10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One);
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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o |
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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 1-13610
PMC COMMERCIAL TRUST
(Exact name of registrant as specified in its charter)
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TEXAS
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75-6446078 |
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(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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17950 Preston Road, Suite 600, Dallas, TX 75252
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(972) 349-3200 |
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(Address of principal executive offices)
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(Registrants 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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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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
PART I
Financial Information
ITEM 1.
Financial Statements
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
|
ASSETS |
|
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|
|
|
|
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Loans receivable, net |
|
$ |
198,712 |
|
|
$ |
179,807 |
|
Retained interests in transferred assets |
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|
12,413 |
|
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|
33,248 |
|
Cash and cash equivalents |
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9,652 |
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|
10,606 |
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Real estate owned |
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3,214 |
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Restricted cash and cash equivalents |
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1,220 |
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Other assets |
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4,156 |
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3,863 |
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Total assets |
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$ |
229,367 |
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$ |
227,524 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Liabilities: |
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Junior subordinated notes |
|
$ |
27,070 |
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$ |
27,070 |
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Revolving credit facility |
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23,900 |
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|
22,700 |
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Structured notes and debentures payable |
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16,762 |
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8,168 |
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Borrower advances |
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2,295 |
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|
2,819 |
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Accounts payable and accrued expenses |
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1,987 |
|
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|
2,884 |
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Redeemable preferred stock of subsidiary |
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1,961 |
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|
3,876 |
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Dividends payable |
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1,731 |
|
|
|
3,967 |
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Deferred gains on property sales |
|
|
766 |
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|
1,408 |
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Other liabilities |
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139 |
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|
270 |
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|
|
|
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|
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|
|
|
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Total liabilities |
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76,611 |
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|
73,162 |
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Commitments and contingencies |
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Beneficiaries equity: |
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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 |
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Additional paid-in capital |
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152,587 |
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|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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156,757 |
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|
157,287 |
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|
|
|
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Less: Treasury stock; at cost, 536,329 and 371,495 shares at September 30, 2009 and
December 31, 2008, respectively |
|
|
(4,901 |
) |
|
|
(3,825 |
) |
|
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|
|
|
|
|
|
|
|
|
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Total parent company beneficiaries equity |
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151,856 |
|
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|
153,462 |
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Noncontrolling interests cumulative preferred stock of subsidiary |
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|
900 |
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|
900 |
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|
|
|
|
|
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|
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|
|
|
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Total beneficiaries equity |
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152,756 |
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154,362 |
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Total liabilities and beneficiaries equity |
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$ |
229,367 |
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$ |
227,524 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
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Nine Months Ended |
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Three Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(Unaudited) |
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Revenues: |
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Interest income |
|
$ |
8,466 |
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$ |
10,886 |
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$ |
2,830 |
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$ |
3,601 |
|
Income from retained interests in transferred assets |
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|
2,369 |
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|
5,243 |
|
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|
672 |
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|
1,047 |
|
Other income |
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|
1,265 |
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|
1,587 |
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|
735 |
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|
432 |
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Total revenues |
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12,100 |
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|
17,716 |
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|
4,237 |
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|
5,080 |
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Expenses: |
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Salaries and related benefits |
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2,864 |
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3,752 |
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|
944 |
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|
1,161 |
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Interest |
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|
2,240 |
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|
|
3,163 |
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|
644 |
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|
953 |
|
General and administrative |
|
|
1,380 |
|
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|
1,794 |
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|
403 |
|
|
|
671 |
|
Provision for loan losses, net |
|
|
596 |
|
|
|
114 |
|
|
|
393 |
|
|
|
102 |
|
Permanent impairments on retained interests in transferred assets |
|
|
515 |
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|
377 |
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|
|
438 |
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|
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Severance and related benefits |
|
|
|
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|
1,573 |
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|
|
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|
1,573 |
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Total expenses |
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|
7,595 |
|
|
|
10,773 |
|
|
|
2,822 |
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|
4,460 |
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|
|
|
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|
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|
|
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|
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|
|
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|
|
|
|
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|
Income before income tax benefit (provision) and
discontinued operations |
|
|
4,505 |
|
|
|
6,943 |
|
|
|
1,415 |
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income tax benefit (provision) |
|
|
104 |
|
|
|
(206 |
) |
|
|
54 |
|
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|
(33 |
) |
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|
|
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|
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Income from continuing operations |
|
|
4,609 |
|
|
|
6,737 |
|
|
|
1,469 |
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
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Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of real estate |
|
|
642 |
|
|
|
778 |
|
|
|
592 |
|
|
|
16 |
|
Net losses |
|
|
(166 |
) |
|
|
|
|
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476 |
|
|
|
778 |
|
|
|
426 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
5,085 |
|
|
$ |
7,515 |
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|
$ |
1,895 |
|
|
$ |
603 |
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|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
|
10,582 |
|
|
|
10,771 |
|
|
|
10,548 |
|
|
|
10,782 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Diluted |
|
|
10,582 |
|
|
|
10,771 |
|
|
|
10,548 |
|
|
|
10,782 |
|
|
|
|
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|
|
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Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these consolidated financial statements.
2
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
3
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES EQUITY
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
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.
5
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 entitys future expected losses and receive the entitys 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 |
|
|
|
|
|
6
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 entitys 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 entitys 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).
7
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 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At September 30, 2009, includes approximately $19.9 million of loans held
as collateral for the outstanding structured notes of the 2003 Joint Venture. |
|
(2) |
|
Originated by our Small Business Investment Company (SBIC)
subsidiaries. |
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 |
|
|
|
|
|
|
|
|
8
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain loans were recorded at their estimated fair value, primarily loans in the 2003 Joint
Venture, and as such are reflected at discounted amounts. Generally, these loans have no loan
loss reserves but instead nonaccretable discounts and are thus shown in impaired loans
expected to be fully recoverable with respect to our recorded investment in the loans;
however, we do not expect to collect all amounts due based on the original contractual terms
of the note. |
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).
9
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 |
% |
|
|
|
(1) |
|
Variable interest rates are denoted by the spread over (under) the prime rate (P). |
|
(2) |
|
Discount rates utilized were (a) 4.6% to 8.6% for our required overcollateralization, (b)
9.6% for our reserve funds and (c) 14.9% for our interest-only strip receivables. |
|
(3) |
|
The prepayment rate was based on the actual performance of the loan pools, adjusted for
anticipated principal prepayments considering similar loans. |
|
(4) |
|
The weighted average remaining life of Retained Interests was calculated by summing the
product of (a) the sum of the principal collections expected in each future period multiplied
by (b) the number of periods until collection, and then dividing that total by (c) the
remaining principal balance. |
|
(5) |
|
Represents aggregate estimated future losses as a percentage of the principal outstanding
based upon per annum losses ranging from 0.7% to 1.0%. |
|
(6) |
|
Represents aggregate principal losses to date as a percentage of the principal outstanding at
inception. |
First Western SBLC, Inc. (First Western) has Retained Interests related to the sale of loans
originated pursuant to the Small Business Administrations (SBA) 7(a) Program. We expect the SBA
guaranteed portions of First Westerns 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 Westerns
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).
10
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 |
) |
|
|
|
(1) |
|
Any depreciation of our Retained Interests is either included in the accompanying statement
of income as a permanent impairment or on our balance sheet in beneficiaries equity as an
unrealized loss. |
|
(2) |
|
If we experience losses in excess of anticipated losses, the effect on our Retained Interests
would first be to reduce the value of the IO receivables. To the extent the IO receivables
could not fully absorb the losses, the effect would then be to reduce the value of the reserve
funds and then the value of the OC pieces. |
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.
11
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Beginning January 2009, we consolidated the 2002 Joint Venture including structured notes of
$5,517,000 which were repaid during 2009. |
|
(2) |
|
Represents structured notes relating to the 2003 Joint Venture consolidated beginning in
September 2009. Principal payments of these structured notes are dependent upon cash flows
received from the underlying loans. Our estimate of their repayment is based on scheduled
principal payments on the underlying loans. Our estimate will differ from actual amounts to
the extent we experience prepayments and/or loan losses. |
|
(3) |
|
During May 2009, we redeemed 20,000 shares of $100 par value, 4% cumulative preferred stock
of one of our SBICs held by the SBA due in September 2009. No gain or loss was recorded on
the redemption. |
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.
12
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 2008s REIT taxable income.
PMC Commercial has wholly-owned taxable REIT subsidiaries (TRSs) which are subject to Federal
income taxes. The income generated from the TRSs is taxed at normal corporate rates.
13
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Premium income results from the sale of the government guaranteed portion of our SBA 7(a)
subsidiarys loans pursuant to Secondary Market Loan Sales. |
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 instruments 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.
14
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 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included within income from Retained Interests. |
|
(2) |
|
During the nine months ended September 30, 2009, represents the repurchase of a
securitization and consolidation of a securitization based upon attainment of the clean up
call option. During the nine months ended September 30, 2008, represents the repurchase of two
securitizations. |
|
(3) |
|
Represents accretion of income in excess of principal collections, included within income
from Retained Interests. |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Carrying value represents our impaired loans net of loan loss reserves. Our carrying value
is determined based on managements assessment of the appraised value of the collateral, tax
assessed value of the collateral, and/or operating statistics to the extent available. |
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 managements 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.
15
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 creditors
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.
16
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.
17
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 Arlingtons 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 Courts
approval of Arlingtons 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 managements 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.
18
ITEM 2.
Managements 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.
Economic Environment
We are a REIT which originates loans primarily in the limited service hospitality industry
which are mainly collateralized by real estate. Our loan underwriting is consistent and, among
other terms, typically requires (1) significant equity investments by the borrower in the property,
(2) personal guarantees from the borrower, (3) operating experience by the borrower and (4)
evidence of adequate repayment ability. We do not originate any higher-risk loans such as option
ARM products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans,
subprime loans or loans with initial teaser rates. We also do not originate any residential
mortgage loans.
In response to market disruptions, in late 2008 and early 2009, legislators and financial
regulators implemented a number of mechanisms designed to add stability and/or liquidity to the
financial markets. The overall effects of these and other legislative and regulatory efforts on
the financial markets remain uncertain in the long-term. However, in the short-term, these
initiatives appear to have assisted in the stabilization of capital market liquidity. Several of
these initiatives are due to lapse. Should these initiatives fail, or upon their expiration the
capital markets deteriorate, our business, financial condition, results of operations and prospects
could be materially adversely affected.
19
There has been an increase in mortgage defaults in the broader commercial real estate market
and a strong belief that these defaults will increase. This increase is due in part to
credit-market turmoil and declining property cash flows and property values. In addition, when
there are more foreclosures on commercial real estate properties the property values typically
decline even further as supply exceeds demand in the market for the properties underlying these
mortgages. We are beginning to see an increase in foreclosure activity. In conjunction with this
increase and our current real estate owned, we will likely experience an increase in (1) general
and administrative costs as costs associated with these properties are incurred and (2) loan losses
and/or impairment losses.
Impact on us
In the short-term, we believe the current economic environment is complicated and risky and
will continue to present increasing challenges to us, our industry and the general economy. We
continue to believe our commercial lending business has strong long-term fundamentals. However,
due to the economic conditions, we have experienced, and continue to experience, the following:
|
|
|
Loan origination limitations; |
|
|
|
Reduced operating margins due to lack of economies of scale; |
|
|
|
Limited access to capital, and if such capital is available, at increased costs that
may be significant; |
|
|
|
An increase in watch list loans; |
|
|
|
An increase in real estate owned and foreclosure proceedings; |
|
|
|
An inability to engage in structured loan transactions; and |
|
|
|
Reduced cash available for distribution to shareholders, particularly as our portfolio
yield is reduced primarily by lower variable interest rates and also by scheduled
maturities, prepayments and non-performing loans. |
At this time, we are uncertain as to how long the present economic conditions will remain and
what shape it will take in the future. We are focusing on SBA 7(a) Program loans where we can most
efficiently utilize our present capital structure and liquidity.
Liquidity Overview
Our uncollateralized $45 million revolving credit facility (the Revolver) matures December
31, 2009. We are currently negotiating to extend the maturity date of the Revolver. We believe
that our Revolver will be extended until December 31, 2010. However, the aggregate amount
available under the Revolver is expected to decrease and costs are expected to increase. There can
be no assurance that we will be able to extend or refinance our Revolver.
We have current availability under our Revolver; however, the amount available has caused us
to significantly restrict non-SBA 7(a) Program loan origination activity. As a result, the
majority of our outstanding loan commitments are for SBA 7(a) Program loans. Depending on the
availability of other sources of capital including principal prepayments on our loans, we may have
to curtail some SBA 7(a) lending opportunities in 2010. In addition, to the extent we need
additional capital for unanticipated items, there can be no assurance that we would be able to
increase the amount available under any short-term credit facilities or identify other sources of
funds with acceptable terms.
Strategic Alternatives
The credit and capital market environment remains unstable so we continue to review and
analyze potential strategic and liquidity alternatives. While we continue to explore and evaluate
opportunities as they present themselves, our primary focus is presently on maximizing the value of
our current investment portfolio and business strategy.
Current Reliance on the SBA 7(a) Program
We are focusing on origination of SBA 7(a) Program loans which require less capital due to the
ability to sell the government guaranteed portion of such loans. We utilize the SBA 7(a) Program
to originate small business loans and then sell the government guaranteed portion to investors who
then bundle and sell those loans using the asset-backed securities market.
The American Recovery and Reinvestment Act (the Stimulus Bill), passed in February 2009,
contains provisions that benefit the SBA which we believe have had a positive impact on our lending
operations. The Stimulus Bill provided the SBA with funding to eliminate fees on SBA 7(a) Program
loans and provided increased SBA guarantee percentages on SBA 7(a) Program loans of up to 90% for
certain loans. These program changes are expected to be in effect through approximately the end of
2009.
20
Cost Reduction Initiatives
In October 2008, due to economic and market conditions, we announced cost reduction
initiatives. These initiatives included streamlining our sales, credit and servicing, as well as
outsourcing some functions. Annual savings for these initiatives during the 12 months subsequent
to their implementation were approximately $1.2 million which was primarily a reduction of salaries
and related benefits on our consolidated income statement.
Loan Portfolio Performance
Our aggregate portfolio continues to have minimal realized loan losses; however, economic
conditions have subjected many of our borrowers to financial stress. We continue to see increases
in payment delinquencies, slow pays, insufficient funds payments, late fees, non-payment or lack of
timely payment of real estate taxes and borrower requests for deferments of payment of principal
and interest. Additional changes to the facts and circumstances of the individual borrowers, the
limited service hospitality industry and the economy may require the establishment of significant
additional loan loss reserves and the effect on our results of operations and financial condition
may be material.
We begin foreclosure and liquidation proceedings when we determine the pursuit of these
remedies is the most appropriate course of action. Foreclosure and bankruptcy are complex and
sometimes lengthy processes that are subject to Federal and state laws and regulations. We are in
the process of foreclosure proceedings on several properties collateralizing our serviced loans.
Historically, many borrowers have brought their loans current; thus, we stopped the foreclosure
process. Alternatively, borrowers have the option of seeking Federal bankruptcy protection which
could delay the foreclosure process or modify the terms of the loan agreement. Typically, delays
in the foreclosure process will have a negative impact on our results of operations and/or
financial condition due to direct and indirect costs incurred and possible deterioration of the
collateral. It is difficult to determine what impact the current market disruptions will have on
our borrowers whose collateral is in the process of foreclosure and the borrowers ability to
become current on their loans. We estimate that these foreclosure processes will be completed
within the next three to 12 months; however, there can be no assurance that these foreclosure
processes will be completed within this time frame.
We foreclosed on the underlying collateral (a golf course and a retail establishment) of two
loans during the quarter ended September 30, 2009. The estimated fair value of the collateral,
based upon an expectation of the proceeds to be received from their sale after payment of selling
costs was approximately $3.2 million. We are currently experiencing net operating losses and
holding costs in conjunction with these properties. We expect these net operating losses (included
in discontinued operations on our consolidated income statement) to continue until the properties
are sold or we discontinue their operations.
Loan Activity
During the first nine months of 2009 we funded approximately $16.2 million of loans. At
September 30, 2009, December 31, 2008 and September 30, 2008, our outstanding commitments to fund
loans were approximately $23.2 million, $10.0 million and $18.4 million, respectively. Our
pipeline has increased and we anticipate that our fundings during 2009 will be between $25 million
and $35 million. Depending on liquidity, we expect that fundings during 2010 will be between $30
million and $40 million.
We had a significant amount of prepayments of our serviced loans from 2006 to 2008. The result
was a reduction in our total serviced portfolio outstanding from its peak of approximately $498
million during 2004 to approximately $268 million at September 30, 2009. Our prepayment activity
slowed during the last half of 2008 and during 2009 and we expect that the amount of prepayments
will continue at these lower levels during the fourth quarter of 2009 and during 2010.
In addition to our retained portfolio of approximately $200 million at September 30, 2009, we
service approximately $68 million of aggregate principal balance remaining on loans that were sold
in structured loan sale transactions and Secondary Market Loan Sales. Since we retain a residual
interest in the cash flows from these sold loans, the performance of these loans impacts our
profitability and our cash available for dividend distributions. Therefore, we provide information
on both our loans retained (the Retained Portfolio) and combined with sold loans that we service
(the Serviced Portfolio).
21
Information on our Serviced Portfolio, including prepayment trends, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Serviced Portfolio
(1) |
|
$ |
267,931 |
|
|
$ |
275,530 |
|
|
$ |
326,368 |
|
|
$ |
397,567 |
|
|
$ |
447,220 |
|
|
$ |
468,158 |
|
|
Loans funded (2) |
|
$ |
16,217 |
|
|
$ |
34,587 |
|
|
$ |
33,756 |
|
|
$ |
51,686 |
|
|
$ |
49,942 |
|
|
$ |
49,733 |
|
|
Prepayments (3) |
|
$ |
9,555 |
|
|
$ |
68,556 |
|
|
$ |
84,137 |
|
|
$ |
91,710 |
|
|
$ |
41,049 |
|
|
$ |
15,931 |
|
|
% Prepayments (4) |
|
|
4.6 |
% |
|
|
21.0 |
% |
|
|
21.2 |
% |
|
|
20.5 |
% |
|
|
8.8 |
% |
|
|
3.2 |
% |
|
|
|
(1) |
|
Serviced Portfolio outstanding at the period ended before loan loss reserves and
deferred commitment fees. |
|
(2) |
|
During the years ended December 31 and the nine months ended September 30. |
|
(3) |
|
As of the period ended. Does not include balloon maturities of SBA 504 program
loans. |
|
(4) |
|
Represents prepayments as a percentage of the Serviced Portfolio outstanding as of
the beginning of the applicable year. For the nine months ended September 30, 2009,
represents annualized prepayments as a percentage of our Serviced Portfolio outstanding. |
LOAN PORTFOLIO INFORMATION AND STATISTICS
Loan Portfolio Rollforward
Loans originated and principal repayments on our Retained Portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Loans Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Funded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA 7(a) Program loans |
|
$ |
16,217 |
|
|
$ |
6,955 |
|
|
$ |
8,415 |
|
|
$ |
2,467 |
|
Commercial mortgage loans |
|
|
|
|
|
|
19,739 |
|
|
|
|
|
|
|
|
|
SBA 504 program loans |
|
|
|
|
|
|
3,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans funded |
|
|
16,217 |
|
|
|
30,571 |
|
|
|
8,415 |
|
|
|
2,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loan Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PMC Joint Venture, L.P. 2003 |
|
|
19,993 |
|
|
|
|
|
|
|
19,993 |
|
|
|
|
|
PMC Joint Venture, L.P. 2002-1 |
|
|
12,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PMC Joint Venture, L.P. 2001 |
|
|
|
|
|
|
13,760 |
|
|
|
|
|
|
|
|
|
PMC Capital, L.P. 1999 |
|
|
|
|
|
|
7,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans originated |
|
$ |
48,780 |
|
|
$ |
51,934 |
|
|
$ |
28,408 |
|
|
$ |
2,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Repayments (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of SBA 7(a)
guaranteed loans |
|
$ |
15,375 |
|
|
$ |
4,059 |
|
|
$ |
7,698 |
|
|
$ |
2,203 |
|
Scheduled principal payments |
|
|
5,846 |
|
|
|
3,924 |
|
|
|
2,405 |
|
|
|
1,687 |
|
Prepayments |
|
|
4,419 |
|
|
|
19,123 |
|
|
|
319 |
|
|
|
2,644 |
|
Balloon maturities of SBA 504 program loans |
|
|
|
|
|
|
4,699 |
|
|
|
|
|
|
|
2,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal repayments |
|
$ |
25,640 |
|
|
$ |
31,805 |
|
|
$ |
10,422 |
|
|
$ |
9,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include commercial mortgage loans of $3,157,000 transferred to real estate
owned during the three and nine months ended September 30, 2009. |
22
Interest Rate and Yield Information
Interest rate and yield information on our Retained Portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
contractual
interest rate |
|
|
5.5 |
% |
|
|
7.7 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized average
yield (1) (2) |
|
|
5.8 |
% |
|
|
8.4 |
% |
|
|
8.3 |
% |
|
|
|
(1) |
|
In addition to interest income, the annualized average yield includes all fees
earned and is adjusted by the provision for loan losses, net. |
|
(2) |
|
For the nine month periods ended September 30, 2009 and 2008 and for the year ended
December 31, 2008. |
The LIBOR and the prime rate used in determining interest rates to be charged to our borrowers
during the fourth quarter of 2009 (set on October 1, 2009) is 0.30% and 3.25%, respectively, while
the LIBOR and prime rate charged during the third quarter of 2009 (set on July 1, 2009) was 0.60%
and 3.25%, respectively. To the extent LIBOR or the prime rate changes, we will have changes in
interest income from our variable-rate loans.
We have $133.9 million of loans based on LIBOR and $50.7 million of debt based on LIBOR. On
the net difference of $83.2 million, LIBOR reductions will have a negative impact on future
earnings. Effective in the fourth quarter of 2009, we experienced a reduction in the LIBOR base
rate charged on our loans (a decrease of approximately 30 basis points) which will cause a further
reduction in our net interest income, assuming no change in our LIBOR based loans or debt, of
approximately $250,000 on an annual basis or approximately $63,000 to our fourth quarter 2009 net
interest income. Since LIBOR has already been reduced to historically low levels, further
significant negative impacts from lower LIBOR interest rates is not anticipated. However, there
can be no assurance that LIBOR will not be reduced further.
The weighted average contractual interest rate on our Serviced Portfolio was 5.8%, 7.9% and
7.3% at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.
Retained Portfolio Breakdown
Our Retained Portfolio was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Retained Portfolio |
|
|
Interest |
|
|
Retained Portfolio |
|
|
Interest |
|
|
|
Amount |
|
|
% |
|
|
Rate |
|
|
Amount |
|
|
% |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
Variable-rate
LIBOR |
|
$ |
133,882 |
|
|
|
67.4 |
% |
|
|
4.3 |
% |
|
$ |
123,081 |
|
|
|
68.4 |
% |
|
|
7.5 |
% |
Fixed-rate |
|
|
47,659 |
|
|
|
24.0 |
% |
|
|
9.0 |
% |
|
|
39,297 |
|
|
|
21.9 |
% |
|
|
9.0 |
% |
Variable-rate
prime |
|
|
17,171 |
|
|
|
8.6 |
% |
|
|
5.3 |
% |
|
|
17,429 |
|
|
|
9.7 |
% |
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
198,712 |
|
|
|
100.0 |
% |
|
|
5.5 |
% |
|
$ |
179,807 |
|
|
|
100.0 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
Management closely monitors our impaired loans which are classified into two categories:
Problem Loans and Special Mention Loans (together, Impaired Loans). Our Problem Loans are loans
which are not complying with their contractual terms, the collection of the balance of the
principal is considered unlikely and on which the fair value of the collateral is less than the
remaining unamortized principal balance. Our Special Mention Loans are those loans that are either
not complying or had previously not complied with their contractual terms but, in general, we
expect a full recovery of the principal balance through either collection efforts or liquidation of
collateral.
23
In addition to Impaired Loans, we have watch list loans as determined by management. Watch
List loans are generally loans for which the borrowers are current on their payments; however, they
may be delinquent on their property taxes, have franchise issues (non-payment of fees and/or
failure to meet franchise standards), insurance defaults or other contractual deficiencies.
We have a quarterly review process to identify and evaluate potential exposure to loan losses.
Loans that require specific identification review (and to the extent required, a specific
identification reserve) are identified based on one or more negative characteristics including, but
not limited to, non-payment or lack of timely payment of interest and/or principal, non-payment or
lack of timely payment of property taxes for an extended period of time, insurance defaults and/or
franchise defaults. For each specifically identified loan, an evaluation is prepared to identify
the exposure to loss. The specific identification evaluation begins with an estimation of
underlying collateral values using appraisals, broker price opinions, tax assessed value and/or
revenue analysis. Appraisals are ordered on a case-by-case basis when management believes that the
economic characteristics of the property warrant that a current appraisal be performed. We
generally use MAI certified appraisers from national companies. Management uses appraisals as
tools in conjunction with other determinants of collateral value as described above to estimate
collateral values; not as the sole determinant of value. The property valuation takes into
consideration current information on property values in general and value changes in commercial
real estate and/or hospitality properties.
At September 30, 2009 and December 31, 2008, we had loan loss reserves of $864,000 and
$480,000, respectively, including general reserves of $500,000 and $275,000, respectively. Our
provision for loan losses (excluding reductions of loan losses) as a percentage of our weighted
average outstanding loans receivable was 0.36% and 0.07% during the nine months ended September 30,
2009 and 2008, respectively. To the extent one or several of our loans experience significant
operating difficulties and we are forced to liquidate the loans, future losses may be substantial.
Our loan categories were as follows on our loans receivable (balances represent our investment
in the loans prior to loan loss reserves and deferred commitment fees):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Satisfactory |
|
$ |
169,672 |
|
|
|
84.9 |
% |
|
$ |
156,303 |
|
|
|
86.6 |
% |
|
$ |
160,648 |
|
|
|
96.5 |
% |
Watch List |
|
|
25,824 |
|
|
|
12.9 |
% |
|
|
12,507 |
|
|
|
6.9 |
% |
|
|
2,662 |
|
|
|
1.6 |
% |
Special Mention |
|
|
2,028 |
|
|
|
1.0 |
% |
|
|
9,294 |
|
|
|
5.1 |
% |
|
|
3,064 |
|
|
|
1.9 |
% |
Problem |
|
|
2,429 |
|
|
|
1.2 |
% |
|
|
2,501 |
|
|
|
1.4 |
% |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
199,953 |
|
|
|
100.0 |
% |
|
$ |
180,605 |
|
|
|
100.0 |
% |
|
$ |
166,423 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our Watch List loans is primarily due to borrowers who failed to pay their
property taxes when due.
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. We use Level 3 inputs
to determine the estimated fair value of our Impaired Loans and real estate owned. Adjustments to
the carrying value of Impaired Loans and real estate owned are generally based on managements
assessment of the appraised value of the collateral, tax assessed value of the collateral and/or
operating statistics to the extent available.
RETAINED INTERESTS
At September 30, 2009, Retained Interests was our only asset that is required to be measured
at fair value on a recurring basis. 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. Due to the
limited number of entities that conduct structured loan sale transactions with similar assets, the
small size of our Retained Interests and the limited number of buyers for such assets, no readily
ascertainable market exists for our Retained Interests. Therefore, we utilize our own data and
assumptions to determine the value of our Retained Interests, in conjunction with our knowledge of
similar markets for our type of Retained Interests. Based on these factors, our estimate of fair
value may vary significantly from what a willing buyer would pay for these assets.
24
The estimated fair value of our Retained Interests is determined based on the present
value of estimated future cash flows from the associated QSPEs. This valuation is dependent upon
estimates of future cash flows that are based on the performance of the underlying loans and
estimates of discount rates. Prepayments or losses in excess of estimates may cause unrealized
depreciation and potentially impairments. The estimated future cash flows are calculated based on
assumptions including, among other things, prepayment speeds and loan losses. We regularly measure
loan loss and prepayment assumptions against the actual performance of the loans sold and to the
extent adjustments to our assumptions are deemed necessary, they are made on a quarterly basis.
As a result of the lack of available market inputs, at the time our securitization
transactions were completed and for each quarterly valuation update, we utilized a cash flow model
to determine the estimated fair value of our Retained Interests. The discount rates utilized in
computing the net present value of future cash flows are based on an estimate of the inherent risk
associated with each cash flow stream (i.e., interest-only strip receivable, reserve funds and
overcollateralized piece). Although we believe these estimates of discount rates are reasonable
estimates of the market rate, purchasers of these types of investments may utilize different
discount rates in determining their value of the estimated future cash flows.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Dollars in thousands, except per share data) |
|
Total revenues |
|
$ |
4,237 |
|
|
$ |
5,080 |
|
|
$ |
(843 |
) |
|
|
(16.6 |
%) |
Total expenses |
|
$ |
2,822 |
|
|
$ |
4,460 |
|
|
$ |
(1,638 |
) |
|
|
(36.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1,469 |
|
|
$ |
587 |
|
|
$ |
882 |
|
|
|
150.3 |
% |
Net income |
|
$ |
1,895 |
|
|
$ |
603 |
|
|
$ |
1,292 |
|
|
|
214.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
|
133.3 |
% |
Net income |
|
$ |
0.18 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
|
200.0 |
% |
Our total expenses, income from continuing operations and net income were significantly
impacted during the three months ended September 30, 2008 for a one-time charge for severance costs
of $1,573,000 related to our cost reduction initiatives. Without this charge, our total expenses,
income from continuing operations and net income would have been $2,887,000, $2,160,000 and
$2,176,000, respectively, during the three months ended September 30, 2008.
In addition, when comparing the third quarter of 2009 to the third quarter of 2008:
|
|
|
Interest income decreased $771,000 due primarily to the decline in LIBOR; |
|
|
|
Gains on sales of real estate (included in discontinued operations) increased
$576,000 due to income recognition on previously deferred gains; |
|
|
|
Overhead (salaries and related benefits and general and administrative expenses)
decreased $485,000 due primarily to our 2008 cost reduction initiatives and a
reduction in legal fees; |
|
|
|
Permanent impairments on Retained Interests of $438,000 were incurred during three
months ended September 30, 2009 due primarily to a reduction in estimated future cash
flows from increased losses; |
25
|
|
|
Income from Retained Interests decreased $375,000 due primarily to a reduction in
our weighted average Retained Interests of 28% partially offset by an increase in
unanticipated prepayment fees of $106,000. The 2002 Joint Venture and the 2003 Joint
Venture (previously off-balance sheet entities which were included in Retained
Interests), were consolidated beginning January 2009 and September 2009, respectively; |
|
|
|
Interest expense decreased $309,000 due primarily to the decline in LIBOR; |
|
|
|
Other income increased $303,000 due primarily to premium income recognized on the
sale of SBA 7(a) Program loans into the secondary market; |
|
|
|
Provision for loan losses, net, increased $291,000 due to increases in both our
specific and general reserves due primarily to devaluations of real estate collateral
underlying our limited service hospitality properties; and |
|
|
|
Net losses from discontinued operations were $166,000 during the three months ended
September 30, 2009 from the operations of our real estate owned. |
Based upon loss of QSPE status resulting from a change in accounting rules, we anticipate that
our off-balance sheet securitizations will be consolidated beginning January 1, 2010. At September
30, 2009, our off-balance sheet securitizations had loans of $28.4 million, structured notes of
$20.9 million and restricted cash and cash equivalents of $4.4 million. Upon consolidation, we
would no longer record income from Retained Interests or servicing fee income related to these
off-balance sheet securitizations. Instead, we would record interest income and interest expense.
More detailed comparative information on the composition of and changes in our revenues and
expenses is provided below.
Revenues
The decrease in interest income of $771,000 was primarily attributable to decreases in LIBOR
and our weighted average loans receivable outstanding. Our weighted average loans receivable
outstanding decreased to approximately $186.2 million during the three months ended September 30,
2009 from $189.6 million during the three months ended September 30, 2008. At September 30, 2009,
approximately 76% of our loans had variable interest rates. The base LIBOR charged to our
borrowers decreased from 2.79% during the three months ended September 30, 2008 to 0.60% during the
three months ended September 30, 2009. The reduction in interest income resulting from this drop
in LIBOR as compared to the same period of the prior year was approximately $700,000. To the
extent variable rates decline further, they will have a negative impact on our earnings. In
addition, primarily due to the weakened economy and recession, our non-accrual loans have increased
to $4.4 million at September 30, 2009 from $0.1 million at September 30, 2008.
Income from Retained Interests decreased $375,000 primarily due to a decrease in the weighted
average balance of our Retained Interests outstanding of $9.4 million to $24.0 million during the
three months ended September 30, 2009 compared to $33.4 million during the three months ended
September 30, 2008 due primarily to the attainment of the clean-up call option on the 2003 Joint
Venture and exercise of the clean-up call option and repayment of the structured notes of the
2002 Joint Venture. Partially offsetting this decrease in income from Retained Interests was an
increase in unanticipated prepayment fees of approximately $106,000. The yield on our Retained
Interests, which is comprised of the income earned less permanent impairments, decreased to 7.4%
during the three months ended September 30, 2009 compared to 12.7% during the three months ended
September 30, 2008. Excluding permanent impairments, the yield on our Retained Interests decreased
to 9.2% during the three months ended September 30, 2009 compared to 12.7% during the three months
ended September 30, 2008. Based primarily upon loss of QSPE status resulting from a change in
accounting rules described above, we anticipate only minimal income from Retained Interests in
2010.
26
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Premium income |
|
$ |
561 |
|
|
$ |
110 |
|
Servicing income |
|
|
91 |
|
|
|
98 |
|
Loan related income other |
|
|
45 |
|
|
|
143 |
|
Equity in earnings |
|
|
19 |
|
|
|
22 |
|
Prepayment fees |
|
|
|
|
|
|
18 |
|
Other |
|
|
19 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
$ |
735 |
|
|
$ |
432 |
|
|
|
|
|
|
|
|
Premium income results from the sale of the government guaranteed portion of SBA 7(a) Program
loans into the secondary market. During the three months ended September 30, 2009, we sold
approximately $7.7 million (guaranteed portion) of SBA 7(a) Program loans into the secondary market
and collected cash premiums of approximately $580,000. Premium income will not equal collected
cash premiums because (1) premium income represents the difference between the relative fair value
attributable to the sale of the guaranteed portion of the loan and the principal balance (cost) of
the loan adjusted by costs of origination and (2) the guaranteed portions of some loans were sold
for future servicing instead of up-front cash premiums. Beginning January 1, 2010, due to a change
in accounting rules, 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. Therefore, we do not expect to record any premium income during the first quarter of
2010.
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Junior subordinated notes |
|
$ |
268 |
|
|
$ |
426 |
|
Revolver |
|
|
158 |
|
|
|
272 |
|
Debentures payable |
|
|
126 |
|
|
|
125 |
|
Structured notes |
|
|
51 |
|
|
|
57 |
|
Other |
|
|
41 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
$ |
644 |
|
|
$ |
953 |
|
|
|
|
|
|
|
|
The weighted average cost of our funds for the quarter ended September 30, 2009 was 3.8%
compared to 5.2% during the quarter ended September 30, 2008. Interest expense on the junior
subordinated notes decreased as a result of decreases in LIBOR. Interest expense on our Revolver
decreased as a result of a decrease in the weighted average interest rate from 4.3% during the
three months ended September 30, 2008 to 2.2% during the three months ended September 30, 2009.
During May 2009, we redeemed 20,000 shares of $100 par value, 4% cumulative preferred stock of
one of our SBICs held by the SBA due in September 2009. No gain or loss was recorded on the
redemption.
In September 2009, we repaid the remaining structured notes of the 2002 Joint Venture which
had a fixed interest rate of 6.67%. In addition, beginning in September 2009, we consolidated the
2003 Joint Venture including its structured notes of $8.6 million which bear interest at LIBOR plus
2.5%.
27
Other Expenses
Salaries and related benefits expense decreased $217,000 during the three months ended
September 30, 2009 compared to the three months ended September 30, 2008 due primarily to our
reduction in workforce in October 2008. Annual savings from the cost reduction initiatives during
the 12 months subsequent to their implementation were approximately $1.2 million which were
primarily a reduction of salaries and related benefits.
General and administrative expense decreased $268,000 during the three months ended September
30, 2009 compared to the three months ended September 30, 2008 due primarily to a reduction in
legal fees related to potential strategic alternatives.
Permanent impairments on Retained Interests (write-downs of the value of our Retained
Interests) were $438,000 for the three months ended September 30, 2009 resulting primarily from
reductions in expected future cash flows due to increased losses. There were no permanent
impairments on Retained Interests during the three months ended September 30, 2008.
Provision for loan losses, net, increased to $393,000 during the three months ended September
30, 2009 from $102,000 during the three months ended September 30, 2008. We recorded a provision
for loan losses of $168,000 related to specific reserves during the three months ended September
30, 2009 due primarily to devaluations of commercial real estate collateralizing our limited
service hospitality loans. We recorded a provision for loan losses of $225,000 related to our
general reserves during the three months ended September 30, 2009 due primarily to the weakened
economy and recession, devaluations of commercial real estate, increased Watch List loans and
rising borrower delinquencies and deferment requests. Our provision for loan losses, net, during
the three months ended September 30, 2008 of $102,000 was related only to specific reserves.
Discontinued Operations
We recorded gains on sales of real estate of $592,000 and $16,000 during the three months
ended September 30, 2009 and 2008, respectively, due to income recognition on previously deferred
gains. Our remaining deferred gains total $766,000 at September 30, 2009. Deferred gains are
recorded to income as principal is received on the related loans receivable until the required
amount of cash proceeds are obtained from the purchaser to qualify for full accrual gain treatment.
We anticipate, assuming timely collection of standard principal and interest payments, that
approximately $80,000 of our remaining deferred gains will be recognized during the fourth quarter
of 2009.
Our net losses from discontinued operations of $166,000 during the three months ended
September 30, 2009 primarily represent the losses from operating our real estate owned, primarily a
golf course. We expect these net operating losses to continue until the property is sold or we
discontinue its operations.
28
Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
|
(Dollars in thousands, except per share data) |
|
Total revenues |
|
$ |
12,100 |
|
|
$ |
17,716 |
|
|
$ |
(5,616 |
) |
|
|
(31.7 |
%) |
Total expenses |
|
$ |
7,595 |
|
|
$ |
10,773 |
|
|
$ |
(3,178 |
) |
|
|
(29.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
4,609 |
|
|
$ |
6,737 |
|
|
$ |
(2,128 |
) |
|
|
(31.6 |
%) |
Net income |
|
$ |
5,085 |
|
|
$ |
7,515 |
|
|
$ |
(2,430 |
) |
|
|
(32.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.44 |
|
|
$ |
0.63 |
|
|
$ |
(0.19 |
) |
|
|
(30.2 |
%) |
Net income |
|
$ |
0.48 |
|
|
$ |
0.70 |
|
|
$ |
(0.22 |
) |
|
|
(31.4 |
%) |
Our total expenses, income from continuing operations and net income were significantly
impacted during the nine months ended September 30, 2008 for a one-time charge for severance costs
of $1,573,000 related to our cost reduction initiatives. Without this charge, our total expenses,
income from continuing operations and net income would have been $9,200,000, $8,310,000 and
$9,088,000, respectively, during the nine months ended September 30, 2008.
In addition, when comparing the nine months of 2009 to the nine months of 2008:
|
|
|
Income from Retained Interests decreased $2,874,000 due primarily to a reduction in
our weighted average Retained Interests of 40% and a decrease in unanticipated
prepayment fees of $1,207,000. The 2002 Joint Venture and the 2003 Joint Venture
(previously off-balance sheet entities which were included in Retained Interests),
were consolidated beginning in January 2009 and September 2009, respectively; |
|
|
|
Interest income decreased $2,420,000 due primarily to the decline in LIBOR; |
|
|
|
Overhead (salaries and related benefits and general and administrative expenses)
decreased $1,302,000 due primarily to our 2008 cost reduction initiatives and a
reduction in legal expenses; |
|
|
|
Interest expense decreased $923,000 due primarily to the decline in LIBOR; |
|
|
|
Provision for loan losses, net, increased $482,000 due to increases in both our
specific and general reserves due primarily to devaluations of real estate collateral
underlying our limited service hospitality properties; |
|
|
|
Other income decreased $322,000 due primarily to a reduction in prepayment fees and
servicing income partially offset by an increase in premium income; and |
|
|
|
Net losses from discontinued operations were $166,000 during the nine months ended
September 30, 2009 from the operations of our real estate owned. |
Based upon loss of QSPE status resulting from a change in accounting rules, we anticipate that
our off-balance sheet securitizations will be consolidated beginning January 1, 2010. At September
30, 2009, our off-balance sheet securitizations had loans of $28.4 million, structured notes of
$20.9 million and restricted cash and cash equivalents of $4.4 million. Upon consolidation, we
would no longer record income from Retained Interests or servicing fee income related to these
off-balance sheet securitizations. Instead, we will record interest income and interest expense.
More detailed comparative information on the composition of and changes in our revenues and
expenses is provided below.
29
Revenues
The decrease in interest income of $2,420,000 was primarily attributable to decreases in LIBOR
partially offset by an increase in our weighted average loans receivable outstanding. Our weighted
average loans receivable outstanding increased to approximately $187.9 million during the nine
months ended September 30, 2009 from $179.2 million during the nine months ended September 30, 2008
primarily due to the consolidation of loans previously included in off-balance sheet entities
during January and September 2009. At September 30, 2009, approximately 76% of our loans had
variable interest rates. The average base LIBOR charged to our borrowers decreased from 3.41%
during the nine months ended September 30, 2008 to 1.08% during the nine months ended September 30,
2009. The reduction in interest income resulting from this drop in LIBOR as compared to the same
period of the prior year was approximately $2,200,000. To the extent variable rates decline
further, they will have a negative impact on our earnings. In addition, primarily due to the
weakened economy and recession, our non-accrual loans have increased to $4.4 million at September
30, 2009 from $0.1 million at September 30, 2008.
Income from Retained Interests decreased $2,874,000 primarily due to a decrease in the
weighted average balance of our Retained Interests outstanding of $16.4 million to $24.4 million
during the nine months ended September 30, 2009 compared to $40.8 million during the nine months
ended September 30, 2008 due primarily to the attainment of the clean-up call option on the 2003
Joint Venture and exercise of the clean-up call option and repayment of the structured notes of
the 2002 Joint Venture. In addition, there was a decrease in unanticipated prepayment fees of
$1,207,000. The yield on our Retained Interests, which is comprised of the income earned less
permanent impairments, decreased to 9.8% during the nine months ended September 30, 2009 compared
to 15.1% during the nine months ended September 30, 2008. Excluding permanent impairments, the
yield on our Retained Interests decreased to 11.9% during the nine months ended September 30, 2009
compared to 16.0% during the nine months ended September 30, 2008. Based primarily upon loss of
QSPE status described above, we anticipate only minimal income from Retained Interests in 2010.
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Premium income |
|
$ |
629 |
|
|
$ |
223 |
|
Servicing income |
|
|
289 |
|
|
|
378 |
|
Loan related income other |
|
|
174 |
|
|
|
265 |
|
Equity in earnings |
|
|
58 |
|
|
|
70 |
|
Prepayment fees |
|
|
46 |
|
|
|
396 |
|
Other |
|
|
69 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
$ |
1,265 |
|
|
$ |
1,587 |
|
|
|
|
|
|
|
|
Premium income results from the sale of the government guaranteed portion of SBA 7(a) Program
loans into the secondary market. During the nine months ended September 30, 2009, we sold
approximately $15.4 million (guaranteed portion) of SBA 7(a) Program loans into the secondary
market and collected cash premiums of approximately $790,000. Premium income will not equal
collected cash premiums because (1) premium income represents the difference between the relative
fair value attributable to the sale of the guaranteed portion of the loan and the principal balance
(cost) of the loan adjusted by costs of origination and (2) the guaranteed portions of some loans
were sold for future servicing instead of up-front cash premiums. Beginning January 1, 2010, due to
a change in accounting rules, 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. Therefore, we do not expect to record any premium income during the
first quarter of 2010.
We saw high levels of prepayment activity during the first half of 2008; however, our
prepayment activity slowed during the last half of 2008 and 2009. We anticipate that the amount of
prepayments will continue at relatively low levels during the remainder of 2009 and during 2010.
Prepayment fee income is dependent upon a number of factors and is not generally predictable as the
mix and amount of loans prepaying is not known.
30
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Junior subordinated notes |
|
$ |
896 |
|
|
$ |
1,393 |
|
Revolver |
|
|
513 |
|
|
|
584 |
|
Debentures payable |
|
|
372 |
|
|
|
373 |
|
Structured notes |
|
|
235 |
|
|
|
100 |
|
Conduit facility |
|
|
|
|
|
|
434 |
|
Other |
|
|
224 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
$ |
2,240 |
|
|
$ |
3,163 |
|
|
|
|
|
|
|
|
The weighted average cost of our funds for the nine months ended September 30, 2009 was
3.4% compared to 5.7% during the nine months ended September 30, 2008. Interest expense on the
junior subordinated notes decreased as a result of decreases in LIBOR. Interest expense on our
Revolver decreased due primarily to a decrease in the weighted average interest rate from 4.3%
during the nine months ended September 30, 2008 to 2.4% during the nine months ended September 30,
2009 partially offset by an increase in the weighted average borrowings under the Revolver from
$15.8 million during the nine months ended September 30, 2008 to $24.7 million during the nine
months ended September 30, 2009. The conduit facility matured on May 2, 2008 and was repaid using
proceeds from our Revolver.
During May 2009, we redeemed 20,000 shares of $100 par value, 4% cumulative preferred stock of
one of our SBICs held by the SBA due in September 2009. No gain or loss was recorded on the
redemption.
In September 2009, we repaid the remaining structured notes of the 2002 Joint Venture which
had a fixed interest rate of 6.67%. In addition, beginning in September 2009, we consolidated the
2003 Joint Venture including its structured notes of $8.6 million which bear interest at LIBOR plus
2.5%.
Other Expenses
Salaries and related benefits expense decreased $888,000 during the nine months ended
September 30, 2009 from the nine months ended September 30, 2008 due primarily to our reduction in
workforce in October 2008. Annual savings from the cost reduction initiatives during the 12 months
subsequent to their implementation were approximately $1.2 million which were primarily a reduction
of salaries and related benefits.
General and administrative expenses decreased $414,000 during the nine months ended September
30, 2009 from the nine months ended September 30, 2008 due primarily to a reduction in legal fees
related to potential strategic alternatives.
Permanent impairments on Retained Interests (write-downs of the value of our Retained
Interests) were $515,000 and $377,000 for the nine months ended September 30, 2009 and 2008,
respectively. Permanent impairments during 2009 resulted primarily from reductions in future
expected cash flows due to increased losses. Permanent impairments during 2008 resulted primarily
from reductions in future expected cash flows due to decreased actual prepayments, increased losses
and a reduction in idle funds interest.
Provision for loan losses, net, increased to $596,000 during the nine months ended September
30, 2009 from $114,000 during the nine months ended September 30, 2008. We recorded a provision
for loan losses of $371,000 related to our specific reserves during the nine months ended September
30, 2009 due primarily to devaluations of commercial real estate collateralizing our limited
service hospitality loans. We recorded a provision for loan losses of $225,000 related to our
general reserves during the nine months ended September 30, 2009 due primarily to the weakened
economy and recession, evaluations of commercial real estate, increased Watch List loans and rising
borrower delinquencies and deferment requests. Our provision for loan losses, net, during the nine
months ended September 30, 2008 of $114,000 was related only to specific reserves.
31
Income tax benefit (provision) was a provision of $206,000 during the nine months ended
September 30, 2008 compared to a benefit of $104,000 during the nine months ended September 30,
2009 due primarily to (1) reduced taxable earnings of one of the TRSs and (2) a deferred benefit
resulting from sales of loans of our SBA subsidiary.
Discontinued Operations
We recorded gains on sales of real estate of $642,000 and $778,000 during the nine months
ended September 30, 2009 and 2008, respectively, due to income recognition on previously deferred
gains. Our remaining deferred gains total $766,000 at September 30, 2009. Deferred gains are
recorded to income as principal is received on the related loans receivable until the required
amount of cash proceeds are obtained from the purchaser to qualify for full accrual gain treatment.
We anticipate, assuming timely collection of standard principal and interest payments, that
approximately $80,000 of our remaining deferred gains will be recognized during the fourth quarter
of 2009.
Our net losses from discontinued operations of $166,000 during the nine months ended September
30, 2009 represent the losses from operating our real estate owned, primarily a golf course. We
expect these net operating losses to continue until the properties are sold or we discontinue their
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
Information on our cash flow was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(In thousands) |
|
Cash provided by operating
activities |
|
$ |
5,301 |
|
|
$ |
7,423 |
|
|
$ |
(2,122 |
) |
Cash provided by investing
activities |
|
$ |
9,131 |
|
|
$ |
3,397 |
|
|
$ |
5,734 |
|
Cash used in financing activities |
|
$ |
(15,386 |
) |
|
$ |
(17,463 |
) |
|
$ |
2,077 |
|
Operating Activities
The reduction in cash provided by operating activities was primarily caused by (1) reduced net
income, (2) payment of accounts payable and accrued expenses, including severance payments of
approximately $1.4 million, and (3) disbursement of borrower advances offset by an increase in
proceeds from sale of guaranteed loans net of loans funded, held for sale.
Our net cash flow from operating activities is primarily used to fund our dividends. Our
modified cash available for dividend distributions (Modified Cash), as reconciled below to net
cash provided by operating activities, is defined as cash from operating activities before (1) the
change in operating assets and liabilities and (2) loans funded, held for sale, net of proceeds
from sale of guaranteed loans (Operating Loan Activity). To the extent Modified Cash does not
cover the current dividend distribution rate or if additional cash is needed based on our working
capital needs, the Board of Trust Managers may choose to modify its current dividend policy.
During the nine months ended September 30, 2009, dividend distributions were greater than our
Modified Cash by $2,692,000 funded using principal collections on our loans. This was primarily
caused by REIT taxable income timing differences (i.e., severance payments, etc.) combined with the
declaration of $1.5 million in a special dividend paid in the first quarter of 2009 that related to
2008. During the nine months ended September 30, 2008, dividend distributions were greater than
our Modified Cash by $798,000.
32
The following reconciles net cash flow from operating activities to Modified Cash:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
5,301 |
|
|
$ |
7,423 |
|
Change in operating assets and liabilities |
|
|
1,409 |
|
|
|
(1,719 |
) |
Operating Loan Activity |
|
|
(1,409 |
) |
|
|
1,306 |
|
|
|
|
|
|
|
|
Modified Cash |
|
$ |
5,301 |
|
|
$ |
7,010 |
|
|
|
|
|
|
|
|
Investing Activities
During the nine months ended September 30, 2009 and 2008, the primary source of funds was
principal collected on loans, net of loans funded of $8,014,000 and $2,540,000, respectively.
Principal collected on Retained Interests declined from $773,000 during the nine months ended
September 30, 2008 to $246,000 during the nine months ended September 30, 2009. We anticipate that
the principal collected on our Retained Interests will continue to decline during 2009 based on
payoffs and pay downs of outstanding principal. In addition, during the nine months ended
September 30, 2009 and 2008, we used cash of approximately $1.3 million and $2.8 million,
respectively, to fund the clean-up call options of two of our securitization transactions. We do
not expect to exercise any clean-up call options in the short-term. Since we are focusing on the
origination of SBA 7(a) Program loans, we anticipate that the primary source of net cash provided
by investing activities will continue to be principal collected on loans, net of loans funded.
Financing Activities
We used funds in financing activities during the nine months ended September 30, 2009 and 2008
primarily to pay dividends of $7,993,000 and $7,808,000, respectively. In addition, during the
nine months ended September 30, 2009, we (1) redeemed $2,000,000 of redeemable preferred stock of
subsidiary due in September 2009, (2) repurchased common shares under our share repurchase plan for
$1,076,000 and (3) exercised the clean-up call option and repaid the structured notes of the 2002
Joint Venture of $5,517,000. During the nine months ended September 30, 2008, we repaid $7,205,000
in structured notes of one of our securitizations.
Sources and Uses of Funds
Liquidity Summary
Our primary sources of funds to meet our short-term liquidity needs, including working
capital, dividends, debt service and additional investments, if any, consist of (1) cash flow from
operations (including Secondary Market Loan Sales), (2) proceeds from principal and interest
payments, including prepayments, on our unrestricted investments and (3) borrowings under any
available short-term credit facilities. We believe these sources of funds will be sufficient to
meet our liquidity requirements in the short-term. To a lesser extent, and to the extent available
to us, we may utilize (1) proceeds from potential loan and asset sales, (2) new financings or
additional securitization offerings and (3) proceeds from potential common or preferred equity
offerings.
Due to continued market turbulence, we do not anticipate having the ability in the next year
to access debt capital through alternative or increased warehouse lines, new securitization
issuances or new trust preferred issuances. We continue to explore ways to extend or refinance our
Revolver; however, in the event we are not able to extend or refinance our Revolver or successfully
secure alternative financing, we will rely on cash flows from operations (including Secondary
Market Loan Sales), principal payments (including prepayments) on our unrestricted investments, and
(if necessary) proceeds from asset and loan sales to satisfy our working capital needs. We are in
discussions with our bank to extend our Revolver. Based on these discussions, management believes
it is likely that we will be able to extend our facility through December 31, 2010. However, we
anticipate that the aggregate availability under our Revolver will be reduced and its costs will
increase. There can be no assurance that we will be able to extend or refinance our Revolver. If
we are unable to renew, replace or
expand our sources of financing, it may have an adverse effect on our business, results of
operations and ability to pay dividends to our shareholders.
33
If we are unable to make required payments under our borrowings, breach any representation or
warranty of our borrowings or violate any covenant, our lenders may accelerate the maturity of our
debt or require us to pledge collateral. At September 30, 2009, PMC Commercial Trust has over $139
million of unencumbered loans. In addition, there may be available cash held by our subsidiaries.
To the extent necessary, management believes that these assets would provide sufficient liquidity,
if needed, to satisfy any required payment on our Revolver. If we are unable to repay our
borrowings, including, without limitation, in the event we are unable to extend or refinance our
Revolver, we may need to prematurely sell assets or lenders could force us to take other actions.
Any such event may have a material adverse effect on our liquidity, the value of our common shares
and the ability to pay dividends to our shareholders.
Sources of Funds
In general, we require liquidity to originate new loans and repay debt principal and interest.
Our operating revenues are typically utilized to pay our operating expenses and dividends. We
have been utilizing principal collections on unrestricted loans receivable and Retained Interests
and borrowings under our Revolver as our primary sources of funds. In addition, historically we
utilized a combination of the following sources to generate funds:
|
|
|
Structured loan financings or sales; |
|
|
|
Issuance of SBA debentures; |
|
|
|
Secondary Market Loan Sales; |
|
|
|
Issuance of junior subordinated notes; and/or |
|
|
|
Common equity issuance. |
As discussed previously, these markets (with the exception of SBA debentures and Secondary
Market Loan Sales) are not available at the present time and there can be no assurance that they
will be available in the future. At our current share price, we do not intend to issue common
shares. Since 2004, our working capital has primarily been provided through credit facilities, the
issuance of junior subordinated notes and principal payments (including prepayments) on
unrestricted loans receivable. Prior to 2004, our primary source of long-term funds was structured
loan sale transactions. At the current time, there is no market for commercial loan asset-backed
securitizations. We cannot anticipate when, or if, this market will be available in the future.
Until this market becomes available, we obtain a source of long-term financing or we implement a
strategic alternative, our ability to grow is limited.
The limited amount of capital available to originate new loans has caused us to significantly
restrict non-SBA 7(a) Program loan origination activity. Depending on the availability of other
sources of capital including principal prepayments on our loans, we may have to curtail some SBA
7(a) lending opportunities in 2010. A reduction in the availability of the above sources of funds
could have a material adverse effect on our financial condition and results of operations. If
these sources are not available in the future, we may have to originate loans at further reduced
levels or sell assets, potentially on unfavorable terms.
Our Revolver matures December 31, 2009. There can be no assurance that we will be able to
extend or refinance our Revolver. As discussed above, we are currently negotiating to extend the
maturity date of our Revolver and anticipate that the aggregate availability under our Revolver
will be reduced and its costs will increase. As a result, our ability to grow will be further
limited unless we are subsequently able to increase the aggregate availability under any extension
or replacement of the Revolver. To the extent we need additional capital for unanticipated items,
there can be no assurance that we would be able to increase the amount available under any
short-term credit facilities or identify other sources of funds at an acceptable cost, if at all.
We rely on Secondary Market Loan Sales to create availability on our Revolver. Once fully
funded, we typically sell the government guaranteed portion of our SBA 7(a) Program loans pursuant
to Secondary Market Loan Sales. The market demand for Secondary Market Loan Sales may decline or be
temporarily suspended. To the extent we are unable to execute Secondary Market Loan Sales in the
normal course of business, our financial condition and results of operations could be adversely
affected.
We continue to have a low debt-to-equity ratio of 0.5:1 at September 30, 2009. This ratio is
well below that of typical specialty commercial finance companies.
34
As a REIT, we must distribute to our shareholders at least 90% of our REIT taxable income to
maintain our tax status under the Code. Accordingly, to the extent the sources above represent
taxable income, such amounts have historically been distributed to our shareholders. In general,
should we receive less cash from our portfolio of investments, we can lower the dividend so as not
to cause any material cash shortfall. During 2009, we anticipate that our cash flows from
operating activities will be utilized to fund our expected 2009 dividend distributions and
generally will not be available to fund portfolio growth or for the repayment of principal due on
our debt.
At September 30, 2009, we had availability of $21.1 million under our Revolver. We are
charged interest on the balance outstanding under our Revolver at our election of either the prime
rate of the lender less 75 basis points or 162.5 basis points over either the 30 or 90-day LIBOR.
We are charged an unused fee equal to 37.5 basis points computed based on our daily available
balance. The Revolver requires us to meet certain covenants, the most restrictive of which
provides for an asset coverage test, as defined, based on our cash and cash equivalents, loans
receivable and Retained Interests as a ratio to our senior debt, limits our ability to pay out
returns of capital as part of our dividends and provides for a maximum amount of problem loans, as
defined, as a percentage of equity. We also have minimum equity requirements. At September 30,
2009, we were in compliance with the covenants of this facility.
Uses of Funds
Currently, the primary use of our funds is to originate loans and for voluntary repayment of
the principal balance of our Revolver. Our outstanding commitments to fund new loans were $23.2
million at September 30, 2009, the majority of which were for prime-rate based loans to be
originated by First Western, the government guaranteed portion of which is intended to be sold into
the secondary market. Our net working capital outlay would be approximately $5.0 million related
to these loans; however, the loans cannot be sold until they are fully funded. Commitments have
fixed expiration dates. Since some commitments expire without the proposed loan closing, total
committed amounts do not necessarily represent future cash requirements. During 2009, we
anticipate loan fundings will range from $25 million to $35 million. Depending on liquidity, we
expect that fundings during 2010 will be between $30 million and $40 million.
There may be several months between when the initial balance of an SBA 7(a) Program loan is
funded and it is fully funded and can be sold pursuant to Secondary Market Loan Sales. In these
instances, our liquidity would be affected in the short-term. In addition, once fully funded, we
anticipate the ability to sell the government guaranteed portion of our SBA 7(a) Program loans into
the secondary market pursuant to Secondary Market Loan Sales. The market demand for Secondary
Market Loan Sales may decline or be temporarily suspended. To the extent we are unable to execute
Secondary Market Loan Sales in the normal course of business, our financial condition and results
of operations could be adversely affected.
While currently not anticipated, we may use funds to repurchase loans from the QSPEs which (1)
become charged-off as defined in the transaction documents either through delinquency or
initiation of foreclosure or (2) reach maturity. In addition, we may use funds to exercise
clean-up call options and repay the outstanding structured notes; however, it is not anticipated
that we will exercise clean-up call options in the short-term.
One of our SBICs has $2.0 million of redeemable preferred stock due in May 2010. We expect to
repay this redeemable preferred stock using the SBICs cash on hand or through issuance of SBA
debentures.
Our Board of Trust Managers (the Board) 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 using any available short-term credit facilities. As of September 30, 2009, we had
repurchased 249,979 shares under the share repurchase 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.
During the nine months ended September 30, 2009, our sources of funds for our dividend
distributions of approximately $8.0 million were cash flows from operating activities of
approximately $5.3 million and principal collections on our loans receivable of approximately $2.7
million.
35
SEASONALITY
Generally, we are not subject to seasonal trends. However, since we primarily lend to the
limited service hospitality industry, loan delinquencies generally rise temporarily after the
summer months due primarily to reductions in business travel and consumer vacations.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 of the Consolidated Financial Statements for a full description of recent
accounting pronouncements including the effect, if any, on our results of operations and financial
condition.
DIVIDENDS
Our shareholders are entitled to receive dividends when and as declared by the Board. In
determining dividend policy, the Board considers many factors including, but not limited to, actual
and anticipated Modified Cash, expectations for future earnings, REIT taxable income and
maintenance of REIT status, the economic environment, competition, our ability to obtain leverage
and our loan portfolio performance. In order to maintain REIT status, PMC Commercial is required
to pay out 90% of REIT taxable income. Consequently, the dividend rate on a quarterly basis will
not necessarily correlate directly to any individual factor.
It is presently anticipated that our Board will maintain the current quarterly dividend rate
of $0.16 per share for our fourth quarter dividend that is typically declared in December. At the
present time, the Board has not provided any guidance for anticipated dividends to be declared
during 2010.
In order to meet our 2008 taxable income distribution requirements, we made an election under
the Code to treat a portion of the distributions declared in 2009 as distributions of 2008s REIT
taxable income. These distributions are known as spillover dividends. The Board anticipates
utilizing the shortfall caused by spillover dividends to allow dividends declared in 2009 to exceed
our 2009 REIT taxable income.
REIT TAXABLE INCOME
REIT taxable income is a financial measure that is presented quarterly to assist investors in
analyzing our performance and is one of the factors utilized by our Board in determining the level
of dividends to be paid to our shareholders.
36
The following reconciles net income to REIT taxable income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
5,085 |
|
|
$ |
7,515 |
|
|
$ |
1,895 |
|
|
$ |
603 |
|
Book/tax difference on depreciation |
|
|
(42 |
) |
|
|
(45 |
) |
|
|
(14 |
) |
|
|
(15 |
) |
Book/tax difference on deferred gains from property sales |
|
|
(642 |
) |
|
|
(778 |
) |
|
|
(592 |
) |
|
|
(16 |
) |
Book/tax difference on Retained Interests, net |
|
|
(66 |
) |
|
|
(3 |
) |
|
|
345 |
|
|
|
(151 |
) |
Severance accrual (payments) |
|
|
(1,429 |
) |
|
|
1,573 |
|
|
|
|
|
|
|
1,573 |
|
Dividend distribution from TRS |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Book/tax difference on amortization and accretion |
|
|
(201 |
) |
|
|
(172 |
) |
|
|
(244 |
) |
|
|
(32 |
) |
Loan valuation |
|
|
239 |
|
|
|
106 |
|
|
|
85 |
|
|
|
90 |
|
Other book/tax differences, net |
|
|
(81 |
) |
|
|
(30 |
) |
|
|
(23 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
2,863 |
|
|
|
10,166 |
|
|
|
1,452 |
|
|
|
1,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: TRS income (loss), net of tax |
|
|
268 |
|
|
|
(392 |
) |
|
|
127 |
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income |
|
$ |
3,131 |
|
|
$ |
9,774 |
|
|
$ |
1,579 |
|
|
$ |
1,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared |
|
$ |
5,757 |
|
|
$ |
7,004 |
|
|
$ |
1,688 |
|
|
$ |
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
10,582 |
|
|
|
10,771 |
|
|
|
10,548 |
|
|
|
10,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 provided the distribution exceeds
90% of REIT taxable income. We may make an election under the Code to treat a portion of
distributions declared in the current year as distributions of the prior years taxable income.
Upon election, the Code provides that, in certain circumstances, a dividend declared subsequent to
the close of an entitys taxable year and prior to the extended due date of the entitys tax return
may be considered as having been made in the prior tax year in satisfaction of income distribution
requirements.
37
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in various market metrics. We are
subject to market risk including liquidity risk, real estate risk and interest rate risk as
described below. Although management believes that the quantitative analysis on interest rate risk
below is indicative of our sensitivity to interest rate changes, it does not adjust for potential
changes in credit quality, size and composition of our balance sheet and other business
developments that could affect our financial position and net income. Accordingly, no assurances
can be given that actual results would not differ materially from the potential outcome simulated
by these estimates.
Liquidity Risk
Liquidity risk is the potential that we would be unable to meet our obligations as they come
due because of an inability to liquidate assets or obtain funding. We are subject to changes in
the debt and collateralized mortgage markets. These markets are currently experiencing
disruptions, which could have an adverse impact on our earnings and financial condition.
Current conditions in the debt markets include lack of liquidity and large risk adjusted
premiums. These conditions have increased the cost and reduced the availability of financing
sources. The market for trading asset-backed securities continues to experience disruptions
resulting from reduced investor demand for these securities and increased investor yield
requirements. In light of these market conditions, we expect to finance our loan portfolio in the
short-term with our current capital and any available short-term credit facilities. See Liquidity
and Capital Resources Liquidity Summary.
Real Estate Risk
The value of our commercial mortgage loans and our ability to sell such loans, if necessary,
are impacted by market conditions that affect the properties that are collateral for our loans.
Property values and operating income from the properties may be affected adversely by a number of
factors, including, but not limited to:
|
|
|
national, regional and local economic conditions; |
|
|
|
significant rises in gasoline prices within a short period of time if there is a
concurrent decrease in business and leisure travel; |
|
|
|
local real estate conditions (including an oversupply of commercial real estate); |
|
|
|
natural disasters including hurricanes and earthquakes, acts of war and/or terrorism
and other events that may cause performance declines and/or losses to the owners and
operators of the real estate securing our loans; |
|
|
|
changes or continued weakness in limited service hospitality properties; |
|
|
|
construction quality, construction cost, age and design; |
|
|
|
increases in operating expenses (such as energy costs) for the owners of the
properties; and |
|
|
|
limitations in the availability and cost of leverage. |
In the event property cash flows decrease, a borrower may have difficulty repaying our loan,
which could result in losses to us. In addition, decreases in property values reduce the value of
the collateral and the potential proceeds available to borrowers to repay our loans, which could
also cause us to suffer losses.
In addition, the value of our real estate owned is impacted by market conditions. Decreases
in property values could reduce the value of our real estate owned and the potential proceeds we
receive which could also cause us to suffer losses.
38
The following analysis of our provision for loan losses quantifies the negative impact to our
net income from increased losses on our Retained Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Year Ended |
|
|
Nine Months |
|
|
|
Ended |
|
|
December 31, |
|
|
Ended |
|
Provision for loan losses |
|
September 30, 2009 |
|
|
2008 |
|
|
September 30, 2008 |
|
|
|
(In thousands) |
|
As reported (1) |
|
$ |
674 |
|
|
$ |
488 |
|
|
$ |
133 |
|
Annual loan losses
increase by 50 basis
points (2) |
|
|
1,379 |
|
|
|
1,388 |
|
|
|
1,327 |
|
Annual loan losses
increase by 100 basis
points (2) |
|
|
2,083 |
|
|
|
2,287 |
|
|
|
2,522 |
|
|
|
|
(1) |
|
Excludes reductions of loan losses. |
|
(2) |
|
Represents provision for loan losses based on increases in losses as a percentage of
our weighted average loans receivable for the periods indicated. |
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations and other factors.
Since our loans are predominantly variable-rate, based on LIBOR and the prime rate, our
operating results will depend in large part on LIBOR and the prime rate. One of the primary
determinants of our operating results is differences between the income from our loans and our
borrowing costs. As a result, most of our borrowings are based on LIBOR or the prime rate. The
objective of this strategy is to minimize the impact of interest rate changes on our net interest
income.
VALUATION OF LOANS
Our loans are recorded at cost and adjusted by net loan origination fees and discounts (which
are recognized as adjustments of yield over the life of the loan) and loan loss reserves. In order
to determine the estimated fair value of our loans, we use a present value technique for the
anticipated future cash flows using certain assumptions including a current market discount rate,
potential prepayment risks and loan losses. If we were required to sell our loans at a time we
would not otherwise do so, there can be no assurance that managements estimates of fair values
would be obtained and losses could be incurred.
At September 30, 2009, our loans are approximately 76% variable-rate at spreads over LIBOR or
the prime rate. Increases or decreases in interest rates will generally not have a material impact
on the fair value of our variable-rate loans. We had $151.0 million of variable-rate loans at
September 30, 2009. The estimated fair value of our variable-rate loans (approximately $144.2
million at September 30, 2009) is dependent upon several factors including changes in interest
rates and the market for the type of loans we have originated.
We had $47.7 million and $39.3 million of fixed-rate loans at September 30, 2009 and December
31, 2008, respectively. The estimated fair value of these fixed-rate loans approximates their cost
and is dependent upon several factors including changes in interest rates and the market for the
types of loans that we have originated. Since changes in market interest rates do not affect the
interest rates on our fixed-rate loans, any changes in these rates do not have an immediate impact
on our interest income. Our interest rate risk on our fixed-rate loans is primarily related to
loan prepayments and maturities.
The average maturity of our loan portfolio is less than its average contractual terms because
of prepayments. The average life of mortgage loans tends to increase when the current mortgage
rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when
the current mortgage rates are substantially lower than rates on existing mortgage loans (due to
refinancing of fixed-rate loans).
39
INTEREST RATE SENSITIVITY
At September 30, 2009 and December 31, 2008, we had $151.0 million and $140.5 million of
variable-rate loans, respectively, and $59.6 million and $49.8 million of variable-rate debt,
respectively. On the difference between our variable-rate loans and our variable-rate debt ($91.4
million and $90.7 million at September 30, 2009 and December 31, 2008, respectively) we have
interest rate risk. To the extent variable rates decrease, our interest income net of interest
expense would decrease.
The sensitivity of our variable-rate loans and debt to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of our assets and liabilities. We assess
interest rate risk in terms of the potential effect on interest income net of interest expense in
an effort to ensure that we are insulated from any significant adverse effects from changes in
interest rates. As a result of our predominately variable-rate portfolio, our earnings are
susceptible to being reduced during periods of lower interest rates. Based on a sensitivity
analysis of interest income and interest expense at September 30, 2009 and December 31, 2008, if
the consolidated balance sheet were to remain constant and no actions were taken to alter the
existing interest rate sensitivity, each hypothetical 100 basis point reduction in interest rates
would reduce net income by approximately $914,000 and $907,000, respectively, on an annual basis.
Since LIBOR has already been reduced to historically low levels, further significant negative
impacts from lower LIBOR interest rates is not anticipated. In addition, as a REIT, the use of
hedging interest rate risk is typically only provided on debt instruments due to potential negative
REIT compliance to the extent the hedging strategy was based on our investments. Benefits derived
from hedging strategies not based on debt instruments (i.e., investments) may be deemed bad income
for REIT qualification purposes. The use of a hedge strategy (on our debt instruments) would only
be beneficial to fix our cost of funds and hedge against rising interest rates.
DEBT
Our debt is comprised of SBA debentures, junior subordinated notes, the Revolver, structured
notes and redeemable preferred stock of subsidiary. At September 30, 2009 and December 31, 2008,
approximately $10.1 million and $12.0 million, respectively, of our consolidated debt had fixed
rates of interest and was therefore not affected by changes in interest rates. Our variable-rate
debt is based on LIBOR or the prime rate and thus subject to adverse changes in market interest
rates. Assuming there were no increases or decreases in the balance outstanding under our
variable-rate debt at September 30, 2009, each hypothetical 100 basis points increase in interest
rates would increase interest expense and decrease net income by approximately $596,000.
Our fixed-rate debt at September 30, 2009 was comprised of SBA debentures and redeemable
preferred stock of subsidiary. One SBA debenture ($4.0 million) currently has a prepayment penalty
of 1% of the principal balance.
The following tables present the principal amounts by year of expected maturity, weighted
average interest rates and estimated fair values to evaluate the expected cash flows and
sensitivity to interest rate changes of our outstanding debt at September 30, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Month Periods Ending September 30, |
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Value |
|
|
Value (1) |
|
|
|
(Dollars in thousands) |
|
Fixed-rate debt (2) |
|
$ |
1,961 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,170 |
|
|
$ |
10,131 |
|
|
$ |
10,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate debt
(LIBOR
and prime based)
(3) (4) |
|
|
25,219 |
|
|
|
1,377 |
|
|
|
1,438 |
|
|
|
1,463 |
|
|
|
1,524 |
|
|
|
28,540 |
|
|
|
59,561 |
|
|
|
50,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
27,180 |
|
|
$ |
1,377 |
|
|
$ |
1,438 |
|
|
$ |
1,463 |
|
|
$ |
1,524 |
|
|
$ |
36,710 |
|
|
$ |
69,692 |
|
|
$ |
60,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The estimated fair value is based on a present value calculation based on prices of the
same or similar instruments after considering risk, current interest rates and remaining
maturities. |
|
(2) |
|
The weighted average interest rate of our fixed-rate debt at September 30, 2009 was 6.2%. |
40
|
|
|
(3) |
|
Principal payments on the structured notes are dependent upon cash flows received from the
underlying loans. Our estimate of their repayment is based upon scheduled principal payments
on the underlying loans. Our estimate will differ from actual amounts to the extent we
experience prepayments and/or loan losses. |
|
(4) |
|
The weighted average interest rate of our variable-rate debt at September 30, 2009 was 3.0%. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Value |
|
|
Value (1) |
|
|
|
(Dollars in thousands) |
|
Fixed-rate debt (2) |
|
$ |
1,956 |
|
|
$ |
1,920 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,168 |
|
|
$ |
12,044 |
|
|
$ |
12,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate debt (LIBOR
and prime rate based) (3) |
|
|
22,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,070 |
|
|
|
49,770 |
|
|
|
40,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
24,656 |
|
|
$ |
1,920 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,238 |
|
|
$ |
61,814 |
|
|
$ |
52,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The estimated fair value is based on a present value calculation based on prices of the same
or similar instruments after considering risk, current interest rates and remaining
maturities. |
|
(2) |
|
The weighted average interest rate of our fixed-rate debt at December 31, 2008 was 6.3%. |
|
(3) |
|
The weighted average interest rate of our variable-rate debt at December 31, 2008 was 5.0%. |
41
ITEM 4.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management has evaluated the effectiveness of our disclosure controls and
procedures (as defined under rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended) as of September 30, 2009. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
42
PART II
Other Information
|
|
|
ITEM 1. |
|
Legal Proceedings |
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 managements opinion, the resolution of these legal actions and proceedings
will not have a material adverse effect on our consolidated financial statements.
There have been no material changes to the factors disclosed in Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2008, other than the following.
Investment Risks Lending Activities
The commercial real estate loans we originate are subject to the risks of default and
foreclosure which could result in losses to us.
The commercial real estate loans we originate are secured by income-producing properties
(primarily limited service hospitality properties) and we are subject to risks of default and
foreclosure. In the event of any default under a mortgage loan held directly by us, we will bear a
risk of loss of principal to the extent of any deficiency between the value of the collateral and
the unpaid principal of the mortgage loan, which could have a material adverse effect on our cash
flows from operations. If a borrower defaults on one of our commercial real estate loans and the
underlying property collateralizing the loan is insufficient to satisfy the outstanding balance of
the loan, we may suffer a loss.
Foreclosure and bankruptcy are complex and sometimes lengthy processes that are subject to
Federal and state laws and regulations. An action to foreclose on a property is subject to many of
the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In
the event of a default by a mortgagor, these restrictions, among other things, may impede our
ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay
all amounts due to us on the mortgage loan. Borrowers have the option of seeking Federal
bankruptcy protection which could delay the foreclosure process or modify the terms of the loan
agreement. Typically, delays in the foreclosure process will have a negative impact on our results
of operations and/or financial condition due to direct and indirect costs incurred and possible
deterioration of the collateral.
To the extent we foreclose on real estate assets, it may be difficult for us to sell these
assets quickly and their values may decline.
Our ability to sell any properties we may own as a result of foreclosure will be impacted by
changes in economic and other conditions. Our ability to sell these properties and the prices we
receive on their sale may be affected by many factors, including but not limited to, the number of
potential buyers, the number of competing properties on the market and other market conditions. If
we are required to hold a property for an extended period of time or choose to operate the
property, it could have a negative impact on our results of operations and/or financial condition
due to direct and indirect costs incurred and possible deterioration of the value of the asset.
Operating Risks
We face risks associated with holding and/or operating our real estate owned.
Our real estate owned is subject to a variety of risks including, but not limited to:
|
|
|
We are currently dependent upon third party managers to operate and manage our
real estate owned. As a REIT, PMC Commercial cannot directly operate the real
estate owned; |
|
|
|
Our real estate owned may be operated at a loss and such losses may be
substantial; |
|
|
|
Our insurance coverage may not be sufficient to fully insure our businesses and
assets from claims and/or liabilities, including environmental liabilities; |
43
|
|
|
We may be required to make significant capital improvements to maintain our real
estate owned; |
|
|
|
In conjunction with the operations of our real estate owned, we are subject to
numerous Federal and state laws and government regulations including environmental,
occupational health and safety, state and local taxes and laws relating to access
for disabled persons; |
|
|
|
Under various laws and regulations, we may be considered liable for the costs of
remediating or removing hazardous substances found on our property, regardless of
whether we were responsible for its presence. The ultimate costs may be material
to our financial statements or results of operations. |
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
A. Exhibits
|
|
|
|
|
|
3.1 |
|
|
Declaration of Trust (incorporated by reference
to the exhibits to the Registrants Registration Statement on Form S-11
filed with the Securities and Exchange Commission (SEC) on June 25,
1993, as amended (Registration No. 33-65910)). |
|
3.1 |
(a) |
|
Amendment No. 1 to Declaration of Trust (incorporated by reference to
the Registrants Registration Statement on Form S-11 filed with the SEC
on June 25, 1993, as amended (Registration No. 33-65910)). |
|
3.1 |
(b) |
|
Amendment No. 2 to Declaration of Trust (incorporated by reference to
the Registrants Annual Report on Form 10-K for the year ended December
31, 1993). |
|
3.1 |
(c) |
|
Amendment No. 3 to Declaration of Trust (incorporated by reference to
the Registrants Annual Report on Form 10-K for the year ended December
31, 2003). |
|
3.2 |
|
|
Bylaws (incorporated by reference to the
exhibits to the Registrants Registration Statement on Form S-11 filed
with the SEC on June 25, 1993, as amended (Registration No. 33-65910)). |
|
3.3 |
|
|
Amendment No. 1 to Bylaws (incorporated by
reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K
filed with the SEC on April 16, 2009). |
|
*31.1 |
|
|
Section 302 Officer Certification Chief Executive Officer |
|
*31.2 |
|
|
Section 302 Officer Certification Chief Financial Officer |
|
**32.1 |
|
|
Section 906 Officer Certification Chief Executive Officer |
|
**32.2 |
|
|
Section 906 Officer Certification Chief Financial Officer |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Submitted herewith. |
44
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.
|
|
|
|
|
|
|
PMC Commercial Trust |
|
|
|
|
|
|
|
Date: 11/09/09
|
|
/s/ Lance B. Rosemore
Lance B. Rosemore
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: 11/09/09
|
|
/s/ Barry N. Berlin
Barry N. Berlin
|
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Accounting Officer) |
|
|
45