UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One);

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-13610

PMC COMMERCIAL TRUST

(Exact name of registrant as specified in its charter)

TEXAS		75-6446078
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
17950 Preston Road, Suite 600, Dallas, TX 75252		(972) 349-3200
(Address of principal executive offices)		(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). YES o NO þ

As of November 3, 2009, the Registrant had outstanding 10,548,354 Common Shares of Beneficial Interest, par value $.01 per share.

 

 

PMC COMMERCIAL TRUST AND SUBSIDIARIES

INDEX

		PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - September 30, 2009 and December 31, 2008			1
Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2009 and 2008			2
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2009 and 2008			3
Consolidated Statements of Beneficiaries’ Equity (Unaudited) - Nine Months Ended September 30, 2009 and 2008			4
Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2009 and 2008			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			42
PART II. Other Information
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3. Defaults upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			44
Item 6. Exhibits			44
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Financial Information

ITEM 1.

Financial Statements

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Loans receivable, net		$	198,712			$	179,807
Retained interests in transferred assets			12,413				33,248
Cash and cash equivalents			9,652				10,606
Real estate owned			3,214				—
Restricted cash and cash equivalents			1,220				—
Other assets			4,156				3,863
Total assets		$	229,367			$	227,524
LIABILITIES AND BENEFICIARIES’ EQUITY
Liabilities:
Junior subordinated notes		$	27,070			$	27,070
Revolving credit facility			23,900				22,700
Structured notes and debentures payable			16,762				8,168
Borrower advances			2,295				2,819
Accounts payable and accrued expenses			1,987				2,884
Redeemable preferred stock of subsidiary			1,961				3,876
Dividends payable			1,731				3,967
Deferred gains on property sales			766				1,408
Other liabilities			139				270
Total liabilities			76,611				73,162
Commitments and contingencies
Beneficiaries’ equity:
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01 par value; 11,084,683 and 11,066,283 shares issued at September 30, 2009 and December 31, 2008, respectively, 10,548,354 and 10,694,788 shares outstanding at September 30, 2009 and December 31, 2008, respectively			111				111
Additional paid-in capital			152,587				152,460
Net unrealized appreciation of retained interests in transferred assets			635				620
Cumulative net income			166,010				160,925
Cumulative dividends			(162,586	)			(156,829	)
			156,757				157,287
Less: Treasury stock; at cost, 536,329 and 371,495 shares at September 30, 2009 and December 31, 2008, respectively			(4,901	)			(3,825	)
Total parent company beneficiaries’ equity			151,856				153,462
Noncontrolling interests — cumulative preferred stock of subsidiary			900				900
Total beneficiaries’ equity			152,756				154,362
Total liabilities and beneficiaries’ equity		$	229,367			$	227,524

The accompanying notes are an integral part of these consolidated financial statements.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Unaudited)
Revenues:
Interest income		$	8,466			$	10,886			$	2,830			$	3,601
Income from retained interests in transferred assets			2,369				5,243				672				1,047
Other income			1,265				1,587				735				432
Total revenues			12,100				17,716				4,237				5,080
Expenses:
Salaries and related benefits			2,864				3,752				944				1,161
Interest			2,240				3,163				644				953
General and administrative			1,380				1,794				403				671
Provision for loan losses, net			596				114				393				102
Permanent impairments on retained interests in transferred assets			515				377				438				—
Severance and related benefits			—				1,573				—				1,573
Total expenses			7,595				10,773				2,822				4,460
Income before income tax benefit (provision) and discontinued operations			4,505				6,943				1,415				620
Income tax benefit (provision)			104				(206	)			54				(33	)
Income from continuing operations			4,609				6,737				1,469				587
Discontinued operations:
Gains on sales of real estate			642				778				592				16
Net losses			(166	)			—				(166	)			—
			476				778				426				16
Net income		$	5,085			$	7,515			$	1,895			$	603
Weighted average shares outstanding:
Basic			10,582				10,771				10,548				10,782
Diluted			10,582				10,771				10,548				10,782
Basic and diluted earnings per share:
Income from continuing operations		$	0.44			$	0.63			$	0.14			$	0.06
Discontinued operations			0.04				0.07				0.04				—
Net income		$	0.48			$	0.70			$	0.18			$	0.06

The accompanying notes are an integral part of these consolidated financial statements.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Unaudited)
Net income		$	5,085			$	7,515			$	1,895			$	603
Change in unrealized appreciation of retained interests in transferred assets:
Net unrealized appreciation (depreciation) arising during period			82				(959	)			(100	)			(115	)
Net realized gains included in net income			(67	)			(132	)			(24	)			(30	)
			15				(1,091	)			(124	)			(145	)
Comprehensive income		$	5,100			$	6,424			$	1,771			$	458

The accompanying notes are an integral part of these consolidated financial statements.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Nine Months Ended September 30, 2008
		(Unaudited)
														Net
														Unrealized
		Common												Appreciation
		Shares of												of Retained																Cumulative
		Beneficial								Additional				Interests in				Cumulative												Preferred				Total
		Interest				Par				Paid-in				Transferred				Net				Cumulative				Treasury				Stock of				Beneficiaries’
		Outstanding				Value				Capital				Assets				Income				Dividends				Stock				Subsidiary				Equity
Balances, January 1, 2008			10,765,033			$	111			$	152,331			$	1,945			$	151,119			$	(145,921	)		$	(3,231	)		$	900			$	157,254
Net unrealized depreciation			—				—				—				(1,091	)			—				—				—				—				(1,091	)
Share-based compensation expense			16,500				—				119				—				—				—				—				—				119
Dividends ($0.65 per share)			—				—				—				—				—				(7,004	)			—				—				(7,004	)
Net income			—				—				—				—				7,515				—				—				—				7,515
Balances, September 30, 2008			10,781,533			$	111			$	152,450			$	854			$	158,634			$	(152,925	)		$	(3,231	)		$	900			$	156,793

		Nine Months Ended September 30, 2009
		(Unaudited)
														Net
														Unrealized
		Common												Appreciation
		Shares of												of Retained																Cumulative
		Beneficial								Additional				Interests in				Cumulative												Preferred				Total
		Interest				Par				Paid-in				Transferred				Net				Cumulative				Treasury				Stock of				Beneficiaries’
		Outstanding				Value				Capital				Assets				Income				Dividends				Stock				Subsidiary				Equity
Balances, January 1, 2009			10,694,788			$	111			$	152,460			$	620			$	160,925			$	(156,829	)		$	(3,825	)		$	900			$	154,362
Net unrealized appreciation			—				—				—				15				—				—				—				—				15
Share-based compensation expense			18,400				—				127				—				—				—				—				—				127
Treasury shares, net			(164,834	)			—				—				—				—				—				(1,076	)			—				(1,076	)
Dividends ($0.545 per share)			—				—				—				—				—				(5,757	)			—				—				(5,757	)
Net income			—				—				—				—				5,085				—				—				—				5,085
Balances, September 30, 2009			10,548,354			$	111			$	152,587			$	635			$	166,010			$	(162,586	)		$	(4,901	)		$	900			$	152,756

The accompanying notes are an integral part of these consolidated financial statements.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2009				2008
		(Unaudited)
Cash flows from operating activities:
Net income		$	5,085			$	7,515
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			19				20
Permanent impairments on retained interests in transferred assets			515				377
Gains on sales of real estate			(642	)			(778	)
Deferred income taxes			(170	)			23
Provision for loan losses, net			596				114
Premium income adjustment			162				(10	)
Amortization and accretion, net			(199	)			(212	)
Share-based compensation			127				119
Capitalized loan origination costs			(134	)			(152	)
Loans funded, held for sale			(13,966	)			(5,365	)
Proceeds from sale of guaranteed loans			15,375				4,059
Loan fees remitted, net			(58	)			(6	)
Change in operating assets and liabilities:
Other assets			270				231
Borrower advances			(524	)			323
Accounts payable and accrued expenses			(1,027	)			1,324
Other liabilities			(128	)			(159	)
Net cash provided by operating activities			5,301				7,423
Cash flows from investing activities:
Loans funded			(2,251	)			(25,206	)
Principal collected on loans			10,265				27,746
Principal collected on retained interests in transferred assets			246				773
Principal collected on mortgage-backed security of affiliate			109				62
Investment in retained interests in transferred assets			(559	)			(2,820	)
Purchase of furniture, fixtures and equipment			(5	)			—
Release of restricted cash and cash equivalents, net			1,326				2,842
Net cash provided by investing activities			9,131				3,397
Cash flows from financing activities:
Purchase of treasury shares			(1,076	)			—
Proceeds from (repayment of) credit facilities, net			1,200				(2,450	)
Payment of principal on structured notes			(5,517	)			(7,205	)
Redemption of redeemable preferred stock of subsidiary			(2,000	)			—
Payment of dividends			(7,993	)			(7,808	)
Net cash used in financing activities			(15,386	)			(17,463	)
Net decrease in cash and cash equivalents			(954	)			(6,643	)
Cash and cash equivalents, beginning of year			10,606				11,485
Cash and cash equivalents, end of period		$	9,652			$	4,842

The accompanying notes are an integral part of these consolidated financial statements.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

Note 1. Basis of Presentation:

The accompanying interim financial statements of PMC Commercial Trust (“PMC Commercial” or together with its wholly-owned subsidiaries, “we,” “us” or “our”) have not been audited by independent accountants. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statement presentation. In the opinion of management, the financial statements reflect all adjustments necessary to present a fair statement of our financial position at September 30, 2009 and results of operations for the three and nine months ended September 30, 2009 and 2008. These adjustments are of a normal recurring nature. All material intercompany balances and transactions have been eliminated. The results for the three and nine months ended September 30, 2009 are not necessarily indicative of future financial results. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Certain prior period amounts have been reclassified to conform to the current year presentation. Cumulative preferred stock of subsidiary was reclassified from the mezzanine section of the balance sheet to beneficiaries’ equity and minority interest as presented in the income statement was reclassified to interest expense. These reclassifications had no effect on previously reported consolidated net income or cash flows, but the resulting prior period reclassification does increase our overall consolidated beneficiaries’ equity.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

In preparing the accompanying unaudited consolidated financial statements, we have reviewed, as determined necessary by our management, events that have occurred after September 30, 2009, up until the issuance of the financial statements on November 9, 2009.

Each of our qualified special purpose entities (“QSPEs”) contains a “clean-up” call provision which gives PMC Commercial Trust the option to repay the outstanding structured notes of the QSPE. PMC Joint Venture, L.P. 2003 (the “2003 Joint Venture”) reached this option during September 2009 becoming a non-qualifying SPE; however, based on our current liquidity needs, we did not exercise the option. The subsidiary was determined to be a variable interest entity. Since we expect to absorb the majority of the entity’s future expected losses and receive the entity’s expected residual returns, PMC Commercial Trust is considered to be the primary beneficiary. As a result, effective in September 2009, this subsidiary was consolidated in our financial statements. The following table summarizes the assets and liabilities of the 2003 Joint Venture (which represents a noncash transaction):

		September
		2009
		(In thousands)
Loans receivable		$	19,993
Restricted cash and cash equivalents			1,136
Other assets			46
Total assets		$	21,175
Structured notes payable		$	8,591
Other liabilities			20
Total liabilities		$	8,611

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2. Recently Issued Accounting Pronouncements:

In July 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) topic 105 (formerly Statement of Accounting Standards No. 168, The Hierarchy of Generally Accepted Accounting Principles). ASC 105 contains guidance which reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. This pronouncement was effective September 15, 2009. The adoption of this pronouncement did not have any effect on our consolidated financial statements.

FASB No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“FAS 166”) was issued in June 2009. FAS 166 amends the accounting guidance for transfers of financial assets including (1) eliminating the concept of QSPEs for prospective securitizations, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. FAS 166 is effective for interim and annual reporting periods beginning after November 15, 2009. Earlier application is prohibited. We are currently evaluating the possible impacts of FAS 166 on our consolidated financial statements. We expect this standard to affect our accounting for secondary market loan sales beginning on January 1, 2010. At a minimum, we anticipate that any premium income to be recognized will be deferred for at least 90 days until any potential contingency period for having to refund these premiums has been satisfied. Furthermore, to the extent certain criteria in the new accounting standard are not met, we may also be required to treat certain legally sold loans as secured borrowings.

FASB No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”) was issued in June 2009. FAS 167 requires an entity to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the entity that has both of the following characteristics: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from that entity that could potentially be significant to the variable interest entity. FAS 167 is effective for interim and annual reporting periods beginning after November 15, 2009. Earlier application is prohibited. We are currently evaluating the impact of FAS 167 on our consolidated financial statements. Based on our preliminary analysis, it is anticipated that our off-balance sheet securitizations will be consolidated beginning January 1, 2010. See Note 5 for information on our off-balance sheet securitizations.

Note. 3. Share-Based Compensation Plans:

We granted 15,000 option awards on June 13, 2009 at an exercise price of $8.35 (the closing price on June 12, 2009). The fair value of this option award was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Assumption
Expected Term (years)			3.0
Risk-Free Interest Rate			1.91	%
Expected Dividend Yield			8.44	%
Expected Volatility			28.04	%
Expected Forfeiture Rate			10.0	%

The expected term of the options granted represents the period of time that the options are expected to be outstanding and was based on historical data. The risk-free rate was based on the three-year U.S. Treasury rate corresponding to the expected term of the options. We used historical information to determine our expected volatility and forfeiture rates. We recorded compensation expense of approximately $11,000 during the nine months ended September 30, 2009 related to this option grant. We granted 20,000 option awards on June 14, 2008 at an exercise price of $7.65 (the closing price on June 13, 2008) and recorded compensation expense of approximately $6,000 during the nine months ended September 30, 2008.

In addition, we issued an aggregate of 18,400 restricted shares to executive officers and our Board of Trust Managers on June 13, 2009 at the then current market price of the shares of $8.35. We issued an aggregate of 16,500 and 11,400 restricted shares to executive officers and our Board of Trust Managers on June 14, 2008 and June 9, 2007, respectively, at the then current market price of the shares. The restricted shares vest based on two years of continuous service with one-third of the shares vesting immediately upon issuance of the shares and one-third vesting at the end of each of the next two years. Restricted share awards provide for accelerated vesting if there is a change in control (as defined in the plan).

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Compensation expense related to the restricted shares is being recognized over the vesting periods. We recorded compensation expense of $24,000 and $23,000 during the three months ended September 30, 2009 and 2008, respectively, and $116,000 and $113,000 during the nine months ended September 30, 2009 and 2008, respectively, related to restricted shares. As of September 30, 2009, there was approximately $90,000 of total unrecognized compensation expense related to restricted shares which will be recognized over the next two years.

Note 4. Loans Receivable, net:

Loans receivable, net, consisted of the following:

		September 30,				December 31,
		2009				2008
		(In thousands)
Commercial mortgage loans (1)		$	159,568			$	138,858
SBIC commercial mortgage loans (2)			26,537				27,311
SBA 7(a) program loans			13,848				14,436
Total loans receivable			199,953				180,605
Less:
Deferred commitment fees, net			(377	)			(318	)
Loan loss reserves			(864	)			(480	)
Loans receivable, net		$	198,712			$	179,807

The activity in our loan loss reserves was as follows:

		Nine Months Ended
		September 30,
		2009				2008
		(In thousands)
Balance, beginning of year		$	480			$	42
Provision for loan losses			674				133
Reduction of loan losses			(78	)			(19	)
Principal balances written-off, net			(212	)			(14	)
Balance, end of period		$	864			$	142

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Impaired loans are defined by generally accepted accounting principles as loans for which it is probable that the lender will be unable to collect all amounts due according to the original contractual terms of the loan. Information on those loans considered to be impaired loans was as follows:

		September 30,				December 31,
		2009				2008
		(In thousands)
Impaired loans requiring reserves		$	1,273			$	2,492
Impaired loans expected to be fully recoverable (1)			3,163				2,374
Total impaired loans		$	4,436			$	4,866

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Average impaired loans		$	6,499			$	1,571			$	4,582			$	1,870
Interest income on impaired loans		$	70			$	82			$	53			$	25

Our recorded investment in non-accrual loans at September 30, 2009 and December 31, 2008 was approximately $4.4 million and $5.1 million, respectively. We did not have any loans past due 90 days or more which were accruing interest at September 30, 2009 or December 31, 2008.

Note 5. Retained Interests:

We own subordinated financial interests in non-consolidated QSPEs (i.e., retained interests in transferred assets (“Retained Interests”)). The current QSPEs are PMC Capital, L.P. 1998-1 (“1998 Partnership”) and PMC Joint Venture, L.P. 2000 (“2000 Joint Venture”) created in connection with structured loan sale transactions. In our structured loan sale transactions, we contributed loans receivable to a QSPE in exchange for cash and beneficial interests in that entity. The QSPE issued notes payable (“Structured Notes”) to unaffiliated parties (“Structured Noteholders”).

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Information pertaining to our off-balance sheet structured loan sale transactions as of September 30, 2009 was as follows:

						2000
		1998				Joint
		Partnership				Venture
		(Dollars in thousands)
Principal outstanding on sold loans		$	5,153			$	23,307
Cash in the collection account		$	1,053			$	298
Cash in the reserve account		$	1,329			$	1,675
Structured Notes balance outstanding		$	5,812			$	15,093
Weighted average interest rate of loans (1)			P+1.82	%			9.48	%
Interest rate on Structured Notes (1)			P-1.00	%			7.28	%
Discount rate assumptions (2)		4.6% to 14.9		%		8.6% to 14.9		%
Constant prepayment rate assumption (3)			18.00	%			12.00	%
Weighted average remaining life of Retained Interests (4)		1.86 years				1.56 years
Aggregate principal losses assumed (5)			1.85	%			1.02	%
Aggregate principal losses to date (6)			—				1.65	%

First Western SBLC, Inc. (“First Western”) has Retained Interests related to the sale of loans originated pursuant to the Small Business Administration’s (“SBA”) 7(a) Program. We expect the SBA guaranteed portions of First Western’s loans to be sold to either dealers in government guaranteed loans or institutional investors (“Secondary Market Loan Sales”) as the loans are fully funded. On Secondary Market Loan Sales, we may retain an excess spread between the interest rate paid to us from our borrowers and the rate we pay to the purchaser of the guaranteed portion of the loan and servicing costs. At September 30, 2009, the aggregate principal balance of First Western’s serviced loans on which we had an excess spread was approximately $39.0 million and the weighted average excess spread was approximately 0.6%. In determining the fair value of our Retained Interests related to Secondary Market Loan Sales, our assumptions at September 30, 2009 included a prepayment speed of 12% per annum and a discount rate of 14.5%.

The components of our Retained Interests are the (1) required overcollateralization (the “OC piece”), (2) “reserve fund” and the interest earned thereon and (3) interest-only strip receivable (the “IO Receivable”).

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our Retained Interests consisted of the following:

		September 30, 2009
		Estimated Fair Value
		OC Piece				Reserve Fund				IO Receivable				Total				Cost
		(In thousands)
First Western		$	—			$	—			$	754			$	754			$	581
1998 Partnership			339				999				120				1,458				1,405
2000 Joint Venture			8,500				1,400				301				10,201				9,792
		$	8,839			$	2,399			$	1,175			$	12,413			$	11,778

		December 31, 2008
		Estimated Fair Value
		OC Piece				Reserve Fund				IO Receivable				Total				Cost
		(In thousands)
First Western		$	—			$	—			$	315			$	315			$	315
1998 Partnership			443				916				249				1,608				1,514
2000 Joint Venture			8,372				1,381				315				10,068				9,834
2002 Joint Venture			7,223				1,392				141				8,756				8,671
2003 Joint Venture			10,397				1,971				133				12,501				12,294
		$	26,435			$	5,660			$	1,153			$	33,248			$	32,628

The following sensitivity analysis of our Retained Interests as of September 30, 2009 highlights the volatility that results when losses and discount rates are different than our assumptions:

		Estimated
		Fair				Asset
Changed Assumption		Value				Change (1)
		(In thousands)
Losses increase by 50 basis points per annum (2)		$	12,227			$	(186	)
Losses increase by 100 basis points per annum (2)		$	12,052			$	(361	)
Discount rates increase by 300 basis points		$	11,738			$	(675	)
Discount rates increase by 500 basis points		$	11,313			$	(1,100	)

Due to the short-term weighted average remaining life of our Retained Interests and the relatively small value of our interest-only strip receivables, there is no material asset change for increases in prepayment rates.

These sensitivities are hypothetical and should be used with caution. Values based on changes in these assumptions generally cannot be extrapolated since the relationship of the change in an assumption to the change in fair value is not linear. The effect of a variation in a particular assumption on the fair value of our Retained Interests is calculated without changing any other assumption. In reality, changes in one factor are not isolated from changes in another which might magnify or counteract the sensitivities.

Our consolidated financial statements do not include the assets, liabilities, partners’ capital, revenues or expenses of the off-balance sheet QSPEs. As a result, at September 30, 2009 and December 31, 2008 our consolidated balance sheets do not include $32.9 million and $77.6 million of assets, respectively, and $21.0 million and $44.0 million of liabilities, respectively, related to our off-balance sheet structured loan sale transactions recorded by the QSPEs. At September 30, 2009, the partners’ capital of the off-balance sheet QSPEs was approximately $11.9 million and the estimated fair value and cost of the associated Retained Interests was approximately $11.7 million and $11.2 million, respectively.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6. Debt:

Information on our consolidated debt was as follows:

																				Weighted Average
		September 30, 2009								December 31, 2008										Coupon Rate at
		Face				Carrying				Face				Carrying				Range of		September 30,				December 31,
		Amount				Value				Amount				Value				Maturities		2009				2008
		(Dollars in thousands, except footnotes)
Structured notes and debentures payable (1):
Debentures		$	8,190			$	8,171			$	8,190			$	8,168			2013 to 2015			5.90	%			5.90	%
Structured notes (2)			8,591				8,591				—				—			(2)			3.10	%			N/A
			16,781				16,762				8,190				8,168
Junior subordinated notes			27,070				27,070				27,070				27,070			2035			3.85	%			7.01	%
Revolving credit facility			23,900				23,900				22,700				22,700			2009			2.11	%			2.50	%
Redeemable preferred stock of subsidiary (3)			2,000				1,961				4,000				3,876			2010			4.00	%			4.00	%
Debt		$	69,751			$	69,693			$	61,960			$	61,814

Note 7. Earnings Per Share:

The computations of basic earnings per common share are based on our weighted average shares outstanding. During the three and nine months ended September 30, 2009 and 2008, no shares were added to the weighted average shares outstanding for purposes of calculating diluted earnings per share as options were anti-dilutive.

Not included in the computation of diluted earnings per share were outstanding options to purchase approximately 90,000 common shares during the three and nine months ended September 30, 2009 and 2008, because the options’ exercise prices were greater than the average market price of the shares.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8. Dividends Declared:

Dividends declared during 2009 were as follows:

				Amount
Date Paid		Record Date		Per Share
April 13, 2009		March 31, 2009		$	0.225
July 13, 2009		June 30, 2009			0.160
October 13, 2009		September 30, 2009			0.160
				$	0.545

We have certain covenants within our revolving credit facility which limit our ability to pay out returns of capital as part of our dividends. These restrictions have not historically limited the amount of dividends we have paid and management does not believe that they will restrict future dividend payments.

Note 9. Share Repurchase Program:

Our Board of Trust Managers authorized a share repurchase program for up to $10.0 million for the purchase of outstanding common shares which expires September 26, 2010. The common shares may be purchased from time to time in the open market or pursuant to negotiated transactions. We have repurchased 249,979 shares under the program for an aggregate purchase price of approximately $1,670,000, including commissions. We are not currently purchasing shares under the plan and do not anticipate purchasing additional shares under the plan.

Note 10. Income Taxes:

PMC Commercial has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, PMC Commercial must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our shareholders. As a REIT, PMC Commercial generally will not be subject to corporate level Federal income tax on net income that is currently distributed to shareholders. In order to meet our 2008 taxable income distribution requirements, we will make an election under the Code to treat a portion of the distributions declared in 2009 as distributions of 2008’s REIT taxable income.

PMC Commercial has wholly-owned taxable REIT subsidiaries (“TRS’s”) which are subject to Federal income taxes. The income generated from the TRS’s is taxed at normal corporate rates.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 11. Other Income:

Other income consisted of the following:

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Premium income (1)		$	629			$	223			$	561			$	110
Servicing income			289				378				91				98
Loan related income — other			174				265				45				143
Equity in earnings			58				70				19				22
Prepayment fees			46				396				—				18
Other			69				255				19				41
		$	1,265			$	1,587			$	735			$	432

Note 12. Restructuring Costs:

In October 2008, due to economic and market conditions, we announced a number of cost reduction initiatives. These initiatives included streamlining our sales, credit and servicing, as well as outsourcing some functions. These changes resulted in one-time severance related charges of approximately $1.8 million during 2008.

The table below summarizes the balance of accrued severance and related benefits, which is included in accounts payable and accrued expenses in the consolidated balance sheets, and the changes in the accrued amounts as of and for the nine months ended September 30, 2009 (in thousands):

Accrued balance at December 31, 2008		$	1,596
Payments			(1,429	)
Accrued balance at September 30, 2009		$	167

Note 13. Fair Value Measurements:

At September 30, 2009, Retained Interests was our only asset that was required to be measured at fair value on a recurring basis. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In general, quoted market prices from active markets for the identical asset (Level 1 inputs), if available, should be used to value an asset. If quoted prices are not available for the identical asset, then a determination should be made if Level 2 inputs are available. Level 2 inputs include quoted prices for similar assets in active markets or for identical or similar assets in markets that are not active (i.e., markets in which there are few transactions for the asset, the prices are not current, price quotations vary substantially, or in which little information is released publicly). There is little or no market information for our Retained Interests, thus there are no Level 1 or Level 2 determinations available. Level 3 inputs are unobservable inputs for the asset. Unobservable inputs are used to measure fair value when observable inputs are not available. These inputs include our expectations about the assumptions that market participants would use in pricing the asset in a current transaction.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We use Level 3 inputs to determine the estimated fair value of our Retained Interests. The following is activity for our Retained Interests:

		Nine Months Ended
		September 30,
		2009				2008
		(In thousands)
Value, beginning of period		$	33,248			$	48,616
Principal collections			(246	)			(773	)
Realized gains included in net income (1)			(67	)			(132	)
Investments			884				2,865
Permanent impairments			(515	)			(377	)
Repurchases/Consolidation (2)			(21,129	)			(15,856	)
Accretion (3)			156				—
Unrealized appreciation (depreciation)			82				(959	)
Value, end of period		$	12,413			$	33,384
Cost, end of period		$	11,778			$	32,530

We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result in the recognition of loan loss reserves on individual loans and valuation reserves on real estate owned based on the estimated fair value.

For impaired loans measured at fair value on a nonrecurring basis during the nine months ended September 30, 2009 and 2008, the following table provides the carrying value of the related individual assets at quarter end. We used Level 3 inputs to determine the estimated fair value of our impaired loans.

										Provision for
										Loan Losses
		Carrying value at								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Impaired loans (1)		$	4,234			$	1,395			$	172			$	36

For real estate owned, our carrying value approximates the estimated fair value. We used Level 3 inputs to determine the estimated fair value of our real estate owned. The carrying value of our real estate owned is established at the time of foreclosure based upon management’s assessment of the appraised value of the collateral, tax assessed value of the collateral and/or operating statistics to the extent available. At September 30, 2009, the carrying value and estimated fair value of our real estate owned was $3,214,000.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The estimated fair values of our financial and nonfinancial instruments were as follows at September 30, 2009:

						Estimated
		Carrying				Fair
		Amount				Value
		(In thousands)
Assets:
Loans receivable, net		$	198,712			$	191,830
Retained Interests			12,413				12,413
Restricted cash and cash equivalents			1,220				1,220
Cash and cash equivalents			9,652				9,652
Liabilities:
Structured notes and debentures payable			16,762				16,685
Redeemable preferred stock of subsidiary			1,961				2,000
Revolving credit facility			23,900				23,900
Junior subordinated notes			27,070				18,399

In general, estimates of fair value may differ from the carrying amounts of the financial assets and liabilities primarily as a result of the effects of discounting future cash flows. Considerable judgment is required to interpret market data and develop estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts we could realize in a current market exchange.

Loans receivable, net: Our loans receivable are recorded at cost and adjusted by net loan origination fees and discounts. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions including a current discount rate, prepayment tendencies and potential loan losses. Reserves are established based on numerous factors including, but not limited to, the creditor’s payment history, collateral value and economic factors. In the absence of a readily ascertainable market value, the estimated value of our loans receivable may differ from the values that would be placed on the portfolio if a ready market for the loans receivable existed.

Retained Interests: The assets are reflected in our consolidated financial statements at estimated fair value based on valuation techniques as described in Note 5.

Restricted cash and cash equivalents: Restricted cash and cash equivalents represent our collection and reserve accounts of the 2003 Joint Venture. The carrying amount is considered to be a reasonable estimate of their fair value due to (1) the short maturity of the collection account and (2) the reserve account can be used at any time in conjunction with the exercise of our “clean-up” call option.

Cash and cash equivalents: The carrying amount is considered to be reasonable estimates of fair value due to the short maturity of these funds.

Structured Notes and debentures payable, redeemable preferred stock of subsidiary and junior subordinated notes: The estimated fair value is based on a present value calculation based on prices of the same or similar instruments after considering market risks, current interest rates and remaining maturities.

Revolving credit facility: The carrying amount is a reasonable estimation of fair value as the interest rate on this instrument is variable and the short duration to maturity.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 14. Supplemental Disclosure of Cash Flow Information:

Information regarding our non-cash activities was as follows:

		Nine Months Ended
		September 30, 2009
		2009				2008
		(In thousands)
Loans receivable reclassified to real estate owned		$	3,157			$	—
Consolidation of loans receivable		$	12,570			$	13,760
Reclassification from Retained Interests to loans receivable — 1999 Partnership		$	—			$	7,596

In addition, as described in Note 1, we are now consolidating the assets and liabilities of the 2003 Joint Venture, representing a non-cash transaction. Previously, the 2003 Joint Venture was reflected as Retained Interests.

Note 15. Commitments and Contingencies:

Loan Commitments

Commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Our outstanding loan commitments and approvals to fund loans were approximately $23.2 million at September 30, 2009, the majority of which were for prime-based loans to be originated by First Western, the government guaranteed portion of which may be sold pursuant to Secondary Market Loan Sales. Commitments generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.

Operating Lease

We lease office space in Dallas, Texas under a lease which expires in October 2011. Future minimum lease payments under this lease are as follows:

Twelve Months Ending September 30,		Total
		(In thousands)
2010		$	211
2011			223
2012			19
		$	453

Employment Agreements

We have employment agreements with our executive officers for three-year terms expiring June 30, 2012. Under certain circumstances, as defined within the agreements, the agreements provide for severance compensation to the executive officer in a lump sum payment in an amount equal to 2.99 times the average of the last three years annual compensation paid to the executive officer.

PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Structured Loan Sale Transactions

The documents of the structured loan sale transactions contain provisions (the “Credit Enhancement Provisions”) that govern the assets and the inflow and outflow of funds of the entities originally formed as part of the structured loan sale transactions. The Credit Enhancement Provisions include specified limits on the delinquency rates on the loans included in each structured loan sale transaction. If, at any measurement date, the delinquency rate with respect to any structured loan sale transaction were to exceed the specified limits, the Credit Enhancement Provisions would require an increase in the level of credit enhancement. During the period in which the specified delinquency rate was exceeded, excess cash flow from the entity, if any, which would otherwise be distributable to us, would be used to fund the increased credit enhancement levels up to the principal amount of such loans and would delay or reduce our distribution. In general, there can be no assurance that amounts deferred under Credit Enhancement Provisions would be received in future periods or that future deferrals or losses would not occur. As a result of a delinquent and impaired loan in the 2003 Joint Venture, Credit Enhancement Provisions were triggered during the first quarter of 2009. As a consequence, cash flows related to this transaction otherwise distributable to us are being deferred and utilized to fund the increased credit enhancement requirements. Based on current cash flow assumptions, management anticipates that the funds will be received in future periods or used to repay the structured notes to the extent we exercise the “clean-up” call option.

Litigation

We had significant outstanding claims against Arlington Hospitality, Inc.’s and its subsidiary, Arlington Inns, Inc.’s (together “Arlington”) bankruptcy estates. Arlington objected to our claims and initiated a complaint in the bankruptcy seeking, among other things, the return of payments Arlington made pursuant to the property leases and the master lease agreement.

While confident that a substantial portion of our claims would have been allowed and the claims against us would have been disallowed, due to the exorbitant cost of defense coupled with the likelihood of reduced available assets in the debtors’ estates to pay claims, we executed an agreement with Arlington to settle our claims against Arlington and Arlington’s claims against us. The settlement provides that Arlington will dismiss its claims seeking the return of certain payments made pursuant to the property leases and master lease agreement and substantially reduces our claims against the Arlington estates. The settlement further provides for mutual releases among the parties. The Bankruptcy Court approved the settlement. Accordingly, there are no remaining assets or liabilities recorded in the accompanying consolidated financial statements related to this matter. However, the settlement will only become final upon the Bankruptcy Court’s approval of Arlington’s liquidation plan which was filed during the third quarter of 2007. Due to the complexity of the bankruptcy, we cannot estimate when, or if, the liquidation plan will be approved.

In the normal course of business we are periodically party to certain legal actions and proceedings involving matters that are generally incidental to our business (i.e., collection of loans receivable). In management’s opinion, the resolution of these legal actions and proceedings will not have a material adverse effect on our consolidated financial statements.

Other

If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by First Western, the SBA may seek recovery of funds from us. With respect to the guaranteed portion of SBA loans that have been sold, the SBA will first honor its guarantee and then seek compensation from us in the event that a loss is deemed to be attributable to technical deficiencies.

ITEM 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “believe,” “anticipate,” “estimate,” or “continue,” or the negative thereof or other variations or similar words or phrases. These statements include the plans and objectives of management for future operations, including, but not limited to, plans and objectives relating to future growth of the loan portfolio and availability of funds. The forward-looking statements included herein are based on current expectations and there can be no assurance that these expectations will be attained. For a description of certain factors that could cause our future results to differ materially from those expressed in any such forward-looking statement, see “Recent Developments and Trends That May Affect our Business.” Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not undertake to update them to reflect changes that occur after the date they are made.

The following discussion of our financial condition at September 30, 2009 and results of operations for the three and nine months ended September 30, 2009 and 2008 should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. For a more detailed description of the risks affecting our financial condition and results of operations, see “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and “Part II. Other Information — Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q.

RECENT DEVELOPMENTS AND TRENDS THAT MAY AFFECT OUR BUSINESS

The following provides an update of our recent developments and trends that may affect our business included in our Annual Report on Form 10-K for the year ended December 31, 2008 that may have an impact on our financial condition and results of operations. The factors described below could impact the volume of loan originations, the income we earn on our assets, our liquidity and growth potential, the performance of our loans and/or the performance of the off-balance sheet securitizations.