print Name: Title: Date: Please send file to: [Address] ACKNOWLEDGED PRUDENTIAL SECURITIES CREDIT CORPORATION, as Lender By: Print Name: Title: Date: as Pledgee By: Print Name: Title: Date: DOCUMENTS RETURNED TO THE CUSTODIAN FIRST UNION NATIONAL BANK, as Custodian By: Print Name: Title: Date: 2 EXHIBIT 4 Authorized Representatives a) of Emergent Mortgage Corp. Name Specimen Siqnature 1. Dennis Canupp 2. Phil Cox 3. Wade Hall 4. Steve Klein 5. John Kunst 6. Kevin Mast b) of Prudential Securities Credit Corporation Name Specimen Siqnature 1. Elizabeth Castagna 2. George D. Morgan, III 3. Jeffrey French EXHIBIT 5 NOTICE OF PLEDGE TO: First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger [Borrower] [Address] Attention: The undersigned (the "Lender") hereby notifies the Custodian and Emergent Mortgage Corp. that the mortgage loans and related Custodian's Mortgage Files specified in the attached Schedule A (the "Pledged Mortgage Loans") have been pledged, sold pursuant to a repurchase facility, participated or otherwise hypothecated by us pursuant to a _____________________ Agreement (the "Security Agreement") dated as of ____________,1997, between the Lender and ______________ (the "Pledgee") and are to be held by you as bailee of, and agent for, the Pledgee as secured party pursuant to the provisions of a Custodial Agreement dated as of July __, 1997 among the Lender, Emergent Mortgage Corp. and First Union National Bank (the "Custodial Agreement") until released or transferred as provided in the Custodial Agreement. An interest in the Pledged Mortgage Loans has been granted to the Pledgee, a corporation having an address at __________________________ , pursuant to the Security Agreement. You are instructed to enter the Pledged Mortgage Loans and to promptly provide to the Pledgee an acknowledgement of this Notice of Pledge by signing in the space provided below and delivering acknowledged copy of this Notice to the Pledgee at the above address. Such acknowledgement will serve to confirm that this Notice of Pledge has been duly received by you and that (i) the related Custodian's Mortgage Files are being held by you as bailee of, and agent for, the Pledgee and (ii) you have duly reflected on your records that the Pledgee has been granted an interest in and to such Mortgage Loans and related Custodian's Mortgage Files all in accordance with the provisions of the Custodial Agreement and the Security Agreement. PRUDENTIAL SECURITIES CREDIT CORPORATION By: Name: Title: Date: ACKNOWLEDGMENT OF PLEDGE ACKNOWLEDGED: FIRST UNION NATIONAL BANK, as Custodian By: Name: Title: Date: 2 EXHIBIT 6 RELEASE OF PLEDGE TO: First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger The undersigned, in accordance with Section 5(c) of the Custodial Agreement dated as of July _, 1997 among Prudential Securities Credit Corporation, Emergent Mortgage Corp. and First Union National Bank, hereby releases all of its lien and interest in the Mortgage Loans and related Custodian's Mortgage Files identified in Schedule A to this Release of Pledge and instructs the Custodian to reflect such release on its records. (PLEDGEE) By: Name: Title: Date: EXHIBIT 7 [RESERVED] EXHIBIT 8 NOTIFICATION IN EVENT OF DEFICIENCY IN CUSTODIAN'S MORTGAGE FILES ________________, 199_ TO: First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger Re: Custodial Agreement (the "Custodial Agreement") dated as of July _, 1997, among Prudential Securities Credit Corporation ("Lender"), Emergent Mortgage Corp. ("Borrower") and First Union National Bank ("Custodian") The undersigned, in accordance with Section 4 of the Custodial Agreement, hereby notifies the Custodian that: [ ] The Borrower shall deliver the following documents to the Custodian within five (5) Business Days from the date hereof [list of documents] [ ] The Lender has waived the Deficiencies noted in the Certification. [ ] The Borrower shall cure the Deficiencies within five (5) Business Days from the date hereof. [ ] The Borrower shall substitute another Mortgage Loan for the deficient Mortgage Loan and shall deliver to the Custodian the Custodian's Mortgage File with respect to the substituted Mortgage Loan within five (5) Business Days from the date hereof. [ ] The Custodian shall release the deficient Custodian's Mortgage Loan File to the Borrower. [ ] The Custodian shall retain the deficient Custodian's Mortgage File. Capitalized words used herein shall have the respective meanings assigned to them in the above-captioned Custodial Agreement. PRUDENTIAL SECURITIES CREDIT CORPORATION By: Name: Title: Date: 2 EXHIBIT 9 RELEASE OF MORTGAGE LOANS TO: First Union National Bank 9639 Dr. Perry Road, Suite 124 Ijamsville, MD 21754 Attention: Robin Belanger The undersigned, in accordance with Section 6(c) of the Custodial Agreement dated as of July _, 1997 among Prudential Securities Credit Corporation, Emergent Mortgage Corp. and First Union National Bank, hereby releases all of its lien and interest in the Mortgage Loans and related Custodian's Mortgage Files identified in Schedule A to this Release of Mortgage Loans. PRUDENTIAL SECURITIES CREDIT CORPORATION By: Name: Title: Date: EX-10 5 EXHIBIT 10.26 AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT ("Amendment") is dated as of July 30, 1997 and is entered into by and between BankAmerica Business Credit, Inc. ("Lender") and The Loan Pro$, Inc. ("Borrower"). All capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Agreement (as hereinafter defined). WITNESSETH WHEREAS, the Borrower and the Lender have entered into that certain Loan and Security Agreement dated as of December 19, 1995, as amended and supplemented (the "Agreement"); and WHEREAS, the Borrower desires to amend the Agreement and the Lender is willing to do so, subject to the terms and conditions stated herein; NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower and Lender hereby agree as follows: SECTION 1. Amendment to the Agreement. The Lender and Borrower agree that the Agreement shall be amended as follows: A. Amendment to Section 1. The definition of "Adjusted Tangible Net Worth" contained in Section 1 of the Agreement is amended in its entirety to read as follows: "`Adjusted Tangible Net Worth' means, at any date, the remainder of (a) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves as determined in accordance with GAAP) at which the Adjusted Tangible Assets of the Borrower would be shown on a balance sheet of the Borrower at such date prepared in accordance with GAAP, minus (b) the amount at which its liabilities (other than capital stock, surplus, and retained earnings) would be shown on such balance sheet and including as liabilities all reserves for contingencies and other potential liabilities which would be shown on such balance sheet or disclosed in the footnotes thereto." B. Amendment to Section 1. The definition of "Delinquency/Repossession Adjustment Percent" contained in Section 1 of the Agreement is amended in its entirety to read as follows: 1 "`Delinquency/Repossession Adjustment Percent' means, as of the first day of each month, the number of full percentage points that the average Delinquency/Repossession Adjustment Percent for the two months immediately preceding such date is greater than eight percent (8%). In computing the Delinquency/Repossession Adjustment Percent, the Contracts sold pursuant to a Securitization Transaction shall be considered and included for the purpose of calculating the Delinquency/Repossession Adjustment Percent." C. Amendment to Section 1. The definition of "Emergent" contained in Section 1 of the Agreement is amended in its entirety to read as follows: "`Emergent' means Emergent Group, Inc., a South Carolina Corporation." D. Amendment to Section 1. The definition of "Total Facility" contained in Section 1 of the Agreement is amended in its entirety to read as follows: "`Total Facility' means Four Million Dollars ($4,000,000)." E. Amendment to Section 1. The definition of "Charge-Off Adjustment" contained in Section 1 of the Agreement is deleted. F. Amendment to Section 1. Section 1 of the Agreement is amended to add the following ------------------------ definitions: "`Charge-Off Adjustment Percent' means the excess, calculated as of the first day of each month, of the Actual Loss Percent over four percent (4%). In computing the Charge-Off Adjustment Percent, the Contracts sold pursuant to a Securitization Transaction shall be considered and included for the purpose of calculating the Charge-Off Adjustment Percent." `Securitization Transaction' shall mean a transaction wherein an identified pool of Contracts and related documents are sold, pledged or conveyed with the consent of Lender by Borrower to a trustee, grantor trust or other special purpose financing entity as collateral security for the issuance by such financing entity of notes, certificates or other evidence of indebtedness." G. Amendment to Section 3. The first sentence of Section 3.4 of the Agreement is amended to read as follows: -2- "3.4 Audit Fees. The Borrower agrees to pay to the Lender an annual audit fee of $20,000 during each year of the Agreement which shall be payable in 12 monthly installments of $1,666.66 each no later than the fifteenth day of each month." H. Amendment to Section 4. Section 4.2 of the Agreement is amended in its entirety to read as follows: "4.2 Termination of Facility. The Borrower may terminate this Agreement at any time by giving at least ten (10) Business Days prior written notice to the Lender and paying in full (a) all outstanding Revolving Loans, together with accrued interest thereon and (b) all other Obligations together with accrued interest thereon." I. Amendment to Section 9. Section 9.19 of the Agreement is amended in its entirety to read as follows: "9.19 Charge-Off Policy. The Borrower shall establish and implement, in a manner satisfactory to the Lender, a policy for charging off the unpaid balance of its delinquent Contracts. Without limiting the generality of the foregoing, the Borrower's policy shall provide that as of the last day of each quarter in each Fiscal Year, the Borrower shall charge off the unpaid balance of all Contracts with respect to which any payment due thereunder is one hundred eighty (180) or more days delinquent, as determined on a contractual basis, provided, however, $50,000 of such delinquent Contracts may remain not charged off as of the last day of each fiscal quarter." J. Amendment to Section 9. Section 9.15, 9.16, 9.17, and 9.18 of the Agreement are deleted and shall have no further force or effect. K. Amendment to Section 11. Section 11.1(q) of the Agreement is amended in its entirety to read as follows: "(q) the sum of the Delinquency/Repossession Adjustment Percent plus the Net Charge-Off Percent is at any time equal to or greater than thirty percent (30%)." SECTION 2. Conditions. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: A. Amendment. Fully executed copies of this Amendment signed by the Borrower and a ratification signed by the Guarantor shall be delivered to Lender. -3- B. Resolution. A certificate executed by the Secretary or Assistant Secretary of Borrower certifying that the Borrower's Board of Directors has adopted resolutions authorizing the execution, delivery and performance by Borrower of the Amendment shall be delivered to Lender. C. Other Documents. Borrower shall have executed and delivered to Lender such other documents and instruments as Lender may require. D. Resolution by Emergent. A certificate executed by the Secretary or Assistant Secretary of Emergent certifying that Emergent's Board of Directors has adopted resolutions authorizing the execution, delivery and performance by Emergent of the guaranty in favor of Lender shall be delivered to Lender. SECTION 3. Miscellaneous. A. Survival of Representations and Warranties. All representations and warranties made in the Agreement or any other document or documents relating thereto, including, without limitation, any Loan Document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely thereon. B. Reference to Agreement. The Agreement, each of the Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof, or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference therein to the Agreement shall mean a reference to the Agreement as amended hereby. C. Agreement Remains in Effect. The Agreement and the Loan Documents remain in full force and effect and the Borrower ratifies and confirms its agreements and covenants contained therein. The Borrower hereby confirms that, after giving effect to this Amendment, no Event of Default or Default exists as of such date. D. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. E. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF NEW JERSEY AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY. -4- F. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and Borrower and their respective successors and assigns; provided, however, that Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. G. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. H. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. I. Expenses of Lender. Borrower agrees to pay on demand (i) all costs and expenses reasonably incurred by Lender in connection with the preparation, negotiation and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all subsequent amendments, modifications, and supplements hereto or thereto, including, without limitation, the costs and fees of Lender's legal counsel and the allocated cost of Lender's in-house counsel and (ii) all costs and expenses reasonably incurred by Lender in connection with the enforcement or preservation of any rights under the Agreement, this Amendment and/or other Loan Documents, including, without limitation, the costs and fees of Lender's legal counsel and the allocated cost of Lender's in-house counsel. J. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER. IN WITNESS WHEREOF, the parties have executed this Amendment under seal on the date first written above. THE LOAN PRO$, INC. By: (Signature of Kevin J. Mast appears here) Name: Kevin J. Mast Title: Executive Vice President Chief Financial Officer and Treasurer -5- BANKAMERICA BUSINESS CREDIT, INC. By: (Signature of John M. Huhn appears here) Name: John M. Huhn Title: Vice President -6- CONSENTS AND REAFFIRMATIONS The undersigned, successor-in-interest to Emergent Financial Corporation, hereby consents to the terms and conditions of that Waiver and Amendment No. 3 to Loan and Security Agreement dated as of July 30, 1997, between The Loan Pro$, Inc. and BankAmerica Business Credit, Inc. ("Creditor") and reaffirms its obligations under a Guaranty dated as of December 19, 1995 (the "Guaranty") made by the undersigned in favor of the Creditor and acknowledges and agrees that the Guaranty remains in full force and effect. Dated as of July 30, 1997 EMERGENT GROUP, INC. a South Carolina corporation By: (Signature of Kevin J. Mast appears here) Kevin J. Mast Executive Vice President, Chief Financial Officer and Treasurer -7- CERTIFICATE OF SECRETARY I, Keith B. Giddens, hereby certify on behalf of the corporation named below that: 1. I am the duly qualified and acting Assistant Secretary of Emergent Group, Inc., a South Carolina corporation, and as such Assistant Secretary I am the keeper of the corporate records and seal of the corporation. 2. The following is a true copy of resolutions duly adopted pursuant to the unanimous written consent of the board of directors of said corporation on July 30, 1997: "NOW, THEREFORE, BE IT RESOLVED that the corporation enter into, ratify and/or confirm a Continuing Guaranty ('Guaranty') in connection with that certain Loan and Security Agreement by and among The Loan Pro$, Inc. and BankAmerica Business Credit, Inc. ('BABC') in form and substance as is satisfactory to BABC. RESOLVED, that any one of the officers of this corporation be, and each hereby is authorized and directed, in the name and on behalf of this corporation to execute and deliver and/or ratify and confirm the Guaranty and to make, execute, and deliver to BABC any and all consents, certificates, documents, instruments, amendments, papers, or writings as may be required by BABC in connection with or in furtherance of the Guaranty, the same to be in form and substance satisfactory to BABC and to do any and all other acts necessary or desirable to effectuate the foregoing. FURTHER RESOLVED, that the execution, delivery and performance of the foregoing documents by such officer or officers of this corporation shall be deemed conclusive evidence of the approval by this corporation of the terms, provisions, and conditions thereof." 3. The resolutions specified in paragraph 2 have never been modified or repealed and are now in full force and effect. 4. The following named individuals are duly elected and appointed officers of the corporation, are currently serving in their respective offices and the signatures at the right of those names, respectively, are the genuine signatures of said officers: -1- Office Name Signature Executive Vice President, Kevin J. Mast /s/ Kevin J. Mast Chief Financial Officer and Treasurer President, Chief Operating Keith B. Giddens /s/ Keith B. Giddens Officer and Assistant Secretary 5. Attached hereto is a true and correct copy of the articles of incorporation and bylaws of the corporation as in effect on the date hereof, which have not been amended, modified, or rescinded, and are in full force and effect on the date hereof. IN WITNESS WHEREOF, I have executed this Certificate of Secretary on behalf of the corporation this 30 day of July, 1997. /s/ Keith B. Giddens Keith B. Giddens, Assistant Secretary -2- CERTIFICATE OF RESOLUTION I, Kevin J. Mast, hereby certify that: I am the duly qualified and acting Assistant Secretary of The Loan Pro$, Inc., a South Carolina corporation. The following is a true copy of resolutions duly adopted by the board of directors of the corporation at a special meeting held on July 30, 1997, at which a quorum was present and which voted thereon: "RESOLVED that the terms of Amendment No. 3 to Loan and Security Agreement between the corporation and BankAmerica Business Credit, Inc. are hereby approved and ratified. FURTHER RESOLVED, that any one officer of this corporation is hereby authorized and directed, on behalf of this corporation, to make, execute, and deliver to BankAmerica Business Credit Inc., any and all documents and to do any and all acts necessary or desirable to effectuate the foregoing resolution." These resolutions are in conformity with the articles of incorporation and bylaws of the corporation, have never been modified or repealed, and are now in full force and effect. IN WITNESS WHEREOF, I have set my hand and the seal of the corporation on the 30th day of July, 1997. /s/ Kevin J. Mast Kevin J. Mast, Assistant Secretary [Seal] EX-10 6 EXHIBIT 10.27 AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT ("Amendment") is dated as of August 1, 1997 and is entered into by and between BankAmerica Business Credit, Inc. ("Lender") and Premier Financial Services, Inc. ("Borrower"). All capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Agreement (as hereinafter defined). WITNESSETH WHEREAS, the Borrower and the Lender have entered into that certain Loan and Security Agreement dated as of April 10, 1995, as amended and supplemented (the "Agreement"); and WHEREAS, the Borrower desires to amend the Agreement and the Lender is willing to do so, subject to the terms and conditions stated herein; NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrower and Lender hereby agree as follows: SECTION 1. Amendment to the Agreement. The Lender and Borrower agree that the Agreement shall be amended as follows: A. Amendment to Section 1. Section 1.54 of the Agreement is amended in its entirety to read as follows: "1.54 Total Credit Facility shall mean $4,000,000." B. Amendment to Section 1. Section 1.58 of the Agreement is amended in its entirety to read as follows: "1.58 Actual Charge-Off Percent means, as of the first day of each month, the percent (rounded to the nearest whole percent) resulting from dividing (a) the aggregate amount of all of Borrower's Net Charge-Off's during each of the twelve (12) months immediately preceding the date of calculation, by (b) the average monthly amount of Borrower's Net Contracts Payments outstanding as of the last day of each of those twelve (12) months. In computing the Actual Charge-Off Percent, the Contracts sold pursuant to a Securitization Transaction shall be considered and included for the purpose of calculating the Actual Charge-Off Percent." C. Amendment to Section 1. Section 1.61 of the Agreement is amended in its entirety to read as follows: "1.61 Delinquency/Repossession Adjustment Percent means, as of the first day of each month, the number of full percentage points that the -1- average Delinquency/Repossession Percent for the two months immediately preceding such date is greater than six percent (6%)." D. Amendment to Section 1. Section 1.62 of the Agreement is amended in its entirety to read as follows: "1.62 Delinquency/Repossession Percent means the percent (rounded to the nearest whole percent), calculated as of the first day of each month, determined by dividing (a) the aggregate amount of the Net Contract Payments owing under all of Borrower's Contracts with respect to which any payment due thereunder is more than sixty (60) days past due, as determined on a contractual basis, as of the last day of each of the three (3) months immediately preceding the date of calculation, plus the Repossession Value of all Vehicles which Borrower has repossessed but has not sold as of the date of calculation, by (b) the average monthly amount of Borrower's Net Contracts Payments outstanding as of the last day of each of those three (3) months. In computing the Delinquency/Repossession Percent, the Contracts sold pursuant to a Securitization Transaction shall be considered and included for the purpose of calculating the Delinquency/Repossession Percent." E. Amendment to Section 1. Section 1 of the Agreement is amended to add a new Section 1.69 to read as follows: "1.69 Securitization Transaction shall mean a transaction wherein an identified pool of Contracts and related documents are sold, pledged or conveyed with the consent of Lender by Borrower to a trustee, grantor trust or other special purpose financing entity as collateral security for the issuance by such financing entity of notes, certificates or other evidence of indebtedness." F. Amendment to Section 4. Section 4.1 of the Agreement is amended in its entirety to read as follows: "4.1 Term of Agreement and Loan Repayment. This Agreement shall have a term commencing on April 10, 1995, and terminating on December 31, 1997 (`Maturity Date'). The Loan shall be due and payable in full on the Maturity Date without notice or demand and shall be repaid to Lender by a wire transfer of immediately available funds. Borrower may terminate this Agreement prior to the Maturity Date by: (a) giving Lender at least ten (10) business days prior written notice of its intention to terminate this Agreement and (b) paying and performing, as appropriate, all Obligations on or prior to the effective date of termination. Notwithstanding the foregoing, upon the occurrence of an Event of Default, Lender may immediately terminate further performance under this Agreement without notice or demand." G. Amendment to Section 8. Section 8.12 of the Agreement is amended in its entirety to read as follows: -2- "8.12 Charge-Off Policy. Borrower shall establish and implement, in a manner satisfactory to Lender, a policy for charging off the unpaid balance of its delinquent Contracts. Without limiting the generality of the foregoing, Borrower's policy shall provide that on the last day of each quarter in each Fiscal Year, Borrower shall charge-off the unpaid balance of all Contracts with respect to which (a) any payment due thereunder is one hundred eighty (180) or more days delinquent, as determined on a contractual basis, or (b) the Goods which are the subject thereof have been repossessed and sold for an amount which is less than the Contract balance then owing and after application of the sale proceeds to such Contract balance, a deficiency remains, provided, however, $50,000 of such delinquent Contracts may remain not charged off as of the last day of each fiscal quarter." H. Amendment to Section 8. Section 8.18 of the Agreement is amended to add at the end of the Section an additional sentence to read as follows: "The Borrower shall at all times have Subordinated Debt of not less than $2,500,000." I. Amendment to Section 8. Sections 8.6, 8.7, 8.10 and 8.24 of the Agreement shall be deleted and shall be of no further force or effect. J. Amendment to Section 11. Section 11.1(p) of the Agreement is amended in its entirety to read as follows: "(p) Change of Stock Ownership. Emergent Group shall cease to own, either directly or indirectly, all legal and beneficial title to one hundred percent (100%) of the voting common stock of Borrower, or Emergent Group shall convey, pledge, or transfer any interest in such stock to any Person." K. Amendment to Section 11. Section 11.1(r) of the Agreement is amended in its entirety to read as follows: "(r) the Delinquency/Repossession Percent plus the Actual Charge-Off Percent is at any time greater than ten percent (10%)." SECTION 2. Conditions. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: A. Amendment. Fully executed copies of this Amendment signed by the Borrower and a ratification signed by the Guarantor shall be delivered to Lender. B. Resolution. A certificate executed by the Secretary or Assistant Secretary of Borrower certifying that the Borrower's Board of Directors has adopted resolutions authorizing the execution, delivery and performance by Borrower of the Amendment shall be delivered to Lender. -3- C. Other Documents. Borrower shall have executed and delivered to Lender such other documents and instruments as Lender may require. D. Resolution by Emergent. A certificate executed by the Secretary or Assistant Secretary of Emergent Group certifying that Emergent Group's Board of Directors has adopted resolutions authorizing the execution, delivery and performance by Emergent Group of the ratification of the guaranty in favor of Lender shall be delivered to Lender. SECTION 3. Miscellaneous. A. Survival of Representations and Warranties. All representations and warranties made in the Agreement or any other document or documents relating thereto, including, without limitation, any Loan Document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely thereon. B. Reference to Agreement. The Agreement, each of the Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof, or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference therein to the Agreement shall mean a reference to the Agreement as amended hereby. C. Agreement Remains in Effect. The Agreement and the Loan Documents remain in full force and effect and the Borrower ratifies and confirms its agreements and covenantscontained therein. The Borrower hereby confirms that, after giving effect to this Amendment, no Event of Default or Default exists as of such date. D. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. E. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN THE STATE OF NEW JERSEY AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY. F. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and Borrower and their respective successors and assigns; provided, however, that Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Lender. G. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. -4- H. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. I. Expenses of Lender. Borrower agrees to pay on demand (i) all costs and expenses reasonably incurred by Lender in connection with the preparation, negotiation and execution of this Amendment and the other Loan Documents executed pursuant hereto and any and all subsequent amendments, modifications, and supplements hereto or thereto, including, without limitation, the costs and fees of Lender's legal counsel and the allocated cost of Lender's in-house counsel and (ii) all costs and expenses reasonably incurred by Lender in connection with the enforcement or preservation of any rights under the Agreement, this Amendment and/or other Loan Documents, including, without limitation, the costs and fees of Lender's legal counsel and the allocated cost of Lender's in-house counsel. J. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER. IN WITNESS WHEREOF, the parties have executed this Amendment under seal on the date first written above. PREMIER FINANCIAL SERVICES, INC. By: (Signature of Kevin J. Mast appears here) Name: Kevin J. Mast Title: Executive Vice President Chief Financial Officer and Treasurer BANKAMERICA BUSINESS CREDIT, INC. By: (Signature of Jeffrey T. Macaluso appears here) Name: Jeffrey T. Macaluso Title: Senior Vice President -5- CONSENTS AND REAFFIRMATIONS The undersigned, successor-in-interest to Emergent Financial Corporation hereby consents to the terms and conditions of that Amendment No. 5 to Loan and Security Agreement dated as of August 1, 1997, between Premier Financial Services, Inc. and BankAmerica Business Credit, Inc. ("Creditor") and reaffirms its obligations under a Guaranty dated as of April 10, 1995 (the "Guaranty") made by Emergent Financial Corporation in favor of the Creditor and acknowledges and agrees that the Guaranty remains in full force and effect. Dated as of August 1, 1997 EMERGENT GROUP, INC. a South Carolina corporation By: (Signature of Kevin J. Mast appears here) Kevin J. Mast Executive Vice President, Chief Financial Officer and Treasurer -6- CERTIFICATE OF RESOLUTION I, Kevin J. Mast, hereby certify that: I am the duly qualified and acting Assistant Secretary of Premier Financial Services, Inc., a South Carolina corporation. The following is a true copy of resolutions duly adopted by the board of directors of the corporation at a special meeting held on August 4th, 1997, at which a quorum was present and which voted thereon: "RESOLVED that the terms of Amendment No. 5 to Loan and Security Agreement between the corporation and BankAmerica Business Credit, Inc. are hereby approved and ratified. FURTHER RESOLVED, that any one officer of this corporation is hereby authorized and directed, on behalf of this corporation, to make, execute, and deliver to BankAmerica Business Credit Inc., any and all documents and to do any and all acts necessary or desirable to effectuate the foregoing resolution." These resolutions are in conformity with the articles of incorporation and bylaws of the corporation, have never been modified or repealed, and are now in full force and effect. IN WITNESS WHEREOF, I have set my hand and the seal of the corporation on the 4th day of August, 1997. /s/ Kevin J. Mast Kevin J. Mast, Assistant Secretary [Seal] CERTIFICATE OF SECRETARY I, Keith B. Giddens, hereby certify on behalf of the corporation named below that: 1. I am the duly qualified and acting Assistant Secretary of Emergent Group, Inc., a South Carolina corporation, and as such Assistant Secretary I am the keeper of the corporate records and seal of the corporation. 2. The following is a true copy of resolutions duly adopted pursuant to the unanimous written consent of the board of directors of said corporation on August 4th, 1997: "NOW, THEREFORE, BE IT RESOLVED that the corporation enter into, ratify and/or confirm a Continuing Guaranty ('Guaranty') in connection with that certain Loan and Security Agreement by and among Premier Financial Services, Inc. and BankAmerica Business Credit, Inc. ('BABC') in form and substance as is satisfactory to BABC. RESOLVED, that any one of the officers of this corporation be, and each hereby is authorized and directed, in the name and on behalf of this corporation to execute and deliver and/or ratify and confirm the Guaranty and to make, execute, and deliver to BABC any and all consents, certificates, documents, instruments, amendments, papers, or writings as may be required by BABC in connection with or in furtherance of the Guaranty, the same to be in form and substance satisfactory to BABC and to do any and all other acts necessary or desirable to effectuate the foregoing. FURTHER RESOLVED, that the execution, delivery and performance of the foregoing documents by such officer or officers of this corporation shall be deemed conclusive evidence of the approval by this corporation of the terms, provisions, and conditions thereof." 3. The resolutions specified in paragraph 2 have never been modified or repealed and are now in full force and effect. 4. The following named individuals are duly elected and appointed officers of the corporation, are currently serving in their respective offices and the signatures at the right of those names, respectively, are the genuine signatures of said officers: -1- Office Name Signature Executive Vice President, Kevin J. Mast /s/ Kevin J. Mast Chief Financial Officer and Treasurer President, Chief Operating Keith B. Giddens /s/ Keith B. Giddens Officer and Assistant Secretary 5. Attached hereto is a true and correct copy of the articles of incorporation and bylaws of the corporation as in effect on the date hereof, which have not been amended, modified, or rescinded, and are in full force and effect on the date hereof. IN WITNESS WHEREOF, I have executed this Certificate of Secretary on behalf of the corporation this 4th day of August, 1997. /s/ Keith B. Giddens Keith B. Giddens, Assistant Secretary -2- EX-27 7 EXHIBIT 27
5 1,000 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 APR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 5,621 5,621 6,959 6,959 336,510 336,510 4,621 4,621 0 0 0 0 12,961 12,961 2,613 2,613 364,988 364,988 0 0 0 0 0 0 0 0 482 482 0 0 364,988 364,988 0 0 30,197 49,864 0 0 18,429 31,871 0 0 2,599 4,671 6,055 9,782 3,096 3,539 (1,667) (1,626) 4,763 5,165 0 0 0 0 0 0 4,763 5,165 0.51 0.55 0.51 0.55 Unclassified Balance Sheet
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