e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 K
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2006
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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 of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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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) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Shares of beneficial interest, $.01 par value
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule
12b-2).
YES o NO þ
Indicate by check mark whether the Registrant is a well-known seasoned issuer (as defined in Rule
405 of the Securities Act).
YES o NO þ
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.
YES o NO þ
The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon
the closing sale price of the Common Shares of Beneficial Interest on June 30, 2006 as reported on
the American Stock Exchange, was approximately $121 million. Common Shares of Beneficial Interest
held by each officer and trust manager and by each person who owns 10% or more of the outstanding
Common Shares of Beneficial Interest have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 2, 2007, the Registrant had outstanding 10,753,803 Common Shares of Beneficial
Interest.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrants Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the year covered by this Form 10-K with respect to the Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
PMC COMMERCIAL TRUST
Form 10-K
For the Year Ended December 31, 2006
TABLE OF CONTENTS
1
Forward-Looking Statements
This Form 10-K 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. These statements include the plans and
objectives of management for future operations, including plans and objectives relating to future
growth of our loans receivable and availability of funds. 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. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties identified in this Form 10-K, including,
without limitation, the risks identified under the caption Item 1A. Risk Factors. 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-K 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.
PART I
Item 1. BUSINESS
INTRODUCTION
PMC Commercial Trust (PMC Commercial and together with its wholly-owned subsidiaries, the
Company, our or we) is a real estate investment trust (REIT) that primarily originates
loans to small businesses collateralized by first liens on the real estate of the related business.
Our loans are primarily to borrowers in the limited service hospitality industry. We also
originate loans for commercial real estate primarily in the service, retail, multi-family and
manufacturing industries. In addition, our investments include the ownership of commercial
properties in the hospitality industry. As a REIT, we seek to maximize shareholder value through
long-term growth in dividends paid to our shareholders. We must distribute at least 90% of our
REIT taxable income to shareholders to maintain our REIT status. See Tax Status. We pay
dividends from the cash flow generated from operations. Our common shares are traded on the
American Stock Exchange under the symbol PCC.
Our mission is to derive income primarily from the origination of real estate collateralized
loans and from ownership in income producing real estate. Through conservative underwriting and
exceptional service, we strive to provide our shareholders with the highest dividend, consistent
with the focus on preservation of investment capital.
We generate revenue primarily from the yield and other fee income earned on our investments.
Our operations are centralized in Dallas, Texas and include originating, servicing and selling
commercial loans and to a lesser extent, property ownership. During the years ended December 31,
2006 and 2005, our total revenues were approximately $30.7 million and $25.1 million, respectively,
and our net income was approximately $15.7 million and $11.3 million, respectively. See Item 8.
Consolidated Financial Statements and Supplementary Data for additional financial information.
In addition to loans originated by PMC Commercial, we also originate loans through our
subsidiaries. Our wholly-owned lending subsidiaries are: First Western SBLC, Inc. (First
Western), PMC Investment Corporation (PMCIC) and Western Financial Capital Corporation (Western
Financial). First Western is licensed as a small business lending company (SBLC) that
originates loans through the Small Business Administrations (SBA) 7(a) Guaranteed Loan Program
(SBA 7(a) Program). PMCIC and Western Financial are small business investment companies
(SBICs). These subsidiaries were acquired in the merger with PMC Capital, Inc. (PMC Capital),
our affiliate through common management, on February 29, 2004.
First Western is currently a Preferred Lender nationwide, as designated by the SBA, and
originates, sells and services small business loans throughout the continental United States. As a
non-bank SBA 7(a) Program lender, First Western is able to originate loans on which a substantial
portion of the loan (generally 75%) is
2
guaranteed as to payment of principal and interest by the SBA. A market exists for the sale of the
guaranteed portion of First Westerns loans and we receive cash premiums at the time of sale that
approximate up to 10% of the principal amount of the loan sold. To the extent we are able to
increase our volume of loans originated by our SBLC, there should be a corresponding increase in
premiums received. In addition, due to the existence of the SBA guarantee, we are able to
originate loans that would not typically meet our underwriting criteria due to the profitability of
the loan including the premium received. See Lending Activities SBA Programs.
Our ability to generate interest income, as well as other loan related fees, is dependent upon
economic, regulatory and competitive factors that influence interest rates and loan originations
and our ability to secure financing for our investment activities. The amount of income earned
varies based on the volume of loans funded, the timing and amount of structured loan transactions,
the volume of loans which prepay and the resultant applicable prepayment fees, if any, the mix of
loans (construction versus non-construction), the interest rate on loans originated and the general
level of interest rates.
Generally, in order to fund new loans, we need to borrow funds or sell loans. From 1996 to
2003, our primary source of funds was structured loan transactions. In a structured loan
transaction, we contribute loans receivable to a special purpose entity (SPE) in exchange for
cash and a subordinate financial interest in that entity. If the SPE meets the definition of a
qualifying special purpose entity (QSPE), we account for the transaction as a sale of our loans
receivable; and as a result, neither the loans receivable contributed to the QSPE nor the notes
payable issued by the QSPE are included in our consolidated financial statements. See Structured
Loan Transactions. Since the completion of our last securitization in October 2003, our working
capital has been provided through credit facilities and the issuance of junior subordinated notes
in March 2005.
We have historically operated in two identifiable reportable segments: (1) the lending
division, which originates loans to small businesses primarily in the hospitality industry and (2)
the property division, which owns and operates certain of our hotel properties. As a result of
sales of a majority of our hotel properties, at December 31, 2006, the lending division comprised
approximately 98% of our total assets. See detailed financial information regarding our segments
in Item 8. Consolidated Financial Statements and Supplementary Data.
LENDING ACTIVITIES
Overview
Our lending division originates loans to small businesses, primarily in the hospitality
industry. For the year ended December 31, 2006, total revenues and income from continuing
operations of our lending division were approximately $28.5 million (approximately 93% of our total
revenues) and $15.0 million, respectively. See Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations Executive Summary.
We are a national lender that primarily originates small business loans in the limited service
sector of the hospitality industry. In addition to first liens on real estate of the related
business, our loans are generally personally guaranteed by the principals of the entities obligated
on the loans.
We identify loan origination opportunities through personal contacts, internet referrals,
attendance at trade shows and meetings, correspondence with local chambers of commerce, direct
mailings, advertisements in trade publications and other marketing methods. We also generate loans
through referrals from lawyers, accountants, real estate and loan brokers and existing borrowers.
Payments are often made to non-affiliated individuals who assist in generating loan applications,
with such payments generally not exceeding 1% of the principal amount of the originated loan.
Limited Service Hospitality Industry
Our loans are generally collateralized by first liens on limited service hospitality
properties and are typically made for owner-operated facilities operating under national
franchises. We believe that franchise operations offer attractive lending opportunities because
such businesses generally employ proven business concepts, have national reservation systems, have
consistent product quality, are screened and monitored by franchisors and generally have a higher
rate of success when compared to other independently operated hospitality businesses.
3
Lodging demand in the United States appears to correlate to changes in the United States Gross
Domestic Product (U.S. GDP), with typically a two to three quarter lag. Given the relatively
strong U.S. GDP growth over the past several years, continued improvement in 2007 lodging demand
has been predicted by industry analysts. Such improvement will be dependent upon several factors
including: the strength of the economy, the correlation of hotel demand to new hotel supply and the
impact of global or domestic events on travel and the hotel industry. Leading industry analysts,
including PricewaterhouseCoopers LLP, have published reports that predict the industrys results
will continue to improve in 2007.
Loan Originations and Underwriting
We originate mortgage loans to small businesses primarily collateralized by commercial real
estate. We believe that we successfully compete in certain sectors of the commercial real estate
finance market due to our understanding of our borrowers businesses, the flexible loan terms that
we offer and our responsive customer service. Our approach to assessing new commercial mortgage
loans requires an analysis of the property operator, the replacement cost of the collateral, its
liquidation value and an analysis of local market conditions.
We consider the underlying cash flow of the tenant or owner-occupant as well as more
traditional real estate underwriting criteria such as:
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The components and value of the borrowers collateral (primarily real estate); |
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The ease with which the collateral can be liquidated; |
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The industry and competitive environment in which the borrower operates; |
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The financial strength of the guarantors; |
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The existence of any secondary repayment sources; and |
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The existence of a franchise relationship. |
Upon receipt of a completed loan application, our credit department conducts: (1) a detailed
analysis of the potential loan, which typically includes an appraisal and a valuation by our credit
department of the property that will collateralize the loan to ensure compliance with loan-to-value
percentages, (2) a site inspection for real estate collateralized loans, (3) a review of the
borrowers business experience, (4) a review of the borrowers credit history, and (5) an analysis
of the borrowers debt-service-coverage, debt-to-equity and other applicable ratios. All
appraisals are performed by an approved, licensed third party appraiser and based on the market
value, replacement cost and cash flow value approaches. We utilize nationwide independent
appraisal firms and local market economic information to the extent available.
We believe that our typical non SBA 7(a) Program loan is distinguished from those of some of
our competitors by the following characteristics:
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Substantial down payments are required. We usually require an initial down payment
of not less than 20% of the value of the property which is collateral for the loan at
the time of such loan. Our experience has shown that the likelihood of full repayment
of a loan increases if the owner/operator is required to make an initial and
substantial financial commitment to the property which is collateral for the loan. |
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Cash outs are typically not permitted. Generally, we will not make a loan in an
amount greater than the lesser of either the replacement cost of the property which is
collateral for the loan or the current appraised value of the property which is
collateral for the loan. For example, a hotel property may have been originally
constructed for a cost of $2,000,000, with the owner/operator borrowing $1,600,000 of
that amount. At the time of the borrowers loan refinancing request, the property
securing the loan is appraised at $4,000,000. Some of our competitors might loan from
70% to 90% or more of the new appraised value of the property and permit the
owner/operator to receive a cash distribution from the proceeds. Generally, we would
not permit this type of cash-out distribution. |
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The obligor is personally liable for the loan. We generally require the principals
of the borrower to personally guarantee the loan. |
We are currently originating primarily variable-rate loans. Our variable-rate loans are based
on (1) LIBOR or (2) the prime rate (primarily related to our SBA 7(a) Program). Many of our
competitors are presently pricing fixed-rate loans based on a spread over the interest rate swap
market. We are currently offering fixed-rate loans to borrowers at approximately 3.5% over the
5-year treasury rate and anticipate the maximum amount of fixed-rate loans we will originate under
this program to be approximately $30.0 million. We are continually evaluating the feasibility of
utilizing the swap market or interest rate caps to lock in a fixed cost of funds so that we can
offer a more competitive fixed-rate product. Based on the current interest rate environment, these
alternative sources of pricing are not viable for us since there is significant exposure of loss of
capital in the event of loan liquidation or
4
prepayment. To the extent we are able to use the swap market or interest rate caps to lock in a
fixed cost of funds, we believe our originations of fixed-rate loans would increase. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Current
Operating Overview and Economic Factors Lending Division.
General information on our loans receivable, net, was as follows:
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At December 31, |
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2006 |
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2005 |
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Weighted |
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Weighted |
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Average |
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Average |
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Loans Receivable, net |
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Interest |
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Loans Receivable, net |
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Interest |
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Amount |
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% |
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Rate |
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Amount |
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% |
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Rate |
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(Dollars in thousands) |
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Variable-rate LIBOR |
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$ |
127,931 |
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75.6 |
% |
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9.4 |
% |
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$ |
120,645 |
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76.6 |
% |
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8.3 |
% |
Fixed-rate |
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23,419 |
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13.9 |
% |
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8.8 |
% |
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18,651 |
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11.8 |
% |
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9.4 |
% |
Variable rate prime |
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17,831 |
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10.5 |
% |
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10.2 |
% |
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18,278 |
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11.6 |
% |
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8.7 |
% |
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Total |
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$ |
169,181 |
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100.0 |
% |
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9.4 |
% |
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$ |
157,574 |
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100.0 |
% |
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8.5 |
% |
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Our variable-rate loans receivable generally require monthly payments of principal and
interest, reset on a quarterly basis, to amortize the principal over the remaining life of the
loan. Fixed-rate loans receivable generally require level monthly payments of principal and
interest calculated to amortize the principal over the remaining life of the loan.
Loan Activity
The following table details our loan activity for the years indicated:
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Years Ended December 31, |
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2006 |
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2005 |
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2004 |
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2003 |
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2002 |
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(In thousands) |
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Loans receivable, net beginning of year |
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$ |
157,574 |
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$ |
128,234 |
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$ |
50,534 |
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$ |
71,992 |
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$ |
78,486 |
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Loans originated |
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71,530 |
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|
58,852 |
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53,659 |
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31,320 |
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32,776 |
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Loans acquired in the merger (1) |
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55,144 |
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Principal collections (2) |
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(47,240 |
) |
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(13,826 |
) |
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(23,196 |
) |
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(5,655 |
) |
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(11,637 |
) |
Repayments of SBA 504 program loans (3) |
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(2,342 |
) |
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(2,180 |
) |
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(1,621 |
) |
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(1,963 |
) |
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(631 |
) |
Loans sold (4) |
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(6,373 |
) |
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(7,785 |
) |
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(6,222 |
) |
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Loans transferred to AAL (5) |
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(3,730 |
) |
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(5,657 |
) |
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(2,115 |
) |
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Structured loan sales (6) |
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(45,456 |
) |
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(27,286 |
) |
Loan deemed to be repurchased from QSPE (7) |
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2,126 |
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Other adjustments (8) |
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(238 |
) |
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(64 |
) |
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(75 |
) |
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296 |
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|
284 |
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Loans receivable, net end of year |
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$ |
169,181 |
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$ |
157,574 |
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|
$ |
128,234 |
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|
$ |
50,534 |
|
|
$ |
71,992 |
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(1) |
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Represents the estimated fair value of loans acquired from PMC Capital in the
merger. |
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(2) |
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Represents scheduled principal payments, maturities and prepayments. |
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(3) |
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Represents second mortgages obtained through the SBA 504 Program which are repaid by
certified development companies. |
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(4) |
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Represents the guaranteed portion of SBA 7(a) Program loans sold through private placements
to either dealers in government guaranteed loans or institutional investors. |
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(5) |
|
Loans receivable on which the collateral was foreclosed upon and the assets were subsequently
classified as assets acquired in liquidation (AAL). |
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(6) |
|
Loans receivable which were sold as part of structured loan sale transactions. |
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(7) |
|
Represents a loan receivable at its estimated fair value deemed to be repurchased from a
QSPEs as a result of a delinquent loan on which we initiated foreclosure on the underlying
collateral and were contractually allowed to repurchase from the QSPE. |
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(8) |
|
Represents the change in loan loss reserves, discounts and deferred commitment fees. |
5
Quarterly Loan Originations
The following table is a breakdown of loans originated on a quarterly basis during the years
indicated:
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|
Years Ended December 31, |
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|
|
2006 |
|
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2005 |
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|
2004 |
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2003 |
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2002 |
|
|
|
(In thousands) |
|
First Quarter |
|
$ |
17,630 |
|
|
$ |
8,251 |
|
|
$ |
6,609 |
|
|
$ |
9,009 |
|
|
$ |
6,346 |
|
Second Quarter |
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|
13,536 |
|
|
|
11,236 |
|
|
|
17,255 |
|
|
|
12,103 |
|
|
|
6,506 |
|
Third Quarter |
|
|
5,710 |
|
|
|
15,010 |
|
|
|
14,998 |
|
|
|
5,557 |
|
|
|
10,044 |
|
Fourth Quarter |
|
|
34,654 |
|
|
|
24,355 |
|
|
|
14,797 |
|
|
|
4,651 |
|
|
|
9,880 |
|
|
|
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|
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|
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|
Total |
|
$ |
71,530 |
|
|
$ |
58,852 |
|
|
$ |
53,659 |
|
|
$ |
31,320 |
|
|
$ |
32,776 |
|
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|
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|
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|
Loan Portfolio Statistics
Information on our loans receivable, loans which have been sold (either to our QSPEs or
secondary market sales of SBA 7(a) Program loans) and on which we have retained interests (the
Sold Loans) and our loans receivable combined with our Sold Loans (the Aggregate Portfolio) was
as follows:
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At December 31, |
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|
|
2006 |
|
|
2005 |
|
|
|
Aggregate |
|
|
Sold Loans |
|
|
Loans |
|
|
Aggregate |
|
|
Sold Loans |
|
|
Loans |
|
|
|
Portfolio |
|
|
(1) |
|
|
Receivable |
|
|
Portfolio |
|
|
(1) |
|
|
Receivable |
|
|
|
(Dollars in thousands) |
|
Portfolio outstanding (2) |
|
$ |
397,567 |
|
|
$ |
227,874 |
|
|
$ |
169,693 |
|
|
$ |
447,220 |
|
|
$ |
288,652 |
|
|
$ |
158,568 |
|
Weighted average interest rate |
|
|
9.5 |
% |
|
|
9.6 |
% |
|
|
9.4 |
% |
|
|
8.8 |
% |
|
|
8.9 |
% |
|
|
8.5 |
% |
Annualized average yield (3) |
|
|
10.5 |
% |
|
|
10.1 |
% |
|
|
11.0 |
% |
|
|
9.4 |
% |
|
|
9.6 |
% |
|
|
8.9 |
% |
Weighted average contractual
maturity (in years) |
|
|
15.0 |
|
|
|
13.6 |
|
|
|
16.7 |
|
|
|
15.3 |
|
|
|
14.6 |
|
|
|
16.8 |
|
Impaired loans (4) |
|
$ |
5,415 |
|
|
$ |
3,496 |
|
|
$ |
1,919 |
|
|
$ |
12,780 |
|
|
$ |
5,558 |
|
|
$ |
7,222 |
|
Hospitality industry concentration % |
|
|
91.7 |
% |
|
|
90.0 |
% |
|
|
93.9 |
% |
|
|
91.5 |
% |
|
|
89.6 |
% |
|
|
94.9 |
% |
Texas concentration % (5) |
|
|
24.7 |
% |
|
|
26.5 |
% |
|
|
22.3 |
% |
|
|
24.0 |
% |
|
|
28.9 |
% |
|
|
14.9 |
% |
|
|
|
(1) |
|
In addition to loans of the QSPEs, includes secondary market sales of SBA 7(a) Program loans. |
|
(2) |
|
Loan portfolio outstanding before loan loss reserves and deferred commitment fees. |
|
(3) |
|
The calculation of annualized average yield divides our interest income, prepayment fees and
other loan related fees, adjusted by the provision for loan losses, by the weighted average
outstanding portfolio. |
|
(4) |
|
Includes loans on which the collection of the balance of principal and interest is considered
unlikely and on which the fair value of the collateral is less than the remaining unamortized
principal balance (Problem Loans) and the principal balance of loans which have been
identified as potential problem loans for which it is expected that a full recovery of the
principal balance will be received through either collection efforts or liquidation of
collateral (Special Mention Loans, and together with Problem Loans, Impaired Loans). We do
not include the remaining outstanding principal of serviced loans pertaining to the guaranteed
portion of loans sold into the secondary market since the SBA has guaranteed payment of
principal on these loans. |
|
(5) |
|
We also had a concentration of approximately 10.3% of loans receivable in Ohio at December
31, 2006. No other concentrations greater than or equal to 10% existed at December 31, 2006
for our loans receivable, Sold Loans or Aggregate Portfolio. |
6
Industry Concentration
The distribution of our loan portfolio by industry was as follows at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable |
|
|
Aggregate Portfolio |
|
|
|
Number |
|
|
|
|
|
|
% of |
|
|
Number |
|
|
|
|
|
|
% of |
|
|
|
of |
|
|
|
|
|
|
Total |
|
|
of |
|
|
|
|
|
|
Total |
|
|
|
Loans |
|
|
Cost (1) |
|
|
Cost |
|
|
Loans |
|
|
Cost (1) |
|
|
Cost |
|
|
|
(Dollars in thousands) |
|
Hotels and motels |
|
|
161 |
|
|
$ |
159,417 |
|
|
|
93.9 |
% |
|
|
311 |
|
|
$ |
364,530 |
|
|
|
91.7 |
% |
Gasoline/service stations |
|
|
16 |
|
|
|
6,638 |
|
|
|
3.9 |
% |
|
|
23 |
|
|
|
14,051 |
|
|
|
3.5 |
% |
Restaurants |
|
|
15 |
|
|
|
1,219 |
|
|
|
0.7 |
% |
|
|
15 |
|
|
|
2,894 |
|
|
|
0.7 |
% |
Apartments/RV Parks |
|
|
3 |
|
|
|
771 |
|
|
|
0.5 |
% |
|
|
7 |
|
|
|
4,532 |
|
|
|
1.1 |
% |
Retail, other |
|
|
9 |
|
|
|
556 |
|
|
|
0.3 |
% |
|
|
9 |
|
|
|
1,601 |
|
|
|
0.4 |
% |
Services |
|
|
10 |
|
|
|
364 |
|
|
|
0.2 |
% |
|
|
18 |
|
|
|
3,486 |
|
|
|
0.9 |
% |
Other |
|
|
13 |
|
|
|
728 |
|
|
|
0.5 |
% |
|
|
16 |
|
|
|
6,473 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
|
$ |
169,693 |
|
|
|
100.0 |
% |
|
|
399 |
|
|
$ |
397,567 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loan portfolio outstanding before loan loss reserves and deferred commitment fees. |
SBA Programs
General
We utilize programs established by the SBA to generate loan origination opportunities and
provide us with a funding source as follows:
|
|
|
We have an SBLC that originates loans through the SBAs 7(a) Program; |
|
|
|
|
We participate as a private lender in the SBA 504 Program which allows us
to originate first mortgage loans with lower loan-to-value ratios; |
|
|
|
|
We have two licensed SBICs regulated under the Small Business Investment
Act of 1958, as amended (SBIA). Our SBICs use long-term funds provided by the SBA,
together with their own capital, to provide long-term collateralized loans to eligible
small businesses, as defined under SBA regulations. |
Our regulated SBA subsidiaries are periodically examined and audited by the SBA to determine
compliance with SBA regulations.
SBA 7(a) Program
Under the SBA 7(a) Program, the SBA typically guarantees 75% of qualified loans over $150,000
with such guarantees to an individual not exceeding $1.5 million. While the eligibility
requirements of the SBA 7(a) Program vary by the industry of the borrower and other factors, the
general eligibility requirements are that: (1) gross sales of the borrower cannot exceed $6.5
million, (2) liquid assets of the borrower and affiliates cannot exceed specified limits, and (3)
the maximum aggregate SBA loan guarantees to a borrower cannot exceed $1.5 million. Maximum
maturities for SBA 7(a) Program loans are 25 years for real estate and between seven and 15 years
for the purchase of machinery, furniture, fixtures and/or equipment. In order to operate as an
SBLC, a licensee is required to maintain a minimum net worth (as defined by SBA regulations) of the
greater of (1) 10% of the outstanding loans receivable and other investments or (2) $1.0 million,
as well as certain other regulatory restrictions such as change in control provisions. See Item
1A. Risk Factors.
SBA 504 Program
The SBA 504 Program assists small businesses in obtaining subordinated, long-term financing by
guaranteeing debentures available through certified development companies for the purpose of
acquiring land, building, machinery and equipment and for modernizing, renovating or restoring
existing facilities and sites. A typical finance structure for an SBA 504 Program project would
include a first mortgage covering 50% of the project cost from a private lender, a second mortgage
obtained through the SBA 504 Program covering up to 40% of
the project cost and a contribution of at least 10% of the project cost by the principals of
the small businesses being assisted. We typically require at least a 20% contribution of the
equity in a project by our borrowers. The SBA
7
does not guarantee the first mortgage. Although the
total sizes of projects utilizing the SBA 504 Program are unlimited, currently the maximum amount
of subordinated debt in any individual project is generally $1.5 million (or $2 million for certain
projects). Typical project costs range in size from $1 million to $6 million.
SBIC Program
We originate loans to small businesses through our SBICs. According to SBA regulations, SBICs
may make long-term loans to small businesses and invest in the equity securities of such
businesses. Under present SBA regulations, eligible small businesses include businesses that have
a net worth not exceeding $18 million and have average annual fully taxable net income not
exceeding $6 million for the most recent two fiscal years. An SBIC can issue debentures whose
principal and interest is guaranteed to be paid to the debt holder in the event of non-payment by
the SBIC. As a result, the debentures costs of funds are usually lower compared to alternative
fixed-rate sources of funds available to us.
PROPERTY DIVISION
We originally purchased a total of 30 properties, operated as Amerihost Inns, during 1998 and
1999. These properties were part of a sale and leaseback transaction with Arlington Hospitality,
Inc. (AHI) whereby we purchased the properties from AHI and then leased the properties to a
wholly-owned subsidiary of AHI, Arlington Inns, Inc. (AII and together with AHI, Arlington).
We concurrently entered into a Master Lease Agreement with AHI and AII covering all the properties
and entered into a guaranty agreement with AHI whereby AHI guaranteed all obligations of AII under
the individual property lease agreements. AII filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code (Chapter 11) on June 22, 2005. AHI filed for bankruptcy
protection under Chapter 11 on August 31, 2005.
We commenced selling properties during 2000, and we began 2006 with 13 owned Amerihost Inns
and two Amerihost Inns acquired in liquidation of loans for a total of 15 properties. On January
13, 2006, AII rejected the leases and turned over property operations to us. We sold 12 of these
properties during the first half of 2006. Our property division owns and operates our limited
service hospitality properties through third party management companies. For the year ended
December 31, 2006, total revenues and loss from continuing operations of our property division were
approximately $2.2 million (approximately 7% of our total revenues) and $1.3 million, respectively.
At December 31, 2006, two of the three limited service hospitality properties that we own were
included in our consolidated financial statements. We leased one of our three remaining hotel
properties during the third quarter of 2006 and as a result of the lease structure, have
deconsolidated the ownership and operations of the property. We are currently marketing to lease
the remaining two properties. As a REIT, we cannot directly operate hotel properties; therefore,
the properties are being operated by third party management companies.
STRUCTURED LOAN TRANSACTIONS
General
Structured loan transactions have historically been our primary method of obtaining funds for
new loan originations. In a structured loan transaction, we contribute loans receivable to an SPE
in exchange for a subordinate financial interest in that entity and obtain an opinion of counsel
that the contribution of the loans receivable to the SPE constitutes a true sale of the loans
receivable. The SPE issues notes payable (usually through a private placement) to third parties
and then distributes a portion of the notes payable proceeds to us. The notes payable are
collateralized solely by the assets of the SPE. If the SPE meets the definition of a QSPE, we
account for the structured loan transaction as a sale of our loans receivable; and as a result,
neither the loans receivable contributed to the QSPE nor the notes payable issued by the QSPE are
included in our consolidated financial statements. The terms of the notes payable issued by the
QSPEs provide that the partners of these QSPEs are not liable for any payment on the notes.
Accordingly, if the QSPEs fail to pay the principal or interest due on the notes, the sole recourse
of the holders of the notes is against the assets of the QSPEs. We have no obligation to pay the
notes, nor do the holders of the notes have any recourse against our assets. We are the servicer
of the loans pursuant to the transaction documents and are paid a fee of 30 basis points per year
based on the principal outstanding.
When a structured loan sale transaction is completed our ownership interests in the QSPEs are
accounted for as retained interests in transferred assets (Retained Interests) and recorded at
the present value of the estimated
8
future cash flows to be received from the QSPE. The difference
between (1) the carrying value of the loans receivable sold and (2) the sum of (a) the cash
received and (b) the relative fair value of our Retained Interests, constitutes the gain or loss on
sale. Gains or losses on these sales may represent a material portion of our net income in the
period in which the transactions occur.
All of our securitization transactions provide a clean-up call. A clean-up call is an option
allowed by the transaction documents to repurchase the transferred assets when the amount of the
outstanding assets (or corresponding notes payable outstanding) falls to a level at which the cost
of servicing those assets becomes burdensome. The clean-up call option regarding a loan in a QSPE
or SPE is exercised by the party that contributed the loan to the QSPE or SPE.
Since we have historically relied on structured loan transactions as our primary source of
operating capital to fund new loan originations, any adverse changes in our ability to complete
this type of transaction, including any negative impact on the asset-backed securities market for
the type of product we generate, could have a detrimental effect on our ability to generate funds
to originate loans. See Item 1A Risk Factors.
Structured Loan Sale Transactions
General
As of December 31, 2006, the QSPEs consisted of:
|
|
|
PMC Capital, L.P. 1998-1 (the 1998 Partnership) and its related general partner; |
|
|
|
|
PMC Capital, L.P. 1999-1 (the 1999 Partnership) and its related general partner; |
|
|
|
|
PMC Joint Venture, L.P. 2000 (the 2000 Joint Venture) and its related general partner; |
|
|
|
|
PMC Joint Venture, L.P. 2001 (the 2001 Joint Venture) and its related general partner; |
|
|
|
|
PMC Joint Venture, L.P. 2002-1 (the 2002 Joint Venture) and its related general partner; and, |
|
|
|
|
PMC Joint Venture, L.P. 2003-1 (the 2003 Joint Venture, and together with the 2000
Joint Venture, the 2001 Joint Venture and the 2002 Joint Venture, the Joint Ventures)
and its related general partner. |
As a result of the merger, we acquired PMC Capitals subordinate interests in the Joint
Ventures and 100% of the subordinate interests in the 1998 Partnership and the 1999 Partnership
(collectively, the Acquired Structured Loan Sale Transactions). We previously owned subordinate
interests in the Joint Ventures (the Originated Structured Loan Sale Transactions). Even though
we own 100% of the subordinate interest in each of the Joint Ventures, since a portion was obtained
through acquisition, we recorded these investments separately. At the date of acquisition, the
fair value of the Acquired Structured Loan Sale Transactions became our cost.
In addition, First Western has Retained Interests related to the sale of loans originated
pursuant to the SBA 7(a) Program.
9
Originated Structured Loan Sale Transactions
Information relating to our Originated Structured Loan Sale Transactions was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Joint |
|
|
2001 Joint |
|
|
2002 Joint |
|
|
2003 Joint |
|
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
|
(Dollars in thousands) |
|
Transaction date |
|
|
12/18/00 |
|
|
|
06/27/01 |
|
|
|
04/12/02 |
|
|
|
10/07/03 |
|
Principal amount of loans sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At time of sale |
|
$ |
55,675 |
|
|
$ |
32,662 |
|
|
$ |
27,286 |
|
|
$ |
45,456 |
|
At December 31, 2006 |
|
$ |
29,018 |
|
|
$ |
9,161 |
|
|
$ |
15,510 |
|
|
$ |
25,480 |
|
Structured notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At time of sale |
|
$ |
49,550 |
|
|
$ |
30,063 |
|
|
$ |
24,557 |
|
|
$ |
40,910 |
|
At December 31, 2006 |
|
$ |
23,597 |
|
|
$ |
6,562 |
|
|
$ |
12,740 |
|
|
$ |
22,182 |
|
Weighted average interest rate on loans (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At time of sale |
|
|
9.63 |
% |
|
|
9.62 |
% |
|
|
9.23 |
% |
|
|
L+4.02 |
% |
At December 31, 2006 |
|
|
9.54 |
% |
|
|
9.70 |
% |
|
|
9.55 |
% |
|
|
L+4.02 |
% |
Required overcollateralization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At time of sale (2) |
|
|
11.0 |
% |
|
|
8.0 |
% |
|
|
10.0 |
% |
|
|
10.0 |
% |
At December 31, 2006 (3) |
|
|
19.1 |
% |
|
|
28.5 |
% |
|
|
17.7 |
% |
|
|
17.8 |
% |
Interest rate on the structured notes payable (1) |
|
|
7.28 |
% |
|
|
6.36 |
% |
|
|
6.67 |
% |
|
|
L+1.25 |
% |
Rating of structured notes (4) |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
Cash reserve requirement (5) |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
|
(1) |
|
Variable interest rates are denoted by the spread over the 90-day LIBOR (L). |
|
(2) |
|
The required overcollateralization percentage at time of sale represents the
portion of our Sold Loans retained by the QSPEs whose value is included in Retained
Interests. |
|
(3) |
|
The required overcollateralization percentage at December 31, 2006 was larger
than the required overcollateralization percentage at time of sale since all principal
payments received on the underlying loans receivable are paid to the noteholders. |
|
(4) |
|
Structured notes issued by the QSPEs were rated by Moodys Investors Service,
Inc. |
|
(5) |
|
The cash reserve requirement is 6% of the principal amount of loans
outstanding. Transactions all have minimum reserve requirements of 2% of the principal
balance sold at the time of the sale. |
10
Acquired Structured Loan Sale Transactions
Information relating to our Acquired Structured Loan Sale Transactions was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 |
|
|
1999 |
|
|
2000 Joint |
|
|
2001 Joint |
|
|
2002 Joint |
|
|
2003 Joint |
|
|
|
Partnership |
|
|
Partnership |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
|
(Dollars in thousands) |
|
Principal amount of loans sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2004 |
|
$ |
21,702 |
|
|
$ |
29,800 |
|
|
$ |
17,345 |
|
|
$ |
37,191 |
|
|
$ |
36,102 |
|
|
$ |
56,424 |
|
At December 31, 2006 |
|
$ |
11,795 |
|
|
$ |
15,060 |
|
|
$ |
8,561 |
|
|
$ |
17,931 |
|
|
$ |
17,133 |
|
|
$ |
38,631 |
|
Structured notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2004 |
|
$ |
21,221 |
|
|
$ |
26,394 |
|
|
$ |
15,636 |
|
|
$ |
33,324 |
|
|
$ |
32,932 |
|
|
$ |
50,774 |
|
At December 31, 2006 |
|
$ |
11,757 |
|
|
$ |
11,579 |
|
|
$ |
5,860 |
|
|
$ |
15,875 |
|
|
$ |
12,877 |
|
|
$ |
32,954 |
|
Weighted average interest rate on loans (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2004 |
|
|
P+1.22 |
% |
|
|
9.40 |
% |
|
|
9.20 |
% |
|
|
9.64 |
% |
|
|
9.58 |
% |
|
|
L+4.02 |
% |
At December 31, 2006 |
|
|
P+0.96 |
% |
|
|
9.07 |
% |
|
|
9.00 |
% |
|
|
9.67 |
% |
|
|
9.52 |
% |
|
|
L+4.02 |
% |
Required overcollateralization (2) (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 29, 2004 |
|
|
10.5 |
% |
|
|
12.0 |
% |
|
|
15.7 |
% |
|
|
10.6 |
% |
|
|
12.0 |
% |
|
|
10.2 |
% |
At December 31, 2006 |
|
|
10.5 |
% |
|
|
23.8 |
% |
|
|
31.9 |
% |
|
|
22.0 |
% |
|
|
25.2 |
% |
|
|
15.0 |
% |
Mortgage-backed security (4) |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate on structured notes (1) |
|
|
P-1.00 |
% |
|
|
6.60 |
% |
|
|
7.28 |
% |
|
|
6.36 |
% |
|
|
6.67 |
% |
|
|
L+1.25 |
% |
Rating of structured notes (5) |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
Cash reserve requirement (6) |
|
$ |
1,329 |
|
|
$ |
1,210 |
|
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
|
|
|
(1) |
|
Variable interest rates are denoted by the spread over (under) the prime rate
(P) or the 90-day LIBOR (L). |
|
(2) |
|
The required overcollateralization percentage at February 29, 2004 represents the portion of
our Sold Loans retained by the QSPEs whose value is included in Retained Interests. |
|
(3) |
|
For the majority of the Acquired Structured Loan Sale Transactions, the required
overcollateralization percentage at December 31, 2006 was larger than the required
overcollateralization percentage at February 29, 2004 since all principal payments received on
the underlying loans receivable are paid to the noteholders. |
|
(4) |
|
Owned by PMC Commercial. |
|
(5) |
|
Structured notes issued by the QSPEs were rated by Moodys Investors Service, Inc. |
|
(6) |
|
The cash reserve requirement is generally 6% of the principal amount of loans outstanding.
Transactions all have minimum reserve requirements of 2% of the principal balance sold at the
time of the sale. The 1998 Partnership and the 1999 Partnership are currently at their
minimum requirements. |
Retained Interests
As a result of our structured loan sale transactions, we have Retained Interests representing
our residual interest in the loans sold to the QSPEs. When we securitize loans, we are required to
recognize Retained Interests, which represent our right to receive net future cash flows, at their
fair value. Our Retained Interests consist of (1) the required overcollateralization, which is the
retention of a portion of each of the Sold Loans, (2) the reserve fund, which represents the
required cash balance owned by the QSPE and (3) the interest-only strip receivable, which
represents the future excess funds to be generated by the QSPE after payment of all obligations of
the QSPE. Our Retained Interests are subject to credit, prepayment and interest rate risks. The
estimated fair value of our Retained Interests is determined based on the present value of
estimated future cash flows that we will receive from the QSPEs. The estimated future cash flows
are calculated based on assumptions concerning, among other things, loan losses and prepayment
speeds. On a quarterly basis, we measure the fair value of, and record income relating to, the
Retained Interests based upon the future anticipated cash flows discounted based on an estimate of
market interest rates for investments of this type. Any appreciation of the Retained Interests is
included in our balance sheet in beneficiaries equity. Any depreciation of Retained Interests is
either included in our statement of income as either a permanent impairment (if there is a
reduction in expected future cash flows) or on the balance sheet in beneficiaries equity as an
unrealized loss.
We retain a portion of the default and prepayment risk associated with the underlying loans of
our Retained Interests. Actual defaults and prepayments, with respect to estimating future cash
flows for purposes of valuing our
11
Retained Interests will vary from our assumptions, possibly to a
material degree, and slower (faster) than anticipated
prepayments of principal or lower (higher) than anticipated loan losses will increase (decrease)
the fair value of our Retained Interests and related cash flows. We regularly measure our loan
loss, prepayment and other assumptions against the actual performance of the loans sold. Although
we believe that assumptions made as to the future cash flows are reasonable, actual rates of loss
or prepayments will vary from those assumed and the assumptions may be revised based upon changes
in facts or circumstances. See Item 1A Risk Factors Investments General There is no market
for our Retained Interests and the value is volatile.
In accordance with generally accepted accounting principles, our consolidated financial
statements do not include the assets, liabilities, partners capital, revenues or expenses of the
QSPEs. As a result, at December 31, 2006 and 2005, our consolidated balance sheets do not include
$207.7 million and $276.1 million in assets, respectively, and $156.5 million and $220.8 million in
liabilities, respectively, related to these structured loan sale transactions recorded by the
QSPEs. At December 31, 2006, the partners capital of the QSPEs was approximately $51.2 million
compared to the estimated value of the associated Retained Interests of approximately $55.1
million.
TAX STATUS
PMC Commercial has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the Code). As a REIT, PMC Commercial is generally not subject to Federal income tax
(including any applicable alternative minimum tax) to the extent that it distributes at least 90%
of its REIT taxable income to shareholders. Certain of PMC Commercials subsidiaries, including
First Western and PMCIC, have elected to be treated as taxable REIT subsidiaries; thus, their
earnings are subject to U.S. Federal income tax. To the extent PMC Commercials taxable REIT
subsidiaries retain their earnings and profits, these earnings and profits will be unavailable for
distribution to our shareholders.
PMC Commercial may, however, be subject to certain Federal excise taxes and state and local
taxes on its income and property. If PMC Commercial fails to qualify as a REIT in any taxable
year, it will be subject to Federal income taxes at regular corporate rates (including any
applicable alternative minimum tax) and will not be able to qualify as a REIT for four subsequent
taxable years. REITs are subject to a number of organizational and operational requirements under
the Code. See Item 1A Risk Factors REIT Related Risks for additional tax status information.
EMPLOYEES
We employed 45 individuals including marketing professionals, investment professionals,
operations professionals and administrative staff as of December 31, 2006. In addition, we have
employment agreements with our executive officers. Annual base salary during the terms of the
contracts does not exceed $375,000 for any one individual. Our operations are conducted from our
Dallas, Texas office. We believe the relationship with our employees is good.
COMPETITION
In originating loans we compete with other specialty commercial lenders, banks, broker
dealers, other REITs, savings and loan associations, insurance companies and other entities that
originate loans. Many of these competitors have greater financial and managerial resources than
us, are able to provide services we are not able to provide (i.e., depository services), and may be
better able to withstand the impact of economic downturns than we are. In addition, the yield
curve combined with increased competition has caused margin compression.
Fixed-rate lending: As a result of the prolonged period in which the yield curve has been
inverted or flat (i.e., compression of long-term and short-term interest rates) combined with
increased competition from fixed-rate lenders, our margins for fixed-rate loans contracted to the
point where it is no longer economically viable for us to compete for fixed-rate loans. In
addition, the market has changed where borrowers are looking predominately for fixed-rate loans;
however, our ability to offer fixed-rate loans is constrained by our cost of funds. Local banks
offer a five-year maturity, 20-year amortization loan (mini-perm loan) at a more attractive rate
than we can offer based on our current sources of funds. Consequently, we are currently
predominately committing to loans with a variable rate.
We continue to actively pursue alternative sources of funds and evaluate interest rate hedges
to reduce our cost of funds and/or reduce interest rate risk, which may allow us to originate
fixed-rate loans at more competitive rates.
12
Variable-rate lending: For our variable-rate loan product, we believe we compete effectively
on the basis of interest rates, our long-term maturities and payment schedules, the quality of our
service, our reputation as a lender, timely credit analysis and greater responsiveness to renewal
and refinancing requests from borrowers.
CUSTOMERS
In relation to our lending division, we are not dependent upon a single borrower, or a few
borrowers, whose loss would have a material adverse effect on us. In addition, we have not loaned
more than 10% of our assets to any single borrower.
SECURITIES EXCHANGE ACT REPORTS
The Company maintains an internet site at the following address: www.pmctrust.com. The
information on the Companys website is not incorporated by reference in this annual report on Form
10-K.
We make available on or through our website certain reports and amendments to those reports
that we file with or furnish to the Securities and Exchange Commission (SEC) in accordance with
the Securities Exchange Act of 1934, as amended (the Exchange Act). These include our annual
reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We
make this information available on our website free of charge as soon as reasonably practicable
after we electronically file the information with, or furnish it to, the SEC.
13
Item 1A. RISK FACTORS
Management has identified the following important factors that could cause actual results to
differ materially from those reflected in forward-looking statements or from our historical
results. These factors, which are not all-inclusive, could have a material impact on our asset
valuations, results of operations or financial condition. In addition, these factors could impair
our ability to maintain dividend distributions at current levels.
Investment
Risks Lending Activities
Competition might prevent us from originating loans at favorable yields, which would harm our
results of operations and our ability to continue paying dividends at current levels.
Our net income depends on our ability to originate loans at favorable spreads over our
borrowing costs. In originating loans, we compete with other specialty commercial lenders, banks,
broker dealers, other REITs, savings and loan associations, insurance companies and other entities
that originate loans, many of which have greater financial resources than us. As a result, we may
not be able to originate sufficient loans at favorable spreads over our borrowing costs, which
would harm our results of operations and consequently, our ability to continue paying dividends at
current levels.
There are significant risks in lending to small businesses.
Our loans receivable consist primarily of loans to small, privately-owned businesses. There
is no publicly available information about these businesses; therefore, we must rely on our own due
diligence to obtain information in connection with our investment decisions. Our borrowers may not
meet net income, cash flow and other coverage tests typically imposed by banks. A borrowers
ability to repay its loan may be adversely impacted by numerous factors, including a downturn in
its industry or other negative economic conditions. Deterioration in a borrowers financial
condition and prospects may be accompanied by deterioration in the collateral for the loan. In
addition, small businesses typically depend on the management talents and efforts of one person or
a small group of people for their success. The loss of services of one or more of these persons
could have an adverse impact on the operations of the small business. Small companies are
typically more vulnerable to customer preferences, market conditions and economic downturns and
often need additional capital to expand or compete. These factors may have an impact on the
ultimate recovery of our loans receivable from such businesses. Loans to small businesses,
therefore, involve a high degree of business and financial risk, which can result in substantial
losses and accordingly should be considered speculative.
There is volatility in the valuation of our loans receivable which can require the establishment
of loan loss reserves.
There is typically no public market or established trading market for the loans we originate.
The illiquid nature of our loans may adversely affect our ability to dispose of such loans at times
when it may be advantageous for us to liquidate such investments.
To the extent one or several of our borrowers experience significant operating difficulties
and we are forced to liquidate the collateral underlying the loan, future losses may be
substantial. The determination of whether significant doubt exists and whether a loan loss reserve
is necessary for each loan requires judgment and consideration of the facts and circumstances
existing at the evaluation date. Changes to the facts and circumstances of the borrower and/or the
physical condition of the collateral underlying the loan, the hospitality industry and the economy
may require the establishment of significant additional loan loss reserves.
Changes in interest rates could negatively affect lending operations, which could result in reduced
earnings.
The net income of our lending operations is materially dependent upon the spread between the
rate at which we borrow funds and the rate at which we loan these funds. During periods of
changing interest rates, interest rate mismatches could negatively impact our net income, dividend
yield, and the market price of our common shares.
At the present time, we primarily originate variable-rate loans and have certain debt which is
long-term and at fixed interest rates and preferred stock which is long-term with a fixed dividend
yield. If the yield on loans originated with funds obtained from fixed-rate borrowings or
preferred stock fails to cover the cost of such funds, our cash flow will be reduced.
14
As a result of our current dependence on variable-rate loans, our interest income will be
reduced during low interest rate environments. To the extent that LIBOR or the prime rate
decreases from current levels, interest income on our currently outstanding loans receivable will
decline.
Changes in interest rates do not have an immediate impact on the interest income of our
fixed-rate loans receivable. Our interest rate risk on our fixed-rate loans receivable is
primarily due to loan prepayments and maturities. The average maturity of our loan portfolio is
less than their average contractual terms because of prepayments. The average life of mortgage
loans receivable tends to increase when the current mortgage rates are substantially higher than
rates on existing mortgage loans receivable and, conversely, decrease when the current mortgage
rates are substantially lower than rates on existing mortgage loans receivable (due to refinancings
of fixed-rate loans receivable at lower rates).
We depend on the accuracy and completeness of information about potential borrowers and guarantors.
In deciding whether or not to extend credit or enter into transactions with potential
borrowers and/or their guarantors, we rely on information furnished to us by or on behalf of
potential borrowers and/or guarantors, including financial statements, construction invoices and
other financial information. We also rely on representations of potential borrowers and/or
guarantors as to the accuracy and completeness of that information. Our financial condition and
results of operations could be negatively impacted to the extent we rely on financial statements
that are materially misleading.
Investment
Risks General
There is no market for our Retained Interests and the value is volatile.
Due to the limited number of entities that conduct transactions with similar assets, the
relatively 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, our estimate of the
fair value may vary significantly from what a willing buyer would pay for these assets. If a ready
market existed for our Retained Interests, the value would be different and the difference may be
significant.
The following is a sensitivity analysis of our Retained Interests as of December 31, 2006 to
highlight the volatility that results when prepayments, loan losses and discount rates are
different than our assumptions:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Fair |
|
|
|
|
Changed Assumption |
|
Value |
|
|
Asset Change (1) |
|
|
|
(In thousands) |
|
Losses increase by 50 basis points per annum (2) |
|
$ |
54,157 |
|
|
|
($1,567 |
) |
Losses increase by 100 basis points per annum (2) |
|
$ |
52,583 |
|
|
|
($3,141 |
) |
Rate of prepayment increases by 5% per annum (3) |
|
$ |
55,136 |
|
|
|
($ 588 |
) |
Rate of prepayment increases by 10% per annum (3) |
|
$ |
54,709 |
|
|
|
($1,015 |
) |
Discount rates increase by 100 basis points |
|
$ |
54,127 |
|
|
|
($1,597 |
) |
Discount rates increase by 200 basis points |
|
$ |
52,595 |
|
|
|
($3,129 |
) |
|
|
|
(1) |
|
Any depreciation of our Retained Interests is either included in the
accompanying statement of income as a permanent impairment (if there is a
reduction in expected future cash flows) or on our balance sheet in beneficiaries
equity as an unrealized loss. |
|
(2) |
|
If we experience significant losses (i.e., in excess of anticipated
losses), the effect on our Retained Interests would first be to reduce the value
of the interest-only strip receivables. To the extent the interest-only strip
receivables could not fully absorb the losses, the effect would then be to reduce
the value of our reserve funds and then the value of our required
overcollateralization. |
|
(3) |
|
For example, a 16% assumed rate of prepayment would be increased to 21%
or 26% based on increases of 5% or 10% per annum, respectively. |
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
assumptions to the change in value may not be linear. The effect of a variation in a particular
assumption on the estimated 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.
15
Changes in any of these assumptions or actual results which deviate from assumptions will
affect the estimated fair value of our Retained Interests, possibly to a material degree. There
can be no assurance as to the accuracy of these estimates.
We have a concentration of investments in the hospitality industry and in certain states, which
may negatively impact our financial condition and results of operations.
Substantially all of our revenue is generated from loans collateralized by hospitality
properties. At December 31, 2006, our loans receivable were approximately 94% concentrated in the
hospitality industry and approximately 94% of the loans sold to our QSPEs were concentrated in the
hospitality industry. Any economic factors that negatively impact the hospitality industry,
including terrorism, travel restrictions, bankruptcies or other political or geopolitical events,
could have a material adverse effect on our financial condition and results of operations.
At December 31, 2006, approximately 22% of our loans receivable were collateralized by
properties in Texas, approximately 10% were collateralized by properties in Ohio and approximately
24% of the loans sold to our QSPEs were collateralized by properties in Texas. No other state had
a concentration of 10% or greater of our loans receivable, loans sold to our QSPEs or Aggregate
Portfolio at December 31, 2006. A decline in economic conditions in any state in which we have a
concentration of investments could have a material adverse effect on our financial condition and
results of operations.
We are subject to prepayment risk on our Retained Interests and loans receivable which could
result in losses or reduced earnings and negatively affect our cash available for distribution
to shareholders.
Our prepayment activity has increased. Prepayment activity on our aggregate fixed-rate loans
receivable has remained at high levels as a result of the continued low long-term interest rate
environment combined with increased competition and the reduction or expiration of prepayment fees.
In addition, prepayment activity for our aggregate variable-rate loans has increased since
borrowers with variable-rate loans are generally seeking fixed-rate loans due to currently marketed
fixed-rate interest rates being lower than the current interest rate on their loan and/or concerns
of possible rising interest rates.
The proceeds from the prepayments we receive are either used to repay debt or invested
initially in temporary investments. During decreasing interest rate environments and when
competition is greater, prepayments of our fixed-rate loans have generally been re-loaned or
committed to be re-loaned at lower interest rates than the prepaid loans receivable. For
prepayments on variable-rate loans, if the spread we charge over LIBOR or the prime rate were to
decrease, the lower interest rates we would receive on these new loans receivable would have an
adverse effect on our results of operations and depending upon the rate of future prepayments may
further impact our results of operations.
Prepayments on loans sold to the QSPEs may have a negative impact on our financial condition
or results of operations. Prepayments of loans receivable with higher interest rates negatively
impact the value of our Retained Interests to a greater extent than prepayments of loans receivable
with lower interest rates. Prepayments in excess of assumptions will cause a decline in the fair
value of our Retained Interests primarily relating to a reduction in the excess funds (our
interest-only strip receivable) expected from our structured loan sale transactions. For example,
if a $1.0 million loan with an interest rate of 10% prepays and the all-in cost of that QSPEs
structured notes was 7%, we would lose the 3% spread we had expected to receive on that loan in
future periods. Our all-in costs include interest, servicing, trustee and other ongoing costs.
The spread that is lost may be offset in part or in whole by any prepayment fee that we collect.
Our SBLC sells the guaranteed portion of most of its originated loans through private
placements (Secondary Market Sales). These sales are particularly sensitive to prepayments. Our
Retained Interests in these loan sales consists only of the spread between the interest collected
from the borrower and the interest paid to the purchaser of the guaranteed portion of the loan.
Therefore, to the extent the prepayments of these loans exceed estimates, we lose the estimated
fair value of the associated Retained Interests.
Our Board of Trust Managers may change operating policies and strategies without shareholder
approval or prior notice and such change could harm our business and results of operations and
the value of our stock.
Our Board of Trust Managers has the authority to modify or waive our current operating
policies and strategies, including PMC Commercials election to operate as a REIT, without prior
notice and without shareholder
16
approval. We cannot predict the effect any changes to our current operating policies and
strategies would have on our business, operating results and value of our stock; however, the
effect could be adverse.
Liquidity and Capital Resources Risks
Our operating results could be negatively impacted by our inability to access certain financial
markets.
We rely upon access to capital markets as a source of liquidity to satisfy our working capital
needs, grow our business and invest in loans. Although we believe that we maintain sufficient
access to these financial markets, adverse changes in the economy, the overall health of the
limited service hospitality industry and increased loan losses could limit access to these markets
and restrict us from continuing our current operating strategy or implementing new operating
strategies.
The market for structured loan transactions may decline, which would decrease the availability
of, and/or increase the cost of, working capital and negatively affect the potential for
growth.
We will continue to need capital to fund loans. Historically, we have sold loans receivable
as part of structured loan transactions, borrowed from financial institutions and issued equity
securities to raise capital. A reduction in the availability of funds from financial institutions
or the asset-backed securities market could have a material adverse effect on our financial
condition and our results of operations. Our long-term ability to continue to grow depends, to a
large extent, on our ability to sell asset-backed securities through structured loan transactions.
In certain economic markets the availability of funds may be diminished or the spread charged for
funds may increase causing us to delay a structured loan transaction. In addition, terrorist
attacks or political or geopolitical events could impact the availability and cost of capital.
A number of factors could impair our ability, or alter our decision, to complete a structured
loan transaction. These factors include, but are not limited to:
|
|
|
As a result of certain economic conditions, investors in the type of asset-backed
securities that we place may increase our cost of capital by widening the spreads
(over a benchmark such as LIBOR or treasury rates) they require in order to purchase
the asset-backed securities or cease acquiring our type of asset-backed security; |
|
|
|
|
A deterioration in the performance of our loans receivable or the loans receivable
of our prior transactions (for example, higher than expected loan losses or
delinquencies) may deter potential investors from purchasing our asset-backed
securities; |
|
|
|
|
A deterioration in the operations or market perception of the limited service sector
of the hospitality industry may deter potential investors from purchasing our
asset-backed securities or lower the available rating from the rating agencies; and |
|
|
|
|
A change in the underlying criteria utilized by the rating agencies may cause
transactions to receive lower ratings than previously issued thereby increasing the
cost on our transactions. |
Significant changes in any of these criteria may result in us temporarily suspending the use
of structured loan transactions and we may seek other sources of financing. A reduction in the
availability or an increased cost of this source of funds could have a material adverse effect on
our financial condition and results of operations since working capital may not be available or
available at acceptable spreads to fund future loan originations or to acquire real estate.
We use leverage to fund our capital needs which magnifies the effect of changing interest rates
on our earnings.
We have borrowed funds and intend to borrow additional funds. As a result, we use leverage to
fund our capital needs. Private lenders and the SBA have fixed dollar claims on our assets
superior to the claims of the holders of our common shares. Leverage magnifies the effect that
rising or falling interest rates have on our earnings. Any increase in the interest rate earned by
us on investments in excess of the interest rate on the funds obtained from borrowings would cause
our net income and earnings per share to increase more than they would without leverage, while any
decrease in the interest rate earned by us on investments would cause net income and earnings per
share to decline by a greater amount than they would without leverage. Leverage is thus generally
considered a speculative investment technique. In order for us to repay indebtedness on a timely
basis, we may be required to dispose of assets when we would not otherwise do so and at prices
which may be below the net book value of such assets. Dispositions of assets could have a material
adverse effect on our financial condition and results of operations.
17
Operating Risks
Economic slowdowns, negative political events and changes in the competitive environment could
adversely affect operating results.
Several factors may impact the hospitality industry. Many of the businesses to which we have
made, or will make, loans may be susceptible to economic slowdowns or recessions. During economic
downturns, there may be reductions in business travel and consumers generally take fewer vacations.
Terrorism, bankruptcies or other political or geopolitical events could negatively affect our
borrowers. Our non-performing assets are likely to increase during these periods. These
conditions could lead to losses in our portfolio and a decrease in our interest income, net income
and assets.
Another factor which affects the limited service sector of the hospitality industry is a
significant rise in gasoline prices within a short period of time. A significant portion of the
limited service hospitality properties collateralizing our loans are located on interstate
highways. When gas prices sharply increase, occupancy rates for properties located on interstate
highways may decrease. These factors may cause a reduction in revenue per available room. If
revenue for the limited service sector of the hospitality industry were to experience significant
sustained reductions, the ability of our borrowers to meet their obligations could be impaired and
loan losses could increase.
Many of our competitors have greater financial and managerial resources than us and are able
to provide services we are not able to provide (i.e., depository services). As a result of these
competitors size and diversified income resources, they may be better able to withstand the impact
of economic downturns.
There may be significant fluctuations in our quarterly results which may adversely affect our stock
price.
Our quarterly operating results fluctuate based on a number of factors, including, among others:
|
|
|
Interest rate changes; |
|
|
|
|
The volume and timing of loan originations and prepayments of our loans receivable; |
|
|
|
|
The recognition of gains or losses on investments; |
|
|
|
|
The level of competition in our markets; and |
|
|
|
|
General economic conditions, especially those which affect the hospitality industry. |
As a result of the above factors, quarterly results should not be relied upon as being
indicative of performance in future quarters.
We depend on our key personnel, and the loss of any of our key personnel could adversely affect
our operations.
We depend on the diligence, experience and skill of our key personnel (executive officers) who
provide management services to us for the selection, acquisition, structuring, monitoring and sale
of our portfolio assets and the borrowings used to acquire these assets. We have entered into
employment agreements with our executive officers. The loss of any executive officer could harm
our business, financial condition, cash flow and results of operations.
We operate in a highly regulated environment, changes in which could adversely affect our
financial condition or results of operations.
As a company whose common shares are publicly traded, we are subject to the rules and
regulations of the SEC. In addition, we are regulated by the SBA. Changes in laws that govern our
entities may significantly affect our business. Laws and regulations may be changed from time to
time, and the interpretations of the relevant laws and regulations are also subject to change. Any
change in the laws or regulations governing our business could have a material impact on our
financial condition or results of operations.
At any time, U.S. Federal income tax laws governing REITs or the administrative
interpretations of those laws may be amended. Any of those new laws or interpretations thereof may
take effect retroactively and could adversely affect us. The Jobs and Growth Tax Relief
Reconciliation Act of 2003 reduced the tax rate on both dividends and long-term capital gains for
most non-corporate taxpayers to 15% until 2008. This reduced maximum tax rate generally does not
apply to ordinary REIT dividends, which continue to be subject to tax at the higher tax rates
applicable to ordinary income (a maximum rate of 35%). However, the 15% maximum tax rate does
apply to
18
certain REIT distributions. This legislation may cause shares in non-REIT corporations to be
a more attractive investment to individual investors than shares in REITs and may adversely affect
the market price of our common shares.
To the extent a loan becomes a problem loan, we will deliver a default notice and begin
foreclosure and liquidation proceedings when we determine that pursuit of these remedies is the
most appropriate course of action. Foreclosure and bankruptcy are complex and sometimes time
consuming processes that are subject to Federal and state laws and regulations, as well as various
guidelines imposed by mortgage investors.
In conjunction with the operations of our assets acquired in liquidation and hotel properties,
we are subject to numerous Federal, state and local laws and government regulations including
environmental, occupational health and safety, state and local taxes and laws relating to access
for disabled persons.
Regarding our owned properties, under various Federal, state and local laws, ordinances and
regulations, a current or former owner or operator of real estate may be considered liable for the
costs of remediating or removing hazardous substances found on its property, regardless of whether
or not the property owner or operator was responsible for its presence. Such liability may be
imposed by the Environmental Protection Agency or any state or local government authority
regardless of fault. The ultimate costs under environmental laws and the timing of these costs are
difficult to predict, and the liability under some environmental laws related to contaminated sites
can be imposed retroactively, may be on a joint and several basis and could be material to our
financial statements or results of operations.
The Americans with Disabilities Act of 1990 (ADA) requires all public accommodations and
commercial facilities to meet federal requirements related to access and use by disabled persons.
Compliance with the ADA requirements could require removal of access barriers. Although we believe
that the properties that we own or finance are substantially in compliance with these requirements,
a determination that the properties are not in compliance with the ADA could result in the
imposition of fines by the U.S. Government or an award of damages to private litigants.
REIT Related Risks
Failure to qualify as a REIT would subject PMC Commercial to U.S. Federal income tax.
If a company meets certain income and asset diversification and income distribution
requirements under the Code, it can qualify as a REIT and be entitled to pass-through tax
treatment. We would cease to qualify for pass-through tax treatment if we were unable to comply
with these requirements. PMC Commercial is also subject to a non-deductible 4% excise tax (and, in
certain cases, corporate level income tax) if we fail to make certain distributions. Failure to
qualify as a REIT would subject us to Federal income tax as if we were an ordinary corporation,
resulting in a substantial reduction in both our net assets and the amount of income available for
distribution to our shareholders.
We believe that we have operated in a manner that allows us to qualify as a REIT under the
Code and intend to continue to so operate. Although we believe that we are organized and operate
as a REIT, no assurance can be given that we will continue to remain qualified as a REIT.
Qualification as a REIT involves the application of technical and complex provisions of the Code
for which there are limited judicial or administrative interpretations and involves the
determination of various factual matters and circumstances not entirely within our control. In
addition, no assurance can be given that new legislation, regulations, administrative
interpretations or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the Federal income tax consequences of such qualification.
In addition, compliance with the REIT qualification tests could restrict our ability to take
advantage of attractive investment opportunities in non-qualifying assets, which would negatively
affect the cash available for distribution to our shareholders.
19
If PMC Commercial fails to qualify as a REIT, we may, among other things:
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not be allowed a deduction for distributions to our shareholders in computing our taxable income; |
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be subject to U.S. Federal income tax, including any applicable alternative minimum
tax, on our taxable income at regular corporate rates; |
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be subject to increased state and local taxes; and, |
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unless entitled to relief under certain statutory provisions, be disqualified from
treatment as a REIT for the taxable year in which we lost our qualification and the
four taxable years following the year during which we lost our qualification. |
As a result of these factors, failure to qualify as a REIT could also impair our ability to
expand our business and raise capital, substantially reduce the funds available for distribution to
our shareholders and may reduce the market price of our common shares.
Ownership limitation associated with our REIT status may restrict change of control or business
combination opportunities.
In order for PMC Commercial to qualify as a REIT, no more than 50% in value of our outstanding
capital shares may be owned, directly or indirectly, by five or fewer individuals during the last
half of any calendar year. Individuals include natural persons, private foundations, some
employee benefit plans and trusts, and some charitable trusts.
To preserve PMC Commercials REIT status, our declaration of trust generally prohibits any
shareholder from directly or indirectly owning more than 9.8% of any class or series of our
outstanding common shares or preferred shares without specific waiver from our Board of Trust
Managers. The ownership limitation could have the effect of discouraging a takeover or other
transaction in which holders of our common shares might receive a premium for their shares over the
then prevailing market price or which holders might believe to be otherwise in their best
interests.
Failure to make required distributions to our shareholders would subject us to tax.
In order to qualify as a REIT, an entity generally must distribute to its shareholders, each
taxable year, at least 90% of its taxable income, other than any net capital gain and excluding the
non-distributed taxable income of taxable REIT subsidiaries. As a result, our shareholders receive
periodic distributions from us. Such distributions are taxable as ordinary income to the extent
that they are made out of current or accumulated earnings and profits. To the extent that a REIT
satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income,
it will be subject to federal corporate income tax on its undistributed income. In addition, the
REIT will incur a 4% nondeductible excise tax on the amount, if any, by which its distributions in
any calendar year are less than the sum of:
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85% of its ordinary income for that year; |
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95% of its capital gain net income for that year; and |
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100% of its undistributed taxable income from prior years. |
We have paid out, and intend to continue to pay out, our REIT taxable income to shareholders
in a manner intended to satisfy the 90% distribution requirement and to avoid Federal corporate
income tax.
Our taxable income may substantially exceed our net income as determined based on generally
accepted accounting principles (GAAP) because, for example, capital losses will be deducted in
determining GAAP income, but may not be deductible in computing taxable income. In addition, we
may invest in assets that generate taxable income in excess of economic income or in advance of the
corresponding cash flow from the assets, referred to as excess non-cash income. Although some
types of non-cash income are excluded in determining the 90% distribution requirement, we will
incur Federal corporate income tax and the 4% excise tax with respect to any non-cash income items
if we do not distribute those items on an annual basis. As a result of the foregoing, we may
generate less cash flow than taxable income in a particular year. In that event, we may be
required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that we
regard as unfavorable in order to satisfy the distribution requirement and to avoid federal
corporate income tax and the 4% excise tax in that year.
20
Our ownership of and relationship with our taxable REIT subsidiaries will be limited, and a
failure to comply with the limits would jeopardize our REIT status and may result in the
application of a 100% excise tax.
Subject to certain restrictions, a REIT may own up to 100% of the stock of one or more taxable
REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income
if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT
subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will
automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% of the value of a
REITs assets may consist of stock or securities of one or more taxable REIT subsidiaries. A
taxable REIT subsidiary generally will pay income tax at regular corporate rates on any taxable
income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of
interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable
REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that
are not conducted on an arms-length basis.
Our taxable REIT subsidiaries are PMCIC, First Western, PMC Funding Corp. and PMC Properties,
Inc. (PMC Properties). PMC Funding Corp. holds assets on our behalf. PMC Properties is the
operator, through third party management companies, of our hotel properties.
Our taxable REIT subsidiaries are subject to normal corporate income taxes. We continuously
monitor the value of our investments in taxable REIT subsidiaries for the purpose of ensuring
compliance with the rule that no more than 20% of the value of our assets may consist of taxable
REIT subsidiary stock and securities (which is applied at the end of each calendar quarter). The
aggregate value of our taxable REIT subsidiary stock and securities is less than 20% of the value
of our total assets (including our taxable REIT subsidiary stock and securities). In addition, we
will scrutinize all of our transactions with our taxable REIT subsidiaries for the purpose of
ensuring that they are entered into on arms-length terms in order to avoid incurring the 100%
excise tax described above. There are no distribution requirements applicable to the taxable REIT
subsidiaries and after-tax earnings may be retained. There can be no assurance, however, that we
will be able to comply with the 20% limitation on ownership of taxable REIT subsidiary stock and
securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100%
excise tax imposed on certain non-arms-length transactions.
Hotel Property Ownership Risks
We are dependent on third party management for the operation and management of our hotel
properties and we are subject to operating risks of hotel properties.
We are dependent upon third party managers to operate and manage our hotel properties. As a
REIT, PMC Commercial cannot directly operate the hotel properties. The operating results of our
hotel properties are subject to a variety of risks which could negatively impact their cash flows.
We are incurring costs including holding costs and operating costs until the remaining two
properties are leased. There can be no assurance that we will be able to find new tenants for our
hotel properties or negotiate to receive the same amount of historical lease income.
We could encounter risks that adversely affect real estate ownership.
Our real estate investments are subject to a variety of risks including, but not limited to:
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adverse changes in general or local economic or real estate market conditions; |
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changes in zoning laws; |
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changes in traffic patterns and neighborhood characteristics; |
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increases in assessed valuation and real estate tax rates; |
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increases in the cost of property insurance; |
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governmental regulations and fiscal policies; |
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the potential for uninsured or underinsured property losses; and |
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the impact of environmental laws and regulations. |
Materialization of any of these risks could cause us to incur losses, and our results of
operations and financial condition could be adversely impacted.
21
We may be required to make significant capital improvements to maintain our hotel properties and
their flags.
We may be required to replace furniture, fixtures and equipment or to make other capital
improvements or renovations to the hotel properties which could affect our liquidity. We could
also need periodic capital improvements to comply with standards associated with any flag under
franchise agreements. These capital improvements may cause a disruption of operations and
potential lost room revenue to the extent not covered by insurance and/or a reduction of return on
our investment in these hotel properties.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
22
Item 2. PROPERTIES
We lease office space for our corporate headquarters in Dallas, Texas under an operating lease
which expires in October 2011.
At December 31, 2006, two of the three limited service hospitality properties that we own were
included in our consolidated financial statements. Of our consolidated properties, one property
is located in Illinois and one is in Ohio. The Illinois property has 60 rooms and was built in
1995. The Ohio property has 79 rooms and was built in 1990. We are currently marketing to lease
these two properties. The remaining property owned by our unconsolidated subsidiary is located in
Indiana, was built in 1992 and has 60 rooms.
Item 3. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of
2006.
23
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Common Shares are traded on the American Stock Exchange (the AMEX) under the symbol
PCC. The following table sets forth, for the periods indicated, the high and low sales prices as
reported on the AMEX and the regular and special dividends per share declared by us for each such
period.
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Regular |
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Special |
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Dividends Per |
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Dividends Per |
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Quarter Ended |
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High |
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Low |
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Share |
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Share |
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December 31, 2006 |
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$ |
15.43 |
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$ |
13.65 |
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$ |
0.30 |
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$ |
0.10 |
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September 30, 2006 |
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$ |
14.72 |
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$ |
12.68 |
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$ |
0.30 |
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June 30, 2006 |
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$ |
13.59 |
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$ |
12.40 |
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$ |
0.30 |
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March 31, 2006 |
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$ |
13.80 |
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$ |
12.19 |
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$ |
0.30 |
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December 31, 2005 |
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$ |
13.48 |
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$ |
11.26 |
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$ |
0.30 |
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September 30, 2005 |
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$ |
13.67 |
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$ |
11.30 |
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$ |
0.30 |
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June 30, 2005 |
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$ |
15.44 |
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$ |
12.80 |
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$ |
0.30 |
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March 31, 2005 |
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$ |
15.65 |
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$ |
14.64 |
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$ |
0.35 |
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December 31, 2004 |
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$ |
15.98 |
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$ |
14.40 |
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$ |
0.34 |
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September 30, 2004 |
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$ |
15.44 |
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$ |
14.00 |
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$ |
0.34 |
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June 30, 2004 |
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$ |
15.55 |
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$ |
13.03 |
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$ |
0.34 |
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March 31, 2004 |
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$ |
17.20 |
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$ |
14.77 |
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$ |
0.38 |
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On March 2, 2007, there were approximately 1,250 holders of record of Common Shares and the
last reported sales price of the Common Shares was $14.87.
Our shareholders are entitled to receive dividends when and as declared by our Board of Trust
Managers (the Board). Our Board considers many factors in determining dividend policy including,
but not limited to, expectations for future earnings, REIT taxable income, the interest rate
environment, competition, our ability to obtain leverage and our loan portfolio activity. The
Board also uses REIT taxable income plus tax depreciation in determining the amount of dividends
declared. In addition, as a REIT we are required to pay out 90% of taxable income. Consequently,
the dividend rate on a quarterly basis will not necessarily correlate directly to any single factor
such as REIT taxable income or earnings expectations. We anticipate, as a result of earnings from
our core business and gains generated on our property sales, that we will maintain our current
regular quarterly dividend of $0.30 per share through the end of 2007.
We have certain covenants within our debt facilities that limit our ability to pay out returns
of capital as part of our dividends. These restrictions have not historically limited the amount
of dividends we have paid and management does not believe that they will restrict future dividend
payments. See Selected Consolidated Financial Data in Item 6, Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources in
Item 7 and Consolidated Financial Statements and Supplementary Data in Item 8 for additional
information concerning dividends.
We have not had any sales of unregistered securities during the last three years.
See Item 12 in this Form 10-K for information regarding our equity compensation plans.
24
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of our Selected Consolidated Financial Data as of and for the five
years in the period ended December 31, 2006. The following data should be read in conjunction with
our consolidated financial statements and the notes thereto and Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form
10-K. The selected financial data presented below has been derived from our consolidated financial
statements.
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Years Ended December 31, |
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2006 |
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2005 |
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2004 (1) |
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2003 |
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2002 |
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(In thousands, except per share information) |
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Total revenues |
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$ |
30,677 |
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$ |
25,099 |
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$ |
20,916 |
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$ |
9,983 |
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$ |
11,212 |
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Income from continuing operations (2) |
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$ |
13,648 |
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$ |
9,378 |
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$ |
9,923 |
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$ |
4,763 |
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$ |
6,194 |
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Discontinued operations (2) |
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$ |
2,036 |
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$ |
1,919 |
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$ |
3,265 |
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$ |
2,700 |
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$ |
3,180 |
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Gain on sale of loans receivable |
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$ |
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$ |
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$ |
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$ |
711 |
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$ |
562 |
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Extraordinary item: negative goodwill |
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$ |
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$ |
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$ |
11,593 |
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$ |
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$ |
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Net income |
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$ |
15,684 |
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$ |
11,297 |
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$ |
24,781 |
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$ |
8,174 |
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$ |
9,936 |
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Basic weighted average common shares outstanding |
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10,748 |
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10,874 |
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10,134 |
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6,448 |
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6,444 |
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Basic and diluted earnings per common share: |
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Income from continuing operations and gain on
sale of loans receivable (2) |
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$ |
1.27 |
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$ |
0.86 |
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$ |
0.98 |
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$ |
0.85 |
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$ |
1.05 |
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Extraordinary item: negative goodwill |
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$ |
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$ |
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$ |
1.14 |
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$ |
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$ |
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Net income |
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$ |
1.46 |
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$ |
1.04 |
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$ |
2.44 |
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$ |
1.27 |
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$ |
1.54 |
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Dividends declared, common |
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$ |
13,975 |
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$ |
13,569 |
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$ |
14,140 |
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|
$ |
9,932 |
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$ |
10,440 |
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Dividends per common share |
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$ |
1.30 |
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$ |
1.25 |
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$ |
1.40 |
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$ |
1.54 |
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$ |
1.62 |
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At December 31, |
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2006 |
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2005 |
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2004 (1) |
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2003 |
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2002 |
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(In thousands) |
|
Loans receivable, net |
|
$ |
169,181 |
|
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$ |
157,574 |
|
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$ |
128,234 |
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$ |
50,534 |
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$ |
71,992 |
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Retained Interests |
|
$ |
55,724 |
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$ |
62,991 |
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$ |
70,523 |
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$ |
30,798 |
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|
$ |
23,532 |
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Real estate investments, net |
|
$ |
4,414 |
|
|
$ |
8,080 |
|
|
$ |
36,223 |
|
|
$ |
41,205 |
|
|
$ |
44,928 |
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Real estate investments, held for sale, net |
|
$ |
|
|
|
$ |
15,470 |
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|
$ |
1,859 |
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$ |
2,134 |
|
|
$ |
1,877 |
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Total assets |
|
$ |
240,404 |
|
|
$ |
259,192 |
|
|
$ |
253,840 |
|
|
$ |
131,736 |
|
|
$ |
149,698 |
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Debt |
|
$ |
64,841 |
|
|
$ |
84,040 |
|
|
$ |
75,349 |
|
|
$ |
33,380 |
|
|
$ |
48,491 |
|
Redeemable preferred stock of subsidiary |
|
$ |
3,668 |
|
|
$ |
3,575 |
|
|
$ |
3,488 |
|
|
$ |
|
|
|
$ |
|
|
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(1) |
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On February 29, 2004, we merged with PMC Capital. Primarily as a result of the merger,
total beneficiaries equity and total assets increased. The merger also resulted in a
substantial increase in revenues and expenses. Revenues increased as a result of the income
generated by the assets acquired from PMC Capital. Prior to the merger, we had no employees
and most of our overhead was paid through an advisory relationship with PMC Capital.
Subsequent to the merger, we are internally managed. |
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(2) |
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Effective January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment of or
Disposal of Long-Lived Assets (SFAS No. 144). In accordance with SFAS No. 144, gains and
losses on property sales are classified within discontinued operations subsequent to the
adoption. In addition, the operations of our hotel properties sold subsequent to January 1,
2002 have been reflected as discontinued operations in our accompanying statements of income
and the prior period financial statements have been reclassified to reflect the operations of
these properties as discontinued operations during all periods
presented above. |
25
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial
Statements and the related notes that appear elsewhere in this document.
BUSINESS
We are primarily a commercial lender that originates loans to small businesses that are
principally collateralized by first liens on the real estate of the related business. We then sell
certain of our loans receivable through privately-placed structured loan transactions.
Historically, we have retained residual interests in all loans receivable sold through our
subordinate financial interest in the related qualifying special purpose entities (QSPEs).
Our revenues have historically included the following:
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Interest earned on our loans receivable; |
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Lease and operating income on our hotel properties; |
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Income on our Retained Interests; and |
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Other related loan fees, including servicing fees, late fees, prepayment fees,
assumption fees and construction monitoring fees. |
Our ability to generate interest income, as well as other revenue sources, is dependent on
economic, regulatory and competitive factors that influence interest rates and loan originations,
and our ability to secure financing for our investment activities. The amount of income earned
will vary based on the volume of loans funded, the timing and amount of structured loan
transactions, the volume of loans receivable which prepay, the mix of loans (construction versus
non-construction), the interest rate and type of loans originated (whether fixed or variable) as
well as the general level of interest rates. For a more detailed description of the risks
affecting our financial condition and results of operations, see Risk Factors in Item 1A of this
Form 10-K.
EXECUTIVE SUMMARY
Lending
During 2006, our loan originations were approximately $71.5 million, of which approximately
$19.8 million were originated in connection with sales of our Amerihost hotel properties and assets
acquired in liquidation. While we were able to originate our highest quarterly loan volume in our
history during the fourth quarter of 2006, we continue to be faced with many challenges in 2007.
The competitive marketing challenges that we are facing have impacted our financial position
through the significant amount of prepayments of our outstanding portfolio and are expected to
impact future operating results. These challenges include:
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The loan products we offer do not include a competitive fixed-rate loan product
and our volume of origination for variable-rate loans has diminished as many potential
customers have sought a fixed-rate loan product; |
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The margins we currently receive between the interest rate we charge our
borrowers and the interest rate we are charged by our lenders have compressed; |
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Prepayments have been at all time highs and caused significant reductions in
both our serviced and retained portfolios; |
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The differential between short-term interest rates (the prime rate is currently
8.25%) and long-term interest rates (5-year treasury rates are approximately 4.7%) has
resulted in fixed-rate loans being more attractive than higher priced variable-rate loans;
and |
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An inverse/flat yield curve has eliminated the premium we historically achieved
for providing a longer term (typically 20 years) fully amortizing loan. |
As a result of these loan origination challenges and our goal to expand our portfolio, we are
exploring additional investment opportunities. We expect to identify and invest in opportunities
in the real estate market that are natural additions to supplement our core business. Currently,
we are evaluating investments including, but not limited to, ownership of office buildings, retail
centers, office warehouses and other real estate, convenience and service stations, restaurants,
joint venture ownership of hotels and acquisitions of real estate related businesses. We
26
are also evaluating opportunities with banks (or internet banks) which may provide alternative
and/or lower costs of funds that will allow us to lend against real estate collateral. In order to
finance these investments, we anticipate utilization of our credit facilities. While we are using
resources to evaluate these opportunities, there can be no assurance that we will ultimately invest
in any of these alternatives. In addition, some of these alternatives may initially generate
negative cash flow and could impact our ability to maintain our dividend payments at their current
levels. However, we anticipate, that as a result of earnings from our core business and gains
generated on our property sales, that we will maintain our current regular quarterly dividend of
$0.30 per share through the end of 2007.
We also anticipate expansion of our Small Business Administrations (SBA) 7(a) Guaranteed
Loan Program (SBA 7(a) Program). Our wholly-owned subsidiary, First Western SBLC, Inc. (First
Western), is licensed as a small business lending company that originates loans through the SBA
7(a) Program. First Western is a Preferred Lender nationwide, as designated by the SBA. This
Preferred Lender status should shorten the time period necessary to originate SBA 7(a) Program
loans. While we anticipate that as a result of this change, our originations under the SBA 7(a)
Program will increase, to date we have not realized a significant increase in origination volume or
commitments since our marketing efforts generally take time to provide benefits. We recently
expanded our marketing initiatives for origination of SBA 7(a) Program loans and anticipate
increased volume as a result.
Competition
The number of lenders who compete with us for limited service hospitality loans has increased
and many of these competitors have a lower cost of funds and are therefore able to offer rates
below what we can offer. The yield curve combined with increased competition has caused margin
compression.
Fixed-rate lending: As a result of the prolonged period in which the yield curve has been
inverted or flat (i.e., compression of long-term and short-term interest rates) combined with
increased competition from fixed-rate lenders, our margins for fixed-rate loans contracted to the
point where it is no longer economically viable for us to compete for fixed-rate loans. In
addition, the market has changed where borrowers are looking predominately for fixed-rate loans;
however, our ability to offer fixed-rate loans is constrained by our cost of funds. Local banks
offer a five-year maturity, 20-year amortization loan (mini-perm loan) at a more attractive rate
than we can offer based on our current sources of funds. Consequently, we are currently
predominately committing to loans with a variable rate.
If we reduce our rates in order to originate fixed-rate loans, it is likely that the spread on
our next fixed-rate securitization would be significantly lower than we have historically achieved
on our fixed-rate securitizations. In addition, there is a risk that during the interim period
between when we make loans with fixed interest rates and when we complete a fixed-rate structured
loan transaction, if rates were to rise, we would be negatively affected by interest rate spread
compression. We continue to actively pursue alternative sources of funds and evaluate interest
rate hedges to reduce our cost of funds and/or reduce interest rate risk, which may allow us to
originate fixed-rate loans at more competitive rates.
Variable-rate lending: Due to increased competition from variable-rate lenders, our margins
for variable-rate loans have also contracted. Whereas historically we originated variable-rate
loans at 3.5% to 4.5% over LIBOR, currently we are offering rates between 3.0% to 4.0% over LIBOR.
In addition, as a result of our weighted average spread over LIBOR being reduced on our
variable-rate loan originations, we anticipate that the spread between the interest rate on new
loan originations and the cost of funds may be less than the spread of 2.77% on our variable-rate
securitization completed during 2003.
Prepayments
During 2006, we experienced significant prepayment activity. Prepayments of our retained
portfolio were approximately $40.7 million during 2006 compared to approximately $9.4 million
during 2005. In addition, during 2006 we had prepayments of approximately $46.8 million in loans
sold as part of securitizations compared to approximately $31.7 million during 2005. This
increased activity is primarily a result of competitors providing refinance opportunities for our
borrowers combined with the effect of the reduction or expiration of our prepayment fees on certain
of our loans due to the structure of the fees (i.e., expiration of lock out or yield maintenance
provisions). We believe that we will continue to see high levels of prepayment activity during
2007. During January and February 2007, prepayments of our retained portfolio and our loans sold
as part of securitizations were
27
approximately $7.6 million and $10.8 million, respectively.
Property Ownership
We originally purchased a total of 30 properties, operated as Amerihost Inns, during 1998 and
1999. In June 2005, Arlington Inns, Inc. (AII) filed for bankruptcy protection. This was
followed in August 2005 with the bankruptcy filing of Arlington Hospitality, Inc. (AHI and
together with AII, Arlington), the parent of AII and the guarantor of all lease obligations.
We commenced selling properties during 2000, and we began 2006 with 13 owned Amerihost Inns
and two Amerihost Inns acquired in liquidation of loans for a total of 15 properties. On January
13, 2006, AII rejected the leases and turned over property operations to us. We sold 12 of these
properties during the first half of 2006.
At December 31, 2006, two of the three hotel properties that we own were included in our
consolidated financial statements. As a REIT, PMC Commercial cannot directly operate these
properties; therefore, we are dependent upon third party management companies to operate and manage
our hotel properties. As these properties have mortgages (which were assumed in the original
purchase from AHI) with significant prepayment penalties, we do not anticipate selling these
properties until the properties market values increase or the prepayment penalties decrease.
One hotel property is owned by our non-consolidated subsidiary and was leased effective
September 29, 2006. The lessee has the option, and is expected to exercise this option, to
purchase the property for $1,825,000 at termination of the lease in January 2011, or earlier if
certain events occur. Due to the nature of the lease, the subsidiary that owns the hotel property
is no longer consolidated in our financial statements and the equity method is used to account for
our investment in the subsidiary effective September 29, 2006. We are currently marketing to lease
the remaining two properties.
We have significant outstanding claims against Arlingtons bankruptcy estate. Based on
information provided through the bankruptcy proceedings and an estimate of net cash proceeds
available to the unsecured creditors, we recorded impairments on these claims during 2005 and 2006
and valued those claims at approximately $0.6 million at December 31, 2006. Arlington has objected
to our claims and initiated a complaint in the bankruptcy seeking, among other things, the return
of payments Arlington made pursuant to the leases and the Master Lease Agreement. Although the
value of our claims against Arlington is significantly higher than Arlingtons claims against us,
there is no assurance that we will collect our claims from Arlington nor is there any assurance we
will not be required to make payments to the bankruptcy estate in connection with Arlingtons
initiated claim.
CURRENT OPERATING OVERVIEW AND ECONOMIC FACTORS
The following provides a summary of our current operating overview and significant economic
factors 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
ability to complete a securitization, the performance of our loans, the operations of our
properties and/or the performance of the QSPEs.
Lending Division
Loans originated during 2006 were $71.5 million (of which approximately $19.8 million were
originated in conjunction with sales of our Amerihost hotel properties and assets acquired in
liquidation) which is greater than the $58.9 million of loans we originated during 2005. We
currently anticipate loan originations to be between $55 million and $70 million during 2007. At
December 31, 2006 and 2005, our outstanding commitments to fund new loans were approximately $32.6
million and $50.5 million, respectively. The majority of our current commitments are for
variable-rate loans which provide an interest rate match with our present sources of funds.
Several key factors (as described both in Executive Summary and in more detail below) that
affect our estimates of future loan originations are as follows:
|
|
|
our current inability to originate fixed-rate loans with an adequate spread; |
|
|
|
|
borrowers looking to fix their cost of capital (borrow at fixed rates); |
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|
|
uncertainty as to the cost of funds of future securitizations; and |
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|
increased competition from local banks and other lenders, who are willing to lend at lower rates. |
28
We believe that in this interest rate environment borrowers are looking predominately for
fixed-rate loans; however, to the extent we originate fixed-rate loans, we have potential exposure
to interest rate risk. Local bank competitors offer, among other things, five-year fixed-rate
loans with rates that are below the long-term interest rates that we can presently offer.
Historically, the rate for our fixed-rate product needed to be around 3.75% to 4.00% over the
10-year treasury rate in order to provide us with what management believed was a reasonable spread.
With the 10-year treasury rate at approximately 4.7%, historically the rate we needed to obtain
was approximately 8.50% to 8.75% for a quality loan with a 20-year amortization and maturity. The
local banks currently offer a five-year maturity, 20-year amortization loan at approximately 7.25%
to 8.00%. Management believes that the difference between our competitors fixed rate products and
our variable-rate products is causing a greater percentage of borrowers to take on the refinancing
risk that rates will not rise significantly or be unavailable in five years and they are therefore
accepting refinancing with our competitors mini-perm loans. Many of our competitors are presently
pricing fixed-rate loans based on a spread over the interest rate swap market. We are currently
offering fixed-rate loans to borrowers at approximately 3.5% over 5-year treasury rates and
anticipate the maximum amount of fixed-rate loans we will originate under this program to be
approximately $30.0 million. We are continually evaluating the feasibility of utilizing the swap
market or interest rate caps to lock in a fixed cost of funds so that we can offer a more
competitive fixed-rate product. Based on the current interest rate environment, these alternative
sources of pricing are not viable for us since there is significant exposure of loss of capital in
the event of loan liquidation or prepayment. To the extent we are able to use the swap market or
interest rate caps to lock in a fixed cost of funds, we believe our originations of fixed-rate
loans would increase.
The net interest margin for our leveraged portfolio is dependent upon the difference between
the cost of our borrowed funds and the rate at which we invest these funds (the net interest
spread.) In general, a significant reduction in net interest spread may have a material adverse
effect on our results of operations and may cause us to re-evaluate our lending focus. See
Executive Summary. In addition, the weighted average spread over LIBOR for our variable-rate loans has decreased
to 4.0% at December 31, 2006 from 4.2% at December 31, 2005.
While we have been unable to effectively compete for fixed-rate loans, we believe that our
LIBOR-based loan program (1) allows us to compete more effectively with the diminishing market
share of variable-rate products, (2) provides us with a more attractive securitization product and
(3) provides us with a net interest spread that is less susceptible to interest rate risk than
fixed-rate loan programs.
Lodging Industry
Lodging demand in the United States appears to correlate to changes in U.S. GDP, with
typically a two to three quarter lag. Given the relatively strong U.S. GDP growth over the past
several years, continued improvement in 2007 lodging demand has been predicted by industry
analysts. Such improvement will be dependent upon several factors including the strength of the
economy, the correlation of hotel demand to new hotel supply and the impact of global or domestic
events on travel and the hotel industry. Leading industry analysts, including
PricewaterhouseCoopers LLP, have published reports that predict the industrys results will
continue to improve in 2007.
PORTFOLIO INFORMATION
Lending Activities
General
Our lending activities consist primarily of originating loans to borrowers who operate
properties in the hospitality industry.
29
Loans originated and principal repayments of our loans receivable were as follows:
|
|
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|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In millions) |
|
Loan Originations: |
|
|
|
|
|
|
|
|
Commercial mortgage loans |
|
$ |
36.9 |
|
|
$ |
35.9 |
|
SBA 7(a) Program loans |
|
|
8.5 |
|
|
|
10.7 |
|
Loans originated in connection with sale of
assets acquired in liquidation and hotel properties |
|
|
19.8 |
|
|
|
8.5 |
|
SBA 504 program loans (1) |
|
|
6.3 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
Total loans originated |
|
$ |
71.5 |
|
|
$ |
58.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Repayments: |
|
|
|
|
|
|
|
|
Prepayments |
|
$ |
40.7 |
|
|
$ |
9.4 |
|
Proceeds from the sale of SBA 7(a) guaranteed loans |
|
|
6.4 |
|
|
|
7.8 |
|
Scheduled principal payments |
|
|
5.3 |
|
|
|
3.8 |
|
Balloon maturities or SBA 504 program loans |
|
|
3.6 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
Total principal repayments |
|
$ |
56.0 |
|
|
$ |
23.8 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents second mortgages obtained through the SBA 504 Program which are
repaid by certified development companies. |
At December 31, 2006, approximately $145.8 million of our loans receivable had a variable
interest rate (reset on a quarterly basis) based primarily on the 90-day LIBOR, or the prime rate
(primarily related to our SBA 7(a) Program) with a weighted average interest rate of approximately
9.5%. The spread that we charge over LIBOR generally ranges from 3.0% to 4.0% and the spread we
charge over the prime rate generally ranges from 1.25% to 2.50%. The LIBOR and prime rate used in
determining interest rates during the first quarter of 2007 (set on January 1, 2007) was 5.36% and
8.25%, respectively. Changes in LIBOR or the prime rate will have an impact on our interest income
from our variable-rate loans receivable. In addition, at December 31, 2006, approximately $23.4
million of our loans receivable had a fixed interest rate with a weighted average interest rate of
approximately 8.8%. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Prepayment Activity
Our prepayment activity has increased. Prepayment activity for our aggregate fixed-rate loans
receivable has remained at high levels as a result of the continued low long-term interest rate
environment combined with increased competition and the reduction or expiration of prepayment fees.
Prepayment activity for our aggregate variable-rate loans receivable has increased since borrowers
with variable-rate loans are generally seeking fixed-rate loans due to currently marketed
fixed-rate interest rates being lower than the current interest rate on their loan and/or concerns
of possible rising interest rates. We believe that we will continue to see prepayment activity at
these higher levels during 2007.
The timing and volume of our prepayment activity for both our variable and fixed-rate loans
receivable fluctuate and are impacted by numerous factors including the following:
|
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|
The competitive lending environment (i.e., availability of alternative financing); |
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|
|
The current and anticipated interest rate environment; |
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|
|
|
The market value of limited service hospitality properties; and |
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|
|
The amount of the prepayment fee and the length of prepayment prohibition, if any. |
When loans receivable are repaid prior to their maturity, we generally receive prepayment
fees. Prepayment fees result in one-time increases in our income. In addition, prepayments of
Sold Loans will have an impact on our financial condition and results of operations. Prepayments
of Sold Loans with higher interest rates negatively impact the value of our Retained Interests to a
greater extent than prepayments of Sold Loans with lower interest rates. Prepayments in excess of
our assumptions will cause a decline in the value of our Retained Interests primarily relating to a
reduction in the excess funds (our interest-only strip receivable) expected from our structured
loan sale
30
transactions. The spread that is lost may be offset in part or in whole by the
prepayment fee that we collect. Many of the prepayment fees for our aggregate fixed-rate loans
receivable are based upon a yield maintenance premium which provides for greater prepayment fees as interest rates decrease. For our aggregate
fixed-rate loans receivable, these fees are generally greater for those loans with higher interest
rates although the prepayment fees also decline as the loans get closer to their maturity. In
addition, certain loans receivable have prepayment prohibitions of up to five years. Prepayment
fees for our aggregate variable-rate loans receivable and fixed-rate loans receivable whose
prepayment prohibition have expired are generally not significant. For our loans receivable, the
proceeds from the prepayments we receive are either used to repay debt or invested initially in
temporary investments. It is difficult for us to accurately predict the volume or timing of
prepayments since the factors listed above are not all-inclusive and changes in one factor are not
isolated from changes in another which might magnify or counteract the rate or volume of prepayment
activity.
Our SBLC sells the guaranteed portion of most of its originated loans through private
placements. These sales are especially sensitive to prepayments. Our Retained Interests in these
loan sales consist only of the spread between the interest collected from the borrower and the
interest paid to the purchaser of the guaranteed portion of the loan. Therefore, to the extent the
prepayments of these loans exceed estimates, there is a significant impact on the value of the
associated Retained Interests. In addition, loans originated under the SBA 7(a) Program do not
have prepayment fees which are retained by us.
Impaired Loans
Our policy with respect to loans receivable which are in arrears as to interest payments for a
period in excess of 60 days is generally to discontinue the accrual of interest income. To the
extent a loan becomes a Problem Loan (as defined below), we will deliver a default notice and begin
foreclosure and liquidation proceedings when we determine that pursuit of these remedies is the
most appropriate course of action.
Senior 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 impaired and on which the fair value of the collateral is less than
the remaining unamortized principal balance. Our Special Mention Loans are those loans receivable
that are either not complying or had previously not complied with their contractual terms but we
expect a full recovery of the principal balance through either collection efforts or liquidation of
collateral.
31
Historically, we have not had a significant amount of Impaired Loans or delinquent loans nor
have we had a significant amount of charged-off loans. Our Impaired Loans were as follows
(balances represent our investment in the loans prior to loan loss reserves and deferred commitment
fees):
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Problem Loans: |
|
|
|
|
|
|
|
|
Loans receivable |
|
$ |
1,887 |
|
|
$ |
1,587 |
|
Sold loans of QSPEs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,887 |
|
|
$ |
1,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention Loans: |
|
|
|
|
|
|
|
|
Loans receivable (2) |
|
$ |
32 |
|
|
$ |
5,635 |
|
Sold loans of QSPEs (1) |
|
|
3,496 |
|
|
|
5,558 |
|
|
|
|
|
|
|
|
$ |
3,528 |
|
|
$ |
11,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Problem Loans: |
|
|
|
|
|
|
|
|
Loans receivable |
|
|
1.1 |
% |
|
|
1.0 |
% |
Sold loans of QSPEs (1) |
|
|
|
|
|
|
|
|
|
Percentage Special Mention Loans: |
|
|
|
|
|
|
|
|
Loans receivable |
|
|
|
|
|
|
3.6 |
% |
Sold loans of QSPEs (1) |
|
|
1.9 |
% |
|
|
2.3 |
% |
|
|
|
(1) |
|
We do not include the remaining outstanding principal of serviced loans
pertaining to the guaranteed portion of loans sold into the secondary market since the
SBA has guaranteed payment of principal on these loans. |
|
(2) |
|
During 2005, amounts include two loans collateralized by limited service
hospitality properties with an estimated fair value of approximately $3.3 million
related to the Arlington bankruptcy which were liquidated during January 2006 and
reclassified to assets acquired in liquidation. We sold these assets acquired in
liquidation during 2006 with no resulting losses. |
At December 31, 2006 and 2005, we had reserves of approximately $63,000 and $427,000,
respectively, against loans receivable that we have deemed to be Impaired Loans. Our provision for
loan losses (excluding reductions of loan losses) as a percentage of our weighted average
outstanding loans receivable was 0.11% and 0.24% during 2006 and 2005, 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. The decrease in our total Impaired Loans
from 2005 to 2006 is due primarily to foreclosure of the underlying collateral of three limited
service hospitality properties, repayment in full and assumption of certain loans and improved
performance of a sold loan which is no longer considered to be an Impaired Loan.
Retained Interests
At December 31, 2006 and 2005, the estimated fair value of our Retained Interests was
approximately $55.7 million and $63.0 million, respectively. As a result of our structured loan
sale transactions, we have Retained Interests representing the subordinate interest in loans
receivable that have been contributed to QSPEs and have been recorded as sold. When we securitize
loans receivable, we are required to recognize Retained Interests, which represents our right to
receive net future cash flows, at their estimated fair value. Our Retained Interests consist of
(1) the retention of a portion of each of the Sold Loans (the required overcollateralization),
(2) contractually required cash balances owned by the QSPE (the reserve fund) and (3) future
excess funds to be generated by the QSPE after payment of all obligations of the QSPE (the
interest-only strip receivable). Retained Interests are subject to credit, prepayment and
interest rate risks.
The estimated fair value of our Retained Interests is based on estimates of the present value
of future cash flows we expect to receive from the QSPEs. Estimated future cash flows are based in
part upon estimates of prepayment speeds and loan losses. Prepayment speeds and loan losses are
estimated based on the current and
32
anticipated interest rate and competitive environments and our
historical experience with these and similar loans receivable. The discount rates utilized are
determined for each of the components of Retained Interests as estimates of market rates based on
interest rate levels considering the risks inherent in the transaction. Changes in any of our
assumptions, or actual results which deviate from our assumptions, may materially affect the value
of our Retained Interests.
The net unrealized appreciation on our Retained Interests at December 31, 2006 and 2005 was
approximately $3.3 million and $4.5 million, respectively. The primary reason for the decrease in
unrealized appreciation on our Retained Interests was prepayments. Any appreciation of our
Retained Interests is included on our consolidated balance sheets in beneficiaries equity. Any
depreciation of our Retained Interests is either included in the consolidated statements of income
as a permanent impairment (if there is a reduction in expected future cash flows) or on our
consolidated balance sheet in beneficiaries equity as an unrealized loss. Reductions in expected
future cash flows generally occur as a result of decreases in expected yields, increases in
anticipated loan losses or increases in prepayment speed assumptions. Any unrealized appreciation
of our Retained Interests will be recognized as income over the estimated remaining life of the
Retained Interests through a higher effective yield.
Assets Acquired in Liquidation
We have not historically had a significant amount of assets acquired in liquidation. With
regard to properties acquired through foreclosure, deferred maintenance issues may have to be
addressed as part of the operation of the property or it may not be economically justifiable to
operate the property prior to its sale. To the extent keeping the property in operation is deemed
to assist in attaining a higher value upon sale, we will take steps to do so including hiring third
party management companies to operate the property.
In connection with the sale of our assets acquired in liquidation to third parties, we may
finance a portion of the purchase price of the property. These loans will typically bear market
rates of interest. While these loans are evaluated using the same methodology as our loans
receivable, certain lending criteria may not be able to be achieved.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and our results of operations is based
upon our consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. Our management has discussed
the development and selection of these critical accounting policies and estimates with the audit
committee of our Board of Trust Managers, and the audit committee has reviewed the disclosures
relating to these policies and estimates included in this annual report.
We believe the following critical accounting considerations and significant accounting
policies represent our more significant judgments and estimates used in the preparation of our
consolidated financial statements.
Valuation of Loans Receivable
Loan loss reserves are established based on a determination, through an evaluation of the
recoverability of individual loans receivable, that significant doubt exists as to the ultimate
realization of the loan receivable. We monitor the loan portfolio on an ongoing basis and evaluate
the adequacy of our loan loss reserves. In our analysis, we review various factors, including the
value of the collateral underlying the loan receivable and the borrowers payment history. The
determination of whether significant doubt exists and whether a loan loss reserve is necessary for
each loan requires judgment and consideration of the facts and circumstances existing at the
evaluation date. Changes to the facts and circumstances of the borrower, the hospitality industry
and the economy may require the establishment of significant additional loan loss reserves. If a
determination is made that significant doubt exists as to the ultimate collection of our loans
receivable, the effect on our results of operations may be material.
At December 31, 2006 and 2005, we had reserves of approximately $63,000 and $427,000,
respectively, against loans receivable that we have deemed to be Impaired Loans. Our provision for
loan losses (excluding reductions of loan losses) as a percentage of our weighted average
outstanding loans receivable was 0.11% and 0.24% during 2006 and 2005, respectively.
The limited service hospitality industry experienced difficult operating periods from 2001
through 2003;
33
however, this trend reversed with subsequent years experiencing positive trends. In
addition, theses positive trends are expected to continue during 2007. This positive trend along
with our experience with liquidations of properties underlying impaired loans and the knowledge
gained from such liquidations has benefited us in achieving lower losses from loan liquidations.
As a result, our reserves have decreased. 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.
Valuation of Retained Interests
Due to the limited number of entities that conduct structured loan sale transactions with
similar assets, the relatively 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, our estimate of fair value may vary significantly from what a willing buyer would pay
for these assets.
The estimated fair value of our Retained Interests is determined based on the present value of
estimated future cash flows from the QSPEs. This valuation is our most volatile critical
accounting estimate since it is dependent upon estimates of future cash flows that are based on the
performance of the underlying loans receivable and estimates of discount rates. Prepayments or
losses in excess of estimates will cause unrealized depreciation and ultimately permanent
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 receivable sold and to the extent
adjustments to our assumptions are deemed necessary, they are made on a quarterly basis. If
prepayment speeds occur at a faster rate than anticipated, or future loan losses either occur
quicker, or in amounts greater than expected, the fair value of the Retained Interests will decline
and total income in future periods would be reduced. For example, if a $1.0 million loan with an
interest rate of 10% prepays and the all-in cost of that QSPEs structured notes was 7%, we would
lose the 3% spread we had expected to receive on that loan in future periods. The spread that is
lost may be offset in part or in whole by any prepayment fee that we collect. If prepayments occur
slower than anticipated, or future loan losses are either slower than or less than expected, cash
flows would exceed estimated amounts, the estimated fair value of our Retained Interests would
increase and total income in future periods would be enhanced. Although
we believe that assumptions as to the future cash flows of the structured loan sale transactions
are reasonable, actual rates of loss or prepayments may vary significantly from those assumed and
other assumptions may be revised based upon anticipated future events. Over the past three years,
there has been no significant change in the methodology employed in valuing these assets. The
discount rates utilized in computing the net present value of future cash flows are based on an
estimate of the inherent risks associated with each cash flow stream. Purchasers of these types of
investments may utilize different discount rates in determining the fair value of the estimated
future cash flows.
As a result of the merger, we acquired PMC Capitals subordinate interests in the Joint
Ventures and 100% of the subordinate interests in the 1998 Partnership and the 1999 Partnership
(collectively, the Acquired Structured Loan Sale Transactions). We previously owned subordinate
interests in the Joint Ventures (the Originated Structured Loan Sale Transactions).
34
Constant prepayment rates and aggregate losses assumed were as follows for our Originated
Structured Loan Sale Transactions (Originated) and Acquired Structured Loan Sale Transactions
(Acquired):
|
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|
|
|
|
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|
Constant Prepayment Rate |
|
|
Aggregate Losses Assumed |
|
|
|
At December 31, |
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Joint Venture |
|
|
18.0 |
% |
|
|
11.0 |
% |
|
|
1.45 |
% |
|
|
2.74 |
% |
2001 Joint Venture |
|
|
18.0 |
% |
|
|
12.0 |
% |
|
|
|
|
|
|
2.63 |
% |
2002 Joint Venture |
|
|
18.0 |
% |
|
|
12.0 |
% |
|
|
1.42 |
% |
|
|
3.72 |
% |
2003 Joint Venture |
|
|
16.0 |
% |
|
|
12.0 |
% |
|
|
1.36 |
% |
|
|
2.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary Market Sales (1) |
|
|
20.0 |
% |
|
|
20.0 |
% |
|
|
|
|
|
|
|
|
1998 Partnership |
|
|
16.0 |
% |
|
|
12.5 |
% |
|
|
1.71 |
% |
|
|
3.12 |
% |
1999 Partnership |
|
|
18.0 |
% |
|
|
14.0 |
% |
|
|
1.82 |
% |
|
|
2.43 |
% |
2000 Joint Venture |
|
|
18.0 |
% |
|
|
14.0 |
% |
|
|
1.39 |
% |
|
|
3.28 |
% |
2001 Joint Venture |
|
|
18.0 |
% |
|
|
12.0 |
% |
|
|
1.20 |
% |
|
|
2.06 |
% |
2002 Joint Venture |
|
|
18.0 |
% |
|
|
12.0 |
% |
|
|
1.79 |
% |
|
|
2.68 |
% |
2003 Joint Venture |
|
|
16.0 |
% |
|
|
12.0 |
% |
|
|
1.48 |
% |
|
|
2.77 |
% |
|
|
|
(1) |
|
There are no losses assumed on Secondary Market Sales as the SBA has guaranteed
payment of principal on these loans. |
Constant prepayment rates have generally increased from 2005 to 2006 primarily due to
increased historical prepayments and the anticipated continuation of high levels of prepayments due to increased competition and the reduction or expiration of
prepayment fees in a significant portion of the underlying portfolio.
Aggregate losses assumed have generally decreased from December 31, 2005 to December 31, 2006
primarily based on decreased portfolio outstanding, historical losses being significantly below
original estimates and the continued positive performance of our securitized loans and the limited
service hospitality industry.
Discount rates utilized from December 31, 2005 to December 31, 2006 have increased by
approximately 20 basis points (0.20%) due primarily to rising interest rates.
The following is a sensitivity analysis of our Retained Interests as of December 31, 2006 to
highlight the volatility that results when prepayments, loan losses and discount rates are
different than our assumptions:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Fair |
|
|
|
|
Changed Assumption |
|
Value |
|
|
Asset Change (1) |
|
|
|
(In thousands) |
|
Losses increase by 50 basis points per annum (2) |
|
$ |
54,157 |
|
|
|
($1,567 |
) |
Losses increase by 100 basis points per annum (2) |
|
$ |
52,583 |
|
|
|
($3,141 |
) |
Rate of prepayment increases by 5% per annum (3) |
|
$ |
55,136 |
|
|
|
($ 588 |
) |
Rate of prepayment increases by 10% per annum (3) |
|
$ |
54,709 |
|
|
|
($1,015 |
) |
Discount rates increase by 100 basis points |
|
$ |
54,127 |
|
|
|
($1,597 |
) |
Discount rates increase by 200 basis points |
|
$ |
52,595 |
|
|
|
($3,129 |
) |
|
|
|
(1) |
|
Any depreciation of our Retained Interests is either included in the
accompanying statement of income as a permanent impairment (if there is a reduction
in expected future cash flows) or on our consolidated balance sheet in
beneficiaries equity as an unrealized loss. |
|
(2) |
|
If we experience significant losses (i.e., in excess of anticipated
losses), the effect on our Retained Interests would first reduce the value of the
interest-only strip receivables. To the extent the interest-only strip receivables
could not fully absorb the losses, the effect would then be to reduce the value of
our reserve funds and then the value of our required overcollateralization. |
|
(3) |
|
For example, a 16% assumed rate of prepayment would be increased to 21% or
26% based on increases of 5% or 10% per annum, respectively. |
35
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
assumptions to the change in value may not be linear. The effect of a variation in a particular
assumption on the estimated 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.
Valuation of Rent and Related Receivables
At December 31, 2006, our rent and related receivables consisted of unpaid rent, property
taxes, legal fees incurred, termination damages, notes receivable and other charges (the Arlington
Claims) of approximately $2,747,000 before reserves. As a result of the uncertainty of
collection, our claim in the Arlington bankruptcy is well in excess of our recorded investment in
the Arlington Claims.
We performed an analysis of our anticipated future proceeds related to the Arlington
bankruptcy to determine the collectibility of our investment in the rent and related receivables
based on best available information provided to us through the bankruptcy proceedings. As a
result, we established an allowance of $1,255,000 during 2005. We recorded additional allowances
of $925,000 during 2006. Accordingly, our net recorded investment was $567,000 at December 31,
2006. To the extent there is a reduction of the anticipated future proceeds, we would record an
additional allowance against these receivables.
Valuation of Real Estate Investments
At December 31, 2006, two of the three hotel properties that we own were included in our
consolidated financial statements. As these properties have mortgages (which were assumed in the
original purchase from AHI) with significant prepayment penalties, we do not anticipate selling
these properties until the properties market values increase or the prepayment penalties decrease.
We are currently marketing to lease these two properties.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment of or Disposal of Long-Lived Assets, (SFAS No. 144) our hotel properties are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. We consider each hotel property to be an identifiable
component of our business. In accordance with
SFAS No. 144, we do not consider hotels as held for sale until it is probable that the sale will
be completed within one year. The determination of held for sale status is assessed based on all
available facts and circumstances, including managements intent and ability to eliminate the cash
flows of the property from the Companys operations and managements intent and ability not to have
significant continuing involvement in the operations of the property.
We discontinue depreciation on hotel properties if they are classified as held for sale.
Upon designation of a hotel property as held for sale, we compare the carrying value of the hotel
property to its estimated fair value, less costs to sell. We will reclassify the hotel property to
real estate investment held for sale on our consolidated balance sheet at the lesser of its
carrying value or its estimated fair value, less costs to sell. Any adjustment to the carrying
value of a hotel property classified as held for sale is reflected in discontinued operations in
our consolidated statements of income as impairment losses. In addition, the operating results of
those properties classified as held for sale or that have been sold are included in discontinued
operations.
We periodically review our real estate investments for impairment. If facts or circumstances
support the possibility of impairment, we will prepare a projection of the undiscounted future cash
flows without interest charges for the specific property. Impairment exists if the estimate of
future cash flows expected to result from the use and ultimate disposition of the specific property
is less than its carrying value. If impairment is indicated, an adjustment will be made to the
carrying value of the property based on the difference between the current estimated fair value and
the depreciated cost of the asset.
36
Revenue Recognition Policies
Interest Income
Interest income includes interest earned on loans and our short-term investments and the
amortization of net loan origination fees and discounts. Interest income on loans is accrued as
earned with the accrual of interest generally suspended when the related loan becomes a non-accrual
loan. A loan receivable is generally classified as non-accrual (a Non-Accrual Loan) if (1) it is
past due as to payment of principal or interest for a period of more than 60 days, (2) any portion
of the loan is classified as doubtful or is charged-off or (3) if the repayment in full of the
principal and/or interest is in doubt. Generally, loans are charged-off when management determines
that we will be unable to collect any remaining amounts due under the loan agreement, either
through liquidation of collateral or other means. Interest income on a Non-Accrual Loan is
recognized on either the cash basis or the cost recovery basis.
When originating a loan receivable, we generally charge a commitment fee. These fees, net of
costs, are deferred and recognized as an adjustment of yield over the life of the related loan
receivable using a method which approximates the effective interest method.
For purchased loans, we may have discounts representing the difference between the unamortized
principal balance of the loan and its estimated fair value at the date of purchase. For performing
loans, these discounts are recognized as an adjustment of yield over the life of the related loan
receivable using a method which approximates the effective interest method.
For loans originated under the SBA 7(a) Program, when we sell the SBA guaranteed portion of
the loans, a portion of the sale proceeds representing the difference in the face amount of the
unguaranteed portion of the loans and the value of the loans (the Retained Loan Discount) is
determined on a relative fair value basis and is recorded as a reduction in basis of the retained
portion of the loan rather than premium income. The Retained Loan Discount is amortized to
interest income over the life of the underlying loan using the effective interest method unless the
underlying loan receivable is prepaid or sold.
Income from Retained Interests
The income from our Retained Interests represents the accretion (recognized using the
effective interest method) on our Retained Interests which is determined based on estimates of
future cash flows and includes any fees collected (i.e., late fees, prepayment fees, etc.) by the
QSPEs in excess of anticipated fees. We update our cash flow
assumptions on a quarterly basis and any changes to cash flow assumptions impact the yield on our
Retained Interests.
Lease Income
Lease income consists primarily of base rent on our properties and when applicable,
straight-line rental income. We record lease income on a straight-line basis (when applicable)
over the estimated lease term to the extent collectibility is reasonably assured.
RESULTS OF OPERATIONS
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
Overview
Our income from continuing operations increased by $4,270,000 to $13,648,000 ($1.27 per share)
during 2006 from $9,378,000 ($0.86 per share) during 2005. The lending divisions income from
continuing operations increased to $14,977,000 during 2006 from $11,807,000 during 2005. Our
property divisions loss from continuing operations decreased to $1,329,000 during 2006 from
$2,429,000 during 2005. As described in more detail below, significant changes between these
periods were:
|
|
|
An increase in interest income of $3,882,000 due primarily to increases in
variable interest rates and our weighted average loans outstanding; |
|
|
|
|
A gain from early extinguishment of debt of $563,000 resulting from the
repayment of $7,310,000 of debentures with unamortized premiums; and |
|
|
|
|
An increase in other income of $535,000 due primarily to prepayment fees
received; partially offset by |
37
|
|
|
An increase in interest expense of $747,000 due primarily to increases in
variable interest rates and borrowings under our conduit facility, and |
|
|
|
|
A net decrease in hotel property related income of $385,000 as a result of
the rejection in January 2006 of our hotel property leases by our tenant and the
subsequent operation of the properties by third party management companies. |
Discontinued operations increased by $117,000 to $2,036,000 ($0.19 per share) during 2006 from
$1,919,000 ($0.18 per share) during 2005. As described in more detail below, significant changes
between these periods were:
|
|
|
Impairment losses decreased by $1,680,000; partially offset by |
|
|
|
|
Net gains on property sales decreased by $192,000; and |
|
|
|
|
Net earnings from our hotel properties decreased by $1,371,000. |
More detailed comparative information on the composition of and changes in our revenues and
expenses is provided below.
Revenues
Interest income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Increase |
|
|
|
(In thousands) |
|
Interest
income loans |
|
$ |
14,781 |
|
|
$ |
11,106 |
|
|
$ |
3,675 |
|
Accretion of loan fees and discounts |
|
|
437 |
|
|
|
297 |
|
|
|
140 |
|
Interest income idle funds |
|
|
242 |
|
|
|
175 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,460 |
|
|
$ |
11,578 |
|
|
$ |
3,882 |
|
|
|
|
|
|
|
|
|
|
|
The increase in interest income loans was primarily attributable to increases in (1)
variable interest rates (both prime and LIBOR) and (2) our weighted average loans receivable
outstanding of $18.7 million (14%) to
$155.6 million during 2006 from $136.9 million during 2005. The weighted average LIBOR and prime
rate used in the determination of interest rates charged to our borrowers increased by
approximately 180 basis points and 190 basis points, respectively from 2005 to 2006. Our weighted
average interest rate increased from 8.5% at December 31, 2005 to 9.4% at December 31, 2006. As
of December 31, 2006, approximately 86% of our loans receivable had variable interest rates.
Income from Retained Interests decreased $68,000 primarily due to (1) a decrease in the
weighted average balance of our Retained Interests outstanding of $6.9 million to $58.3 million
during 2006 compared to $65.2 million during 2005 and (2) a decrease in unanticipated prepayment
fees of $242,000. Partially offsetting these decreases was an increase in accretion income
primarily due to an increase in anticipated future cash flows resulting mainly from a reduction in
future anticipated losses. The income from our Retained Interests consists of the accretion on our
Retained Interests which is determined based on estimates of future cash flows and includes any
fees collected by the QSPEs in excess of anticipated fees. The yield on our Retained Interests,
which is comprised of the income earned less permanent impairments, increased to 14.1% during 2006
from 13.8% during 2005. Excluding the impact of permanent impairments, the yield on our Retained
Interests increased to 16.1% during 2006 from 14.5% during 2005.
38
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Prepayment fees |
|
$ |
1,653 |
|
|
$ |
590 |
|
|
$ |
1,063 |
|
Servicing income |
|
|
1,025 |
|
|
|
1,222 |
|
|
|
(197 |
) |
Premium income |
|
|
499 |
|
|
|
618 |
|
|
|
(119 |
) |
Other loan related income |
|
|
403 |
|
|
|
646 |
|
|
|
(243 |
) |
Equity in earnings of unconsolidated
subsidiaries |
|
|
76 |
|
|
|
45 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,656 |
|
|
$ |
3,121 |
|
|
$ |
535 |
|
|
|
|
|
|
|
|
|
|
|
Prepayment activity has remained at high levels and we believe that we will continue to see
prepayment activity at these higher levels during 2007. Prepayment activity for our fixed-rate
loans receivable has remained at high levels as a result of the continued low long-term interest
rate environment combined with increased competition and the effect of the reduction or expiration
of prepayment fees. In addition, prepayment activity for our variable-rate loans receivable has
increased since borrowers with variable-rate loans are generally seeking fixed-rate loans due to
currently marketed fixed interest rates being lower than the current interest rate on their loan
and/or concerns of rising interest rates. To the extent that prepayments are for variable-rate
loans, the prepayment fees will generally not be as great as the fees on our fixed-rate loans.
We earn fees for servicing all loans held by the QSPEs and loans sold into the secondary
market by First Western. As these fees are based on the principal balances of sold loans
outstanding, until we complete our next securitization, they will decrease over time as scheduled
principal payments and prepayments occur.
Premium income results from the sale of First Westerns loans into the secondary market. We
sold 14 loans during both 2006 and 2005 and collected cash premiums of $615,000 and $700,000 during
2006 and 2005, respectively. Effective in May 2006, First Western is a Preferred Lender
nationwide. In addition, we recently expanded our marketing initiatives for origination of SBA
7(a) Program loans. As a result, we anticipate that our originations under the SBA 7(a) Program
should increase; however, to date we have not realized a significant increase in origination volume
or commitments since our marketing efforts generally take time to provide benefits. To the extent
we are able to increase our volume of loans originated by First Western, there should be a
corresponding increase in premiums received.
Other loan related income includes late fees, assumption fees, forfeited commitment fees and
other fees. These fees primarily represent one-time increases in our other income when collected
and/or earned. Other loan related income decreased from 2005 to 2006 primarily due to a decrease
in assumption fees.
39
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Junior subordinated notes |
|
$ |
2,318 |
|
|
$ |
1,497 |
|
|
$ |
821 |
|
Conduit facility |
|
|
1,383 |
|
|
|
724 |
|
|
|
659 |
|
Debentures payable |
|
|
813 |
|
|
|
971 |
|
|
|
(158 |
) |
Mortgages on hotel properties |
|
|
304 |
|
|
|
346 |
|
|
|
(42 |
) |
Structured notes |
|
|
201 |
|
|
|
451 |
|
|
|
(250 |
) |
Revolving credit facility |
|
|
125 |
|
|
|
214 |
|
|
|
(89 |
) |
Uncollateralized notes payable |
|
|
|
|
|
|
223 |
|
|
|
(223 |
) |
Other |
|
|
291 |
|
|
|
262 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,435 |
|
|
$ |
4,688 |
|
|
$ |
747 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense increased primarily as a result of an increase in variable interest
rates (LIBOR) and
outstanding borrowings under our conduit facility. The weighted average LIBOR used in the
determination of interest rates charged on our outstanding obligations with variable interest rates
increased by approximately 180 basis points from 2005 to 2006. The weighted average cost of our
funds at December 31, 2006 was 7.1% compared to 6.5% at December 31, 2005. In addition, during
March 2005 we prepaid $20 million of uncollateralized notes with proceeds from our junior
subordinated notes. Interest on our junior subordinated notes increased (1) by approximately
$400,000 since they were outstanding 12 months during 2006 compared to ten months during 2005 and
(2) by approximately $400,000 due to increases in LIBOR. Interest on our conduit facility and
revolving credit facility increased primarily as a result of increased utilization of the
facilities mainly to fund loans during the fourth quarter of 2006. Our average outstanding balance
on our credit facilities increased to $18.4 million during 2006 compared to $13.2 million during
2005.
On September 1, 2006, we prepaid, without penalty, $7,310,000 of fixed-rate SBA debentures
with an interest rate of approximately 8.5%. In addition, the remaining balance outstanding on
our structured notes was repaid on December 1, 2006.
Other Expenses
Our combined expenses for general and administrative and salaries and related benefits
remained relatively constant at $7,387,000 during 2006 compared to $7,548,000 during 2005. General
and administrative expenses decreased to $2,648,000 during 2006 from $2,995,000 during 2005
primarily related to a decrease in legal fees, mainly those associated with Arlingtons
bankruptcies. Salaries and related benefits increased to $4,739,000 during 2006 from $4,553,000
during 2005 due primarily to an increase in bonuses to executive officers and cost of living
increases.
Permanent impairments on Retained Interests were $1,167,000 for 2006 resulting from reductions
in expected future cash flows due primarily to increased actual and anticipated prepayments.
During 2005, we had $467,000 of permanent impairments on Retained Interests primarily due to
reductions in expected future cash flows due to increased anticipated and actual prepayments mainly
on our acquired Retained Interests.
Impairment losses were $436,000 for 2005 while we had no impairment losses during 2006. Our
impairment losses recorded during 2005 were a result of Arlingtons defaults under the lease
agreements. We performed a recoverability test to determine if the future undiscounted cash flows
over our expected holding period for the hotel properties exceeded the carrying value of the hotel
properties. Future cash flows were based on estimated future rent payments to be received on the
hotel properties, proceeds from the sale and/or termination fees and property operations, if
applicable.
Provision for losses on rent and related receivables was $925,000 and $1,255,000 during 2006
and 2005, respectively. Provision for losses during 2006 primarily resulted from reductions in
available cash due to
40
unanticipated and unforecasted cash expenditures by Arlington. Provision for
losses during 2005 pertained to our initial evaluation of rent and related receivables subsequent
to the bankruptcy of AHI. We performed analyses of our anticipated future distribution related to
the bankruptcy of Arlington based on best available information provided to us through the
bankruptcy proceedings to determine the collectibility of our investment in the rent and related
receivables. Due to the uncertainties regarding the bankruptcy proceedings, there can be no
assurance that we will be awarded, or ultimately receive, any proceeds from the Arlington
bankruptcy proceedings. To the extent there is a reduction of the anticipated future proceeds, we
would record an additional allowance against these receivables. The bankruptcy estates/debtors
continue to litigate certain claims asserted by other creditors, including claims related to the
initial financing provided to the debtors and other outstanding secured claims. These disputes
have led to protracted and expensive litigation that has yet to be completed. Our anticipated
recovery continues to be diminished and delayed as long as these disputes remain outstanding. The
litigation between the debtors and the other creditors has been expensive and will continue to have
an adverse effect on our potential recovery. As for our claims in the bankruptcy cases (and the
debtors claims in response), we anticipate trying to negotiate a settlement of those claims with
the debtors; however, there is no certainty that we will be able to settle with the debtors or that
any settlement would be approved by the official unsecured creditors committee or the Bankruptcy
Court, among others. Further, our future prospects for recovery from the bankruptcy estates
continues to be impacted by the litigation with third parties.
Provision for loan losses, net, was $103,000 during 2006 and $298,000 during 2005. We
recorded loan loss reserves of $186,500 during 2005 primarily related to a limited service
hospitality property on which significant doubt existed as to the ultimate realization of the loan.
The primary collateral underlying the loan was acquired through foreclosure during January 2006
and the property was sold in May 2006.
Income tax provision remained constant at $649,000 during 2006 compared to $658,000 during
2005. Our income tax provision decreased due to an increase in costs reimbursed by one of our
taxable lending subsidiaries to PMC Commercial Trust. This decrease was offset by an increase in
the profitability of our lending subsidiaries due to increased interest income and prepayment fees.
Hotel Property Activity
Hotel property activity consists of lease income, hotel property revenues and expenses.
During 2005, we recorded lease revenue of $942,000 compared to $58,000 during 2006, a decrease of
$884,000. Effective February 1, 2006, upon rejection of the leases by our former tenant, we no
longer collected rent on the hotel properties. As a result, during January 2006 we commenced
operating the hotel properties through third party management companies. The operations of hotel
properties sold prior to December 31, 2006 are included in discontinued operations. Partially
offsetting the decrease in lease income is net income of $499,000 generated from the operations of
our remaining hotel properties during 2006. Hotel property revenues were $2,113,000 and hotel
property expenses were $1,614,000 during 2006.
One of our remaining hotel properties was leased effective September 29, 2006 with annual base
rent of $116,700. The lessee has the option, and is expected to exercise this option, to purchase
the property for $1,825,000 at termination of the lease in January 2011 or earlier if certain
events occur. Due to the nature of the lease, the subsidiary that owns the hotel property is no
longer consolidated in our financial statements and the equity method is used to account for our
investment in the subsidiary effective September 29, 2006. We are currently marketing to lease the
remaining two properties.
Gain on Early Extinguishment of Debt
Gain on early extinguishment of debt represents a gain of $563,000 resulting from the
repayment of $7,310,000 of SBA debentures owed by our SBICs which were prepaid, without penalty, on
September 1, 2006. The debentures had a carrying value of $7,873,000 when repaid. When acquired
in the merger, these debentures were recorded at fair value which was greater than face value.
Managements decision to repay the debentures was based upon excess cash at the subsidiary levels
which was unavailable, due to SBIC requirements, to be used by the parent company. In addition,
there were no significant loan commitments at the SBIC level.
Discontinued Operations
We had net realized gains on the sales of real estate of $2,064,000 during 2006 resulting
primarily from the sale of ten hotel properties for approximately $20.6 million generating gains of
approximately $1.9 million and eight assets acquired in liquidation for approximately $4.1 million
generating gains of approximately $0.2 million. As the
41
down payments received were not sufficient
to qualify for full accrual gain treatment on certain of the sales, we recorded initial installment
gains and deferred the remaining gains. Our deferred gains total approximately $1.6 million at
December 31, 2006. We had net realized gains on sale of real estate of $2,256,000 during 2005
resulting primarily from the sale of (1) six hotel properties for net sales proceeds of
approximately $12.8 million and cost of sales of approximately $11.5 million and (2) two assets
acquired in liquidation (one of which was a limited service hospitality property and the other a
retail establishment) for net sales proceeds of approximately $2.8 million and cost of sales of
approximately $1.9 million. In addition, during 2005 we sold a limited service hospitality
property for $3,098,000. As the down payment received was not sufficient to qualify for full
accrual gain treatment, we recorded an installment gain of approximately $86,000 during 2005 and
the remaining gain of approximately $344,000 was deferred. 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. In addition, upon
receipt of updated financial information from the purchaser, if the requirements are met, the
transaction would qualify for the full accrual method and the remaining deferred gain would be
recognized.
Impairment losses were $94,000 for 2006. We performed a recoverability test to determine if
the expected net sales proceeds for the hotel properties exceeded the carrying value of the hotel
properties. Based on this analysis, we recorded impairment losses of $43,000 on our hotel
properties during 2006. In addition, we recorded an impairment loss of $51,000 related to an asset
acquired in liquidation due to a decline in the estimate of its value. During 2005, we recorded
impairment losses of $1,774,000 on our hotel properties.
Net earnings from discontinued operations were $66,000 during 2006 compared to
$1,437,000 during 2005. During 2005, our tenant was obligated for rent. Due to the tenants
bankruptcy filing, effective January 2006 the leases were rejected and for any properties that had
not been sold we commenced operations through third party management companies. Accordingly, the
primary reason for the decrease in net earnings from discontinued operations was a reduction in
rent income, including base rent and straight-line rent, of approximately $3.7 million when
comparing 2006 to 2005. This reduction was partially offset by a decrease in depreciation expense
of approximately $0.9 million due to the discontinuation of depreciation on our held for sale
properties and a reduction in property tax expense of $0.9 million resulting primarily from the sale of properties. Net earnings from discontinued operations included 12 and 16 hotel properties during
2006 and 2005, respectively, and assets acquired in liquidation (primarily three limited service
hospitality properties) during 2006.
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Overview
Our income from continuing operations decreased to $9,378,000 during 2005 from $9,923,000
during 2004. Income from continuing operations during 2005 includes a provision for loss on our
rent and related receivables of $1,255,000, impairment losses of $436,000 on our real estate
investments held for use and permanent impairments on our Retained Interests of $467,000. Income
from continuing operations during 2004 includes permanent impairments on our Retained Interests of
$1,182,000. Excluding these significant non-cash items, our income from continuing operations
would have remained relatively constant at $11,536,000 during 2005 compared to $11,105,000 during
2004. The lending divisions income from continuing operations increased to $11,807,000 during
2005 from $9,960,000 during 2004 while our property division had losses from continuing operations
of $2,429,000 during 2005 and $37,000 during 2004 due primarily to the losses described above.
Our total revenues increased by approximately $4.2 million compared to 2004 primarily from an
increase in interest income due to an increase in our loans receivable outstanding and an increase
in variable interest rates (both prime and LIBOR). Our loans receivable increased as a result of
loans acquired in the merger ($55.1 million) and loan originations during 2004 ($53.7 million) and
2005 ($58.9 million). During 2005, our income from Retained Interests increased approximately $0.7
million due to the merger, increased accretion rates and unanticipated prepayment fees.
Our total expenses increased by approximately $4.2 million primarily as a result of (1)
increased overhead (comprised of salaries and related benefits, general and administrative and
advisory and servicing fees expense) of approximately $1.9 million due in large part to the
increase in our serviced investment portfolio from the merger (upon merger with PMC Capital, we
became a self-managed REIT whereas historically we were managed by PMC Capital pursuant to an
advisory and servicing agreement) and increased professional fees primarily relating to Arlingtons
bankruptcy and increased accounting/auditing fees, (2) a provision for loss on our rent and related
receivables of approximately $1.3 million, (3) increased interest expense of approximately $0.8
million due primarily to an increase in outstanding debt mainly due to borrowings necessary to fund
our increased loan portfolio and an increase in LIBOR which increased interest on our variable-rate
debt and (4) impairment losses of
42
approximately $0.4 million on our real estate investments
included in continuing operations. The merger substantially increased our overhead effective March
1, 2004 as a result of the significant increase in assets under management. Therefore, the impact
was less in 2004 (ten months post merger) than 2005 (12 months).
Our discontinued operations provided income of $3.3 million during 2004 and $1.9 million
during 2005. Included in discontinued operations were gains on sales of real estate of $2,256,000
during 2005 resulting primarily from the sale of six hotel properties and two assets acquired in
liquidation. In addition, we incurred impairment losses of $1,774,000 during 2005 related to our
hotel properties.
More detailed comparative information on the composition of and changes in our revenues and
expenses is provided below.
Revenues
Interest income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Interest
income loans |
|
$ |
11,106 |
|
|
$ |
7,588 |
|
|
$ |
3,518 |
|
Accretion of loan fees and discounts |
|
|
297 |
|
|
|
290 |
|
|
|
7 |
|
Interest income idle funds |
|
|
175 |
|
|
|
284 |
|
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,578 |
|
|
$ |
8,162 |
|
|
$ |
3,416 |
|
|
|
|
|
|
|
|
|
|
|
The increase in interest income loans was primarily attributable to an increase in (1) our
loan portfolio (our weighted average loans receivable outstanding increased $36.1 million (36%) to
$136.9 million during 2005 from $100.8 million during 2004) primarily as a result of loans acquired
in the merger and loan originations and (2) the weighted average interest rate on our loans
receivable from 7.1% at December 31, 2004 to 8.5% at December 31, 2005. The increase in our
weighted average interest rate is primarily due to increases in LIBOR and the prime rate. At
December 31, 2005, approximately 88% of our loans receivable had variable interest rates.
Lease income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Base rent |
|
$ |
696 |
|
|
$ |
821 |
|
|
$ |
(125 |
) |
Straight-line rent |
|
|
215 |
|
|
|
107 |
|
|
|
108 |
|
Percentage rent |
|
|
24 |
|
|
|
83 |
|
|
|
(59 |
) |
Other |
|
|
7 |
|
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
942 |
|
|
$ |
1,017 |
|
|
$ |
(75 |
) |
|
|
|
|
|
|
|
|
|
|
In addition to rent being paid during 2005, rent was paid for January 2006; however, during
January 2006, Arlington rejected all remaining property leases.
Changes in, and descriptions of, lease income are as follows:
|
|
|
Base rent: Base rent consisted of the required monthly rental payment
obligation from Arlington. Base rent declined due to the decrease in the pay rate
from approximately 10.5% to 8.5% of the stated value established for the hotel
properties based on the terms of the lease agreement (effective October 2004); |
|
|
|
|
Straight-line rent: In accordance with the terms of the lease agreement,
beginning in October 2004, we recorded lease income on a straight-line basis based on
all remaining payments due from Arlington over the remaining fixed non-cancelable
term of the lease agreement; however, due to the uncertainty of collection we
discontinued recording straight-line rent effective July 1, 2005; |
43
|
|
|
Percentage rent: We historically received percentage rent equal to 4% of
the gross room revenues of the hotel properties for future capital expenditures.
Arlington did not pay the percentage rent due commencing May 2005. Due to the
uncertainty of collection, we discontinued recording percentage rent effective May 1,
2005. |
The primary reasons for the increase in income from Retained Interests of approximately $0.7
million were (1) increased accretion income of approximately $588,000 due to a combination of a
full year of accretion during 2005 for Retained Interests acquired in the merger compared to ten
months during 2004 and an increase in accretion rates and (2) an increase in the collection of
unanticipated prepayment fees of approximately $80,000. The weighted average balance of our
Retained Interests decreased during 2005 to $65.2 million from $65.9 million during 2004. The
income from our Retained Interests consists of the accretion earned on our Retained Interests which
is determined based on estimates of future cash flows and includes any fees collected by the QSPEs
in excess of anticipated fees. The yield on our Retained Interests, which is comprised of the
income earned less permanent impairments, increased to 13.8% during 2005 from 11.5% during 2004.
Excluding the impact of permanent impairments, the yield on our Retained Interests increased to
14.5% during 2005 from 13.3% during 2004.
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Servicing income |
|
$ |
1,222 |
|
|
$ |
1,142 |
|
|
$ |
80 |
|
Other loan related income |
|
|
646 |
|
|
|
475 |
|
|
|
171 |
|
Premium income |
|
|
618 |
|
|
|
526 |
|
|
|
92 |
|
Prepayment fees |
|
|
590 |
|
|
|
656 |
|
|
|
(66 |
) |
Equity in
earnings of unconsolidated subsidiary |
|
|
45 |
|
|
|
|
|
|
|
45 |
|
Debt release income |
|
|
|
|
|
|
175 |
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,121 |
|
|
$ |
2,974 |
|
|
$ |
147 |
|
|
|
|
|
|
|
|
|
|
|
As a result of the merger, we earn fees for servicing all loans held by the QSPEs and loans
sold into the secondary market by our SBLC. As these fees are based on the principal balances of
Sold Loans outstanding, they will naturally decrease over time as scheduled principal payments and
prepayments occur. The increase during 2005 compared to 2004 is due primarily to the merger
occurring on February 29, 2004.
Our prepayment activity has remained at relatively high levels. Prepayment fees on our
variable-rate loans receivable are generally less than on our fixed-rate loans receivable which are
generally based on a yield maintenance premium. At December 31, 2005, approximately 88% of our
loans receivable had variable interest rates; therefore, while our prepayment activity has
continued at higher levels, the prepayment fees we received have decreased.
Other loan related income includes late fees, assumption fees, forfeited commitment fees and
other fees. These fees represent one-time increases in our other income when collected and/or
earned.
Premium income results from the sale of loans into the secondary market by our SBLC. We sold
14 loans during 2005 and collected cash premiums of approximately $700,000. To the extent we were
to increase our volume of loans originated by our SBLC, there should be a corresponding increase in
premiums received.
44
Interest Expense
Interest expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
Increase |
|
|
|
2005 |
|
|
2004 |
|
|
(Decrease) |
|
|
|
(In thousands) |
|
Junior subordinated notes |
|
$ |
1,497 |
|
|
$ |
|
|
|
$ |
1,497 |
|
Debentures |
|
|
971 |
|
|
|
976 |
|
|
|
(5 |
) |
Conduit facility |
|
|
724 |
|
|
|
|
|
|
|
724 |
|
Mortgages on hotel properties |
|
|
346 |
|
|
|
361 |
|
|
|
(15 |
) |
Structured notes |
|
|
451 |
|
|
|
880 |
|
|
|
(429 |
) |
Uncollateralized notes payable |
|
|
223 |
|
|
|
970 |
|
|
|
(747 |
) |
Revolving credit facility |
|
|
214 |
|
|
|
471 |
|
|
|
(257 |
) |
Other |
|
|
262 |
|
|
|
215 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,688 |
|
|
$ |
3,873 |
|
|
$ |
815 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense increased primarily as a result of an increase in our outstanding debt
which corresponded to the increase in our loan portfolio including the loans acquired in the
merger. Our average debt outstanding increased by 8% to $78.3 million during 2005 from $72.5
million during 2004. In addition, since we have variable-rate debt, the cost of funds on that debt
has increased due to increases in LIBOR and the prime rate. The weighted average cost of our funds
at December 31, 2005 was 6.5% compared to 5.9% at December 31, 2004.
During March 2005, we prepaid $20 million of uncollateralized notes with proceeds from our
junior subordinated notes. The cost of funds on the junior subordinated notes is LIBOR plus 3.25%.
The cost of funds for the uncollateralized notes payable was 7.44% on $10 million and LIBOR plus
1.3% on the other $10 million. In addition, the cost of funds for our conduit facility
approximates LIBOR, plus 1% and our current revolving credit facility cost of funds is LIBOR plus
1.625%.
During March 2005, we rolled-over $4.0 million of debentures and repaid $3.0 million of
debentures. Our debentures had a weighted average cost of funds of 6.0% at December 31, 2005.
At December 31, 2005, we had mortgage notes related to our hotel properties included in
continuing operations. These mortgages mature from January 2011 to December 2017 and have
restrictive provisions which provide for substantial prepayment penalties.
The average structured notes outstanding decreased to $6.2 million during 2005 from $13.0
million during 2004.
Other Expenses
During the first two months of 2004, (1) our overhead expense for identifying, originating and
servicing our investment portfolio and costs of corporate overhead was covered by an investment
advisory agreement with PMC Capital and (2) other general and administrative costs were limited
primarily to professional fees, directors and officers insurance, trust manager fees and
shareholder expenses. As a result of the merger, on March 1, 2004, we became a self-managed REIT
and our assets under management substantially increased from approximately $244.4 million to
approximately $563.9 million. Beginning March 1, 2004, our operating expenses consisted of
salaries and related benefits, rent and other general and administrative expenses necessary to
service our investment portfolio, identify and originate new investments and provide for our
corporate administrative needs. Since our assets under management increased, the increase in our
general and administrative expenses is greater than our historical advisory fee expense.
Our combined general and administrative expenses, advisory fee expense and salaries and
related benefits during 2005 increased from $5.7 million during 2004 to $7.5 million during 2005
primarily as a result of the increased costs related to our larger investment portfolio and
corporate structure. In addition, our professional fees, including accounting, legal and
consulting services, increased to $1,755,000 during 2005 from $880,000 during
45
2004. The increase
related primarily to accounting and auditing fees and legal fees, including those associated with
Arlingtons bankruptcies. Direct costs associated with the Sarbanes-Oxley Act of 2002 were
approximately $390,000 during both 2005 and 2004. Our salaries and related benefits were
$3,557,000 for the ten months of 2004 or $4,268,000 on an annualized basis compared to $4,553,000
during 2005. The 6.7% increase was primarily due to cost of living salary increases and increased
costs associated with share-based compensation awards.
Permanent impairments on Retained Interests were $467,000 during 2005 compared to $1,182,000
during 2004. The permanent impairments during 2005 resulted primarily from reductions in expected
future cash flows due to increased anticipated and actual prepayments primarily on our acquired
Retained Interests while the permanent impairments during 2004 resulted primarily from reductions
in expected future cash flows due to increased anticipated and actual prepayments and anticipated
losses primarily on our acquired Retained Interests.
We recorded impairment losses of $436,000 during 2005 on our hotel properties to be held and
used. We performed a recoverability test to determine if the future undiscounted cash flows over
our expected holding period for the hotel properties exceeded their carrying value. Future cash
flows are based on anticipated proceeds from the sale and anticipated property operations or lease
income. No impairment losses were recorded during 2004.
We performed an analysis of our anticipated future proceeds related to the Arlington
bankruptcy based on best available information provided to us through the bankruptcy proceedings to
determine the collectibility of our investment in the rent and related receivables. Based on this
analysis, we recorded a provision for loss of $1,255,000 during 2005. If anticipated future
proceeds decline, we would record an additional allowance against these receivables and losses
would result.
Our provision for (reduction of) loan losses, net, was $298,000 during 2005 and ($253,000)
during 2004. We recorded loan loss reserves of $186,500 during 2005 primarily related to a limited
service hospitality property on which significant doubt existed as to the ultimate realization of
the loan. The primary collateral underlying the loan was acquired through foreclosure during
January 2006. The property was sold in May 2006. During 2004, we reversed $675,000 of previously
recorded loan loss reserves due to the reduction in the expected loss on a loan collateralized by a
limited service hospitality property due to repayment in full of all principal on the loan. We
recorded loan loss reserves of $422,000 during 2004 primarily related to two limited service
hospitality properties on which significant doubt existed as to the ultimate realization of the
loans.
Our income tax provision increased to $658,000 during 2005 compared to $116,000 during 2004.
PMC Commercial has four wholly-owned taxable REIT subsidiaries which are subject to Federal income
taxes. The income generated from these taxable REIT subsidiaries is taxed at normal corporate
rates.
Discontinued Operations
During 2005, 16 hotel properties were included in discontinued operations while during 2004,
18 hotel properties were included in discontinued operations. The primary reasons for the decrease
in net earnings from discontinued operations of approximately $2.1 million during 2005 were (1)
property tax expense of $895,000 recorded during 2005 for the properties sold or considered held
for sale, (2) lease termination fee income of $624,000 recorded during 2004 and (3) a 20% reduction
in rent charged from 2004 to 2005. Per the lease agreement, Arlington is obligated to pay all
property taxes on the hotel properties. However, to the extent Arlington did not make the required
property tax payments, these property taxes were our responsibility, although we are pursuing
recovery from Arlington. Pursuant to the sale of a hotel property in August 2004, we received a
lease termination fee from Arlington in the form of a note receivable with an estimated fair value
of $624,000 which is included in net earnings from discontinued operations.
We had gains on the sales of real estate of $2,256,000 during 2005 resulting primarily from
the sale of (1) six hotel properties for net sales proceeds of approximately $12.8 million and cost
of sales of approximately $11.5 million and (2) two assets acquired in liquidation (one of which
was a limited service hospitality property and the other a retail establishment) for net sales
proceeds of approximately $2.8 million and cost of sales of approximately $1.9 million. In
addition, during 2005 we sold a limited service hospitality property for $3,098,000. As the down
payment received was not sufficient to qualify for full accrual gain treatment, we recorded an
installment gain of approximately $86,000 during 2005 and the remaining gain of approximately
$344,000 was deferred.
During 2004 we had a net loss on sales of real estate of $252,000 primarily comprised of the
sale of a limited service hospitality property acquired through liquidation of the collateral
underlying a loan and the sale of two hotel properties. The limited service hospitality property
was sold for approximately $1.5 million and generated
46
a gain of approximately $205,000. The two
hotel properties were sold during August 2004 and December 2004 for approximately $1.8 million each
resulting in losses of approximately $354,000 and $116,000, respectively.
For our hotel properties to be sold, we performed a recoverability test to determine if the
expected net sales proceeds for the hotel properties exceeded their carrying value. As a result,
we recorded impairment losses of $1,774,000 during 2005. No impairment losses were recorded during
2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Analysis
Information on our cash flow was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
Cash provided by operating activities |
|
$ |
13,832 |
|
|
$ |
16,029 |
|
|
$ |
(2,197 |
) |
Cash provided by (used in) investing activities |
|
$ |
16,377 |
|
|
$ |
(12,962 |
) |
|
$ |
29,339 |
|
Cash used in financing activities |
|
$ |
(30,437 |
) |
|
$ |
(8,165 |
) |
|
$ |
(22,272 |
) |
In general, we experienced significantly greater positive cash flow from investing activities
during 2006 due to the heavy prepayments on our loans combined with low amounts of cash used for
originating loans. These cash flows were used, in general, to repay outstanding debt which
increased our cash used in financing activities. See Executive Summary.
Operating Activities
Our net cash flow from operating activities is primarily used to fund our dividends. The
decrease in cash provided by operating activities was primarily related to changes in our operating
assets and liabilities. We had a decrease of $2,410,000 in borrower advances due primarily to the
repayment of certain loans and release of borrower advances. Our dividends paid during 2006 and
2005, included in financing activities, were $12,903,000 and $14,037,000, respectively.
Investing Activities
During 2006, the primary sources of funds were (1) net principal collected on Retained
Interests of $5,085,000, (2) net proceeds from the sales of hotel properties and assets acquired in
liquidation of $4,307,000 and (3) principal collected on loans receivable in excess of loans funded
of $3,872,000. During 2005, the primary sources of funds were net proceeds from the sales of
hotel properties and assets acquired in liquidation of $10,940,000 and net principal collected on
Retained Interests of $4,080,000. Funds used in investing activities during 2005 consisted
primarily of loans funded in excess of principal collected on loans receivable of $26,859,000. The
change in net loans funded is primarily due to high prepayment activity. This increased prepayment
activity is primarily a result of competitors providing refinance opportunities to our borrowers
combined with the effect of the reduction or expiration of prepayment fees on certain of our loans
due to the structure of the fees (i.e., expiration of lock out or yield maintenance provisions).
In addition, prepayment activity for our variable-rate loans receivable has increased since
borrowers with variable-rate loans are generally seeking fixed-rate loans due to currently marketed
fixed interest rates being lower than the current interest rate on their loan and/or concerns of
rising interest rates. We believe that we will continue to see prepayment activity at these higher
levels during 2007.
Financing Activities
We used funds in financing activities during 2006 primarily for payment of principal on
mortgages payable and debentures of $19,994,000 and dividends of $12,903,000. Our primary source
of funds during 2006 was net borrowings on our conduit facility of $2,763,000. Other financing
activities during 2005 were generally a repositioning of our debt. We refinanced or repaid (1)
$20,000,000 in uncollateralized notes payable acquired in the merger, (2) $3,000,000 of SBA
debentures acquired in the merger and (3) $14,600,000 on our revolving credit
facility with proceeds of $27,070,000 of junior subordinated notes and net proceeds of $24,205,000
from our conduit facility.
47
Sources and Uses of Funds
General
In general, our liquidity requirements include origination of new loans, debt principal
payment requirements, payment of dividends and operating costs. We intend to utilize, as deemed
appropriate by prevailing market conditions, a combination of the following sources to generate
funds:
|
|
|
Operating revenues; |
|
|
|
|
Principal collections on existing loans receivable and Retained Interests; |
|
|
|
|
Structured loan financings or sales; |
|
|
|
|
Advances under our conduit facility; |
|
|
|
|
Borrowings under our short-term uncollateralized revolving credit facility (the Revolver); |
|
|
|
|
Issuance of SBA debentures; |
|
|
|
|
Issuance of junior subordinated notes; and/or |
|
|
|
|
Common equity issuance |
We had $3.7 million of cash and cash equivalents at December 31, 2006, of which $2.1 million
was available only for future operating commitments of our SBICs. Pursuant to SBA rules and
regulations, our SBICs cannot advance funds to us. As a result, we borrow funds on our revolving
credit facility or conduit facility to make investments even though our SBICs have available cash
and cash equivalents. Our outstanding commitments to fund new loans were $32.6 million at December
31, 2006, of which $2.6 million were for prime-rate based loans to be originated by First Western,
the government guaranteed portion of which (approximately 75% of each individual loan) will be sold
into the secondary market. Commitments have fixed expiration dates and generally require payment
of a fee to us. Since some commitments expire without the proposed loan closing, total committed
amounts do not necessarily represent future cash requirements.
We expect that these sources of funds and cash on hand will be sufficient to meet our working
capital needs. However, there can be no assurance that we will be able to raise funds through
these financing sources. 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, we may have to originate loans at reduced levels or sell assets, potentially on
unfavorable terms. Historically, our primary funding source has been the securitization and sale
of our loans receivable. Since the completion of our last securitization in October 2003, our
working capital has been provided through credit facilities and the issuance of junior subordinated
notes in March 2005.
During 2006, we had significant prepayments on our loan portfolio. This excess cash was used
to repay debt. Due to this debt reduction, our debt to equity ratio has decreased to 0.52 to 1.00
at December 31, 2006 from 0.64 to 1.00 at December 31, 2005. As a result, we believe our ability
to incur additional leverage is currently greater now than at December 31, 2005.
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,
if we receive less cash from our portfolio of investments, we can lower the dividend so as not to
cause any material cash shortfall. During 2007, we anticipate that our cash flows from operating
activities will be utilized to fund our expected 2007 dividend distributions and generally will not
be available to fund portfolio growth or for the repayment of principal due on our debt.
Source of Funds
Prior to 2004, our primary source of long-term funds was structured loan sale transactions.
We generated net proceeds of $39.9 million, $24.0 million, $29.5 million and $49.2 million from the
completion of our 2003, 2002, 2001 and 2000 structured loan sale transactions, respectively. The
proceeds from future structured loan transactions, if any, are expected to be greater as a result
of the merger. However, the timing of future securitization transactions
is dependent upon our portfolio and loan originations. As a result of higher than anticipated
prepayments on our loan portfolio, we do not anticipate completing our next structured loan
transaction until the third or fourth quarter of 2007 when we expect to have a sufficient pool of
primarily variable-rate loans to complete a securitization.
Since we have historically relied on structured loan transactions as our primary source of
operating capital to fund new loan originations, any adverse changes in our ability to complete
this type of transaction, including any
48
negative impact on the asset-backed securities market for
the type of product we generate, could have a detrimental effect on our ability to sell loans
receivable thereby reducing our ability to originate loans. The timing of a structured loan
transaction also has significant impact on our financial condition and results of operations. We
currently have a significant amount of available capital under our Revolver and conduit facility.
A number of factors could impair our ability, or alter our decision, to complete a structured
loan transaction. See Item 1A. Risk Factors.
Our subsidiary, PMC Conduit, L.P. (PMC Conduit) has a three-year $100.0 million conduit
facility expiring February 6, 2008. Interest payments on the advances are payable by PMC Conduit
at a rate approximating 1% over LIBOR and PMC Conduits principal repayment obligations are
expected to be refinanced through future securitizations of the loans collateralizing advances
under the conduit facility. In addition, we are charged an unused fee equal to 12.5 basis points
computed based on the daily available balance. During February 2007, the interest rate was
modified to a rate approximating 85 basis points over LIBOR. PMC Commercial has not guaranteed the
repayment of the advances outstanding under the conduit facility. The conduit facility allows for
advances based on the amount of eligible collateral sold to the conduit facility and has minimum
requirements. At December 31, 2006, approximately $43.6 million of our loans were owned by PMC
Conduit and we had outstanding advances of approximately $27.0 million. We had availability of
$7.4 million under the conduit facility at December 31, 2006 without additional sales of loans
receivable to PMC Conduit. At December 31, 2006, PMC Commercial had available approximately $17.3
million of loans which are eligible to be sold to PMC Conduit. The conduit facility has covenants,
the most restrictive of which are maximum delinquency ratios for our contributed loans and serviced
portfolio, as defined in the transaction documents. In addition, the conduit facility is subject
to cross default provisions with the Revolver. At December 31, 2006, we were in compliance with
the covenants of this facility.
At December 31, 2006, we had availability of $20.0 million under our Revolver which matures
December 31, 2007. Under our Revolver, we are charged interest on the balance outstanding at our
election of either the prime rate of the lender less 75 basis points or 162.5 basis points over the
30, 60 or 90-day LIBOR. In addition, we are charged an unused fee equal to 37.5 basis points
computed based on our daily available balance. The credit facility requires us to meet certain
covenants, the most restrictive of which provides for an asset coverage test based on our cash and
cash equivalents, loans receivable, Retained Interests and real estate investments as a ratio to
our senior debt and limits our ability to pay out returns of capital as part of our dividends. The
ratio must exceed 1.25 times. At December 31, 2006, we were in compliance with the covenants of
this facility.
At December 31, 2006, one of our SBICs had $3.0 million in available commitments from the SBA,
expiring in June 2007, to issue future debentures. These debentures will have 10-year maturities,
will be charged interest (established on the date of issuance) at a spread over the 10-year
treasury rate and will have semi-annual interest-only payments. To the extent funds are needed to
originate loans by our SBICs, these pre-approved debentures can be issued subject to regulatory
compliance; however, we do not anticipate utilization of this commitment.
Use of Funds
The primary use of our funds is to originate commercial mortgage loans to small businesses in
the limited service hospitality industry. During 2007, we anticipate loan originations will range
from $55 million to $70 million. See Current Operating Overview and Significant Economic Factors
for information on current market conditions. As a REIT, we also use funds for the payment of
dividends to shareholders. We also use funds for payment of our operating overhead including
salaries and other general and administrative expenses and we have payment requirements of
principal and interest on our borrowings.
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.
49
Information on Consolidated Debt
Information on our consolidated debt was as follows at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Face |
|
|
Range of |
|
|
Coupon |
|
|
Interest |
|
|
|
Amount |
|
|
Maturities |
|
|
Rate |
|
|
Type |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated notes (1) |
|
$ |
27,070 |
|
|
|
2035 |
|
|
|
8.62 |
% |
|
Variable |
Debentures |
|
|
8,190 |
|
|
|
2013 to 2015 |
|
|
|
5.90 |
% |
|
Fixed |
Mortgage notes (2) |
|
|
2,642 |
|
|
|
2011 to 2017 |
|
|
|
8.02 |
% |
|
Fixed |
Conduit facility |
|
|
26,968 |
|
|
|
2008 |
|
|
|
6.35 |
% |
|
Variable |
Redeemable preferred stock of
subsidiary |
|
|
4,000 |
|
|
|
2009 to 2010 |
|
|
|
4.00 |
% |
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
68,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The junior subordinated notes may be redeemed at our option, without penalty,
beginning March 30, 2010 and are subordinated to PMC Commercials existing debt. |
|
(2) |
|
Does not include a mortgage note with a principal balance of approximately $1.3
million and a fixed interest rate of 8.5% due January 1, 2011 of an unconsolidated
subsidiary. |
Seasonality
Generally, our lending segment is not subject to seasonal trends. However, since we primarily
lend to the limited service hospitality industry, loan delinquencies typically rise temporarily
during the winter months due primarily to reductions in business travel and consumer vacations.
Revenues for the limited service sector of the hospitality industry are generally lower during
the winter months due to weather conditions and business and leisure travel trends, especially in
the northeast and midwest sections of the United States where many of our hotel properties
collateralizing our loans are located.
Impact of Inflation
In general, if we originate fixed-rate loans while we borrow funds at variable rates, we would
have an interest rate mismatch. In an inflationary environment, if variable-rates were to rise
significantly and we were originating fixed-rate loans, our net interest margin would be reduced.
In general, we have matched our fixed-rate debt with fixed-rate producing assets. We primarily
originate variable-rate loans and have approximately $54.0 million (approximately 79% of total
debt) in variable-rate debt; therefore, we do not believe inflation will have a significant adverse
impact on us in the near future. Over the last three years, inflation has not had a significant
impact on us.
To the extent costs of operations (i.e., utilities, salaries, etc.) rise while economic
conditions prevent a matching rise in revenues (i.e., room rates, amenities, etc.), our borrowers
would be negatively impacted and loan losses could be affected. Accordingly, our borrowers and our
results of operations can be impacted by inflation. In
addition, in an inflationary environment we may experience pressure to increase our income and
dividend yield to maintain our stock price.
50
SUMMARIZED CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The following summarizes our contractual obligations at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
1 to 3 |
|
|
4 to 5 |
|
|
After 5 |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
|
|
(In thousands, except footnotes) |
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes and debentures payable (1) |
|
$ |
10,832 |
|
|
$ |
142 |
|
|
$ |
319 |
|
|
$ |
1,222 |
|
|
$ |
9,149 |
|
Revolver (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock of subsidiary (3) |
|
|
4,000 |
|
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
Conduit facility |
|
|
26,968 |
|
|
|
|
|
|
|
26,968 |
|
|
|
|
|
|
|
|
|
Junior subordinated debt (4) |
|
|
27,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated debt (1) |
|
|
72,581 |
|
|
|
4,760 |
|
|
|
6,193 |
|
|
|
5,889 |
|
|
|
55,739 |
|
Mortgage note of unconsolidated subsidiary |
|
|
402 |
|
|
|
108 |
|
|
|
198 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage note of unconsolidated subsidiary (5) |
|
|
1,300 |
|
|
|
65 |
|
|
|
146 |
|
|
|
1,089 |
|
|
|
|
|
Operating lease (6) |
|
|
973 |
|
|
|
179 |
|
|
|
394 |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
144,126 |
|
|
$ |
5,254 |
|
|
$ |
36,218 |
|
|
$ |
10,696 |
|
|
$ |
91,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mortgage notes and debentures payable are presented at face value. For the interest
obligation, the variable-rate in effect at December 31, 2006 was utilized and no change in
variable interest rates was assumed. |
|
(2) |
|
We had availability of $20.0 million under our Revolver at December 31, 2006. |
|
(3) |
|
The 4% preferred stock of our subsidiary (presented at par value) is required to be
repaid at par in September 2009 ($2.0 million) and May 2010 ($2.0 million). Dividends of
approximately $160,000 are due annually on the 4% preferred stock of our subsidiary
(recorded as interest expense). |
|
(4) |
|
The junior subordinated notes may be redeemed at our option, without penalty,
beginning March 30, 2010 and are subordinated to PMC Commercials existing debt. |
|
(5) |
|
Represents a mortgage note with a fixed interest rate of 8.5% of an unconsolidated
subsidiary. |
|
(6) |
|
Represents future minimum lease payments under our operating lease for office space. |
51
Our commitments at December 31, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
Total Amounts |
|
|
Less than |
|
|
1 to 3 |
|
|
4 to 5 |
|
|
After 5 |
|
Other Commitments |
|
Committed |
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
|
|
(In thousands, except footnotes) |
|
Environmental (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other commitments (2) |
|
|
32,634 |
|
|
|
32,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
32,634 |
|
|
$ |
32,634 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
PMC Funding Corp. (PMC Funding) has a recorded liability of approximately
$300,000 at December 31, 2006 related to a loan with collateral that has environmental
remediation obligations which are the primary responsibility of our borrower. Under
purchase accounting, the liability was assumed and the loan was acquired by PMC
Commercial in the merger with PMC Capital. The loan was originated in connection with
the sale of the underlying collateral by PMC Funding to the borrower. The sale was
financed by PMC Capital through a loan with a current outstanding principal balance of
approximately $475,000 which is in default. As a result, we filed a lawsuit in the
State of Georgia to appoint a receiver to operate the property and determine if current
environmental remediation plans are being followed. The Court has refused to appoint a
receiver at the present time. The borrower has filed a counterclaim alleging, among
other things, breach of contract and non-default under the loan documents. We do not
believe there is any merit to the counterclaim and intend to vigorously pursue all
remedies available to us under the law. During 2005, we were informed by the Georgia
Department of Natural Resources that the current remediation plan for the property has
certain aspects that require revision. While our borrower has the primary
responsibility for the environmental remediation, to the extent we elect to foreclose,
we currently believe that the estimated fair value of the collateral underlying the
loan exceeds the current outstanding principal balance on the loan. At the present
time, we have been unable to quantify additional costs, if any, of the potential
changes in remediation methods requested by the State of Georgia; however, these costs
could be material and may exceed the value of the collateral net of the recorded
liability and the current outstanding principal balance of the loan. |
|
(2) |
|
Represents loan commitments and approvals outstanding. |
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 our
subsidiary, 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.
See Note 22 to the accompanying consolidated financial statements for a detailed discussion of
commitments and contingencies.
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements have historically been structured as sales which are our
primary method of obtaining funds for new loan originations. In a structured loan sale
transaction, we contribute loans receivable to a QSPE that is not subject to consolidation in
exchange for cash and beneficial interests in that entity. The QSPE issues notes payable (usually
through a private placement) to unaffiliated parties and then distributes a portion of the notes
payable proceeds to us. The notes payable are collateralized solely by the assets of the QSPE.
The terms of the notes payable issued by the QSPEs provide that the owners of these QSPEs are not
liable for any payment on the notes. Accordingly, if the financial assets in the QSPE are
insufficient for the trustee to pay the principal or interest due on the notes, the sole recourse
of the holders of the notes is against the assets of the QSPE. We have no obligation to pay the
notes, nor do the holders of the notes have any recourse against our assets. We account for
structured loan sale transactions as sales of our loans receivable and the SPE meets the definition
of a QSPE; as a result, neither the loans receivable contributed to the QSPE nor the notes payable
issued by the QSPE are included in our consolidated financial statements. See Item 1. Business
Structured Loan Transactions and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies and Estimates Valuation of
Retained Interests.
On September 29, 2006, we entered into a lease agreement for one of our hotel properties. The
property has a
52
mortgage with a principal balance of $1.3 million with a significant prepayment
penalty. Therefore, we structured the lease with the potential buyer of the property for a term
equal to the term remaining on the mortgage (matures January 1, 2011) and then a purchase with a
price of $1,825,000. Annual base rent on the lease is $116,700 and the lease is a triple net
lease. The lessee provided us with a substantial non-refundable up-front payment of $452,000. The
hotel property is owned by a separate subsidiary and is the subsidiarys primary asset. Based on
this lease
agreement, including the fixed price purchase option, the subsidiary was determined to be a
variable interest entity. Since we do not expect to absorb the majority of the entitys future
expected losses or receive the entitys expected residual returns, PMC Commercial Trust is not
considered to be the primary beneficiary. Thus, the subsidiary is no longer consolidated in PMC
Commercial Trusts financial statements and the equity method is used to account for our investment
in the subsidiary effective September 29, 2006. The subsidiary is contractually responsible for
the mortgage note and its repayment. The subsidiary recorded the lease as an operating lease.
Revenues and expenses of the subsidiary are primarily lease income, interest expense on the
mortgage payable, depreciation expense on the real estate investment and amortization of deferred
lease costs.
RISK MANAGEMENT
In conducting our business, we are exposed to a range of risks including:
|
|
|
Market risk which is the risk to our earnings or capital resulting from
adverse changes in the values of assets resulting from movement in market interest
rates; |
|
|
|
|
Credit risk which is the risk of loss due to an individual borrowers
unwillingness or inability to pay their obligations; |
|
|
|
|
Operations risk which is the risk of loss resulting from systems failure,
inadequate controls, human error, fraud or unforeseen catastrophes; |
|
|
|
|
Liquidity risk which 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. Liquidity risk also includes the risk of having to sell assets at a loss to
generate liquid funds, which is a function of the relative liquidity (market depth) of
the asset(s) and general market conditions; |
|
|
|
|
Compliance risk which is the risk of loss, including fines or penalties,
from failing to comply with Federal, state or local laws, rules and regulations
pertaining to lending and licensed activities; |
|
|
|
|
Legal risk which is the risk of loss, disruption or other negative effect
on our operations or condition that arises from unenforceable contracts, lawsuits,
adverse judgments, or adverse governmental or regulatory proceedings, or the threat
thereof; and |
|
|
|
|
Reputational risk which is the risk that negative publicity regarding our
practices whether true or not will cause a decline in our customer base. |
Our risk management policies and procedures are established and evaluated under the
supervision of our Chief Executive Officer. The policies and procedures are designed to focus on
the following:
|
|
|
identifying, assessing and reporting on corporate risk exposures and trends; |
|
|
|
|
establishing, and revising as necessary, policies and procedures; |
|
|
|
|
monitoring and reporting on adherence with risk policies; and |
|
|
|
|
approving new product developments on business initiatives. |
We cannot provide assurance that our risk management process or our internal controls will
prevent or reduce the risks to which we are exposed. See Risk Factors in Item 1A of this Form
10-K.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Financial Statements for a full description of recent
accounting pronouncements including the respective dates adopted or expected dates of adoption and
effect, if any, on our results of operations and financial condition.
RELATED PARTY TRANSACTIONS
Servicing fee income for the years ended December 31, 2006, 2005 and 2004 for loans held by
the QSPEs was approximately $676,000, $833,000 and $781,000, respectively. We were not the
servicer for the loans receivable held by the QSPEs prior to the merger; therefore, no servicing
fees were earned or received by us prior to March 1, 2004.
We received approximately $14.6 million, $15.4 million and $15.1 million in cash distributions
from the QSPEs during 2006, 2005 and 2004, respectively.
53
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. During 2006 and 2005, we repurchased loans with an aggregate principal balance of
approximately $2.5 million and $5.1 million, respectively, from the Joint Ventures. We did not
repurchase any loans from the QSPEs during 2004.
DIVIDENDS
During 2006, our dividends were declared as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
Record Date |
|
Date Paid |
|
Per Share |
|
|
Type |
March 31, 2006 |
|
April 10, 2006 |
|
$ |
0.30 |
|
|
Regular |
June 30, 2006 |
|
July 10, 2006 |
|
|
0.30 |
|
|
Regular |
September 30, 2006 |
|
October 10, 2006 |
|
|
0.30 |
|
|
Regular |
December 29, 2006 |
|
January 8, 2007 |
|
|
0.30 |
|
|
Regular |
December 29, 2006 |
|
January 8, 2007 |
|
|
0.10 |
|
|
Special |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
In March 2007, the Board declared a $0.30 per share quarterly dividend to common shareholders
of record on March 30, 2007 which will be paid on April 9, 2007.
Our shareholders are entitled to receive dividends when and as declared by our Board. Our
Board considers many factors including, but not limited to, expectations for future earnings, REIT
taxable income, the interest rate environment, competition, our ability to obtain leverage and our
loan portfolio activity in determining dividend policy. The Board also uses REIT taxable income
plus tax depreciation in determining the amount of dividends declared. In addition, as a REIT we
are required to pay out 90% of taxable income. Consequently, the dividend rate on a quarterly
basis will not necessarily correlate directly to any single factor such as REIT taxable income or
earnings expectations. We anticipate that as a result of earnings from our core business and gains
generated on our property sales, that we will maintain our current regular quarterly dividend of
$0.30 per share through the end of 2007.
We have certain covenants within our debt facilities that 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.
54
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.
The following reconciles net income to REIT taxable income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
15,684 |
|
|
$ |
11,297 |
|
|
$ |
24,781 |
|
Less: taxable REIT subsidiaries net income, net of tax |
|
|
(1,280 |
) |
|
|
(1,414 |
) |
|
|
(145 |
) |
Add: book depreciation |
|
|
231 |
|
|
|
1,240 |
|
|
|
1,872 |
|
Less: tax depreciation |
|
|
(508 |
) |
|
|
(1,483 |
) |
|
|
(1,935 |
) |
Book/tax difference on property sales |
|
|
171 |
|
|
|
(350 |
) |
|
|
135 |
|
Book/tax difference on Retained Interests, net |
|
|
1,973 |
|
|
|
1,880 |
|
|
|
3,557 |
|
Impairment losses |
|
|
968 |
|
|
|
2,210 |
|
|
|
|
|
Negative goodwill |
|
|
|
|
|
|
|
|
|
|
(11,593 |
) |
Book/tax difference on amortization and accretion |
|
|
(641 |
) |
|
|
(264 |
) |
|
|
(221 |
) |
Asset valuation |
|
|
(890 |
) |
|
|
181 |
|
|
|
(516 |
) |
Other book/tax differences, net |
|
|
(59 |
) |
|
|
(9 |
) |
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income |
|
$ |
15,649 |
|
|
$ |
13,288 |
|
|
$ |
16,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared |
|
$ |
13,975 |
|
|
$ |
13,569 |
|
|
$ |
14,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
10,748 |
|
|
|
10,874 |
|
|
|
10,134 |
|
|
|
|
|
|
|
|
|
|
|
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 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.
55
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since our consolidated balance sheet consists of items subject to interest rate risk, we are
subject to market risk associated with changes in interest rates as described below. Although
management believes that the analysis 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
consolidated 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.
LOANS RECEIVABLE
Our loans receivable 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. Our loans receivable are approximately 86% variable-rate at spreads over LIBOR or the
prime rate consistent with the market. Increases or decreases in interest rates will generally not
have a material impact on the fair value of our variable-rate loans receivable. If we were required
to sell our loans at a time we would not otherwise plan to do so, our losses may be substantial.
Changes in interest rates on our fixed-rate loans receivable do not have an immediate impact
on our interest income. Our interest rate risk on our fixed-rate loans receivable 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
receivable tends to increase when the current mortgage rates are substantially higher than rates on
existing mortgage loans receivable and, conversely, decrease when the current mortgage rates are
substantially lower than rates on existing mortgage loans receivable (due to refinancings of
fixed-rate loans).
We had $23.4 million and $18.7 million of fixed-rate loans receivable at December 31, 2006 and
2005, respectively. The estimated fair value of our fixed interest rate loans receivable
(approximately $23.9 million at December 31, 2006) is dependent upon several factors including
changes in interest rates and the market for the types of loans that we have originated.
At December 31, 2006 and 2005, we had $145.8 million and $138.9 million of variable-rate loans
receivable, respectively, and $54.0 million and $54.8 million of variable-rate debt, respectively.
On the difference between our variable-rate loans receivable outstanding and our variable-rate debt
($91.8 million and $84.1 million at December 31, 2006 and 2005, respectively) we have interest rate
risk. To the extent variable rates decrease our interest income net of interest expense would
decrease.
As a result of $16.4 million and $21.7 million at December 31, 2006 and 2005, respectively, of
our variable-rate loans receivable having interest rate floors (from 5.25% to 6%), we are deemed to
have derivative instruments. However, we are not required to bifurcate these investments;
therefore, they are not accounted for as derivatives. To the extent that interest rates decline
with respect to our loans that have floors, our interest expense on our variable-rate debt will be
reduced by a higher amount than our interest income. We do not use derivatives for speculative
purposes.
The sensitivity of our variable-rate loans receivable 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. Based on our analysis of the sensitivity of interest income and
interest expense at December 31, 2006 and 2005, 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
$918,000 and $841,000, respectively, on an annual basis.
NOTES AND DEBENTURES PAYABLE, JUNIOR SUBORDINATED NOTES, CREDIT FACILITIES AND REDEEMABLE
PREFERRED STOCK OF SUBSIDIARY (DEBT)
At December 31, 2006 and 2005, approximately $14.5 million (21%) and $32.8 million (37%) of
our consolidated debt had fixed rates of interest and therefore was not affected by changes in
interest rates. Any amount outstanding on our Revolver or the conduit facility is based on the
prime rate and/or LIBOR (or approximates LIBOR) and thus subject to adverse changes in market
interest rates. Assuming there were no increases or decreases |
56
in the balance outstanding under our
variable-rate debt at December 31, 2006, each hypothetical 100 basis points increase in interest
rates would increase interest expense and therefore decrease net income by approximately $540,000. |
Our fixed-rate debt is comprised of SBA debentures and mortgages payable. Our debentures have
current prepayment penalties up to 4% of the principal balance. Our $2.6 million of consolidated
fixed-rate hotel property mortgages at December 31, 2006 have significant penalties for prepayment.
The following presents the principal amounts, weighted average interest rates and estimated
fair values by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes of our outstanding debt at December 31, 2006 and 2005.
Market risk disclosures related to our outstanding debt as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
Value |
|
|
Value (1) |
|
|
|
(Dollars in thousands) |
|
Fixed-rate debt (2) |
|
$ |
142 |
|
|
$ |
153 |
|
|
$ |
2,017 |
|
|
$ |
1,998 |
|
|
$ |
1,042 |
|
|
$ |
9,119 |
|
|
$ |
14,471 |
|
|
$ |
14,607 |
|
Variable-rate debt
(LIBOR
based) (3) |
|
|
|
|
|
|
26,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,070 |
|
|
|
54,038 |
|
|
|
54,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
142 |
|
|
$ |
27,121 |
|
|
$ |
2,017 |
|
|
$ |
1,998 |
|
|
$ |
1,042 |
|
|
$ |
36,189 |
|
|
$ |
68,509 |
|
|
$ |
68,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2006 was 6.6%. |
|
(3) |
|
The weighted average interest rate of our variable-rate debt at December 31, 2006 was 7.5%. |
Market risk disclosures related to our outstanding debt as of December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
Value |
|
|
Value (1) |
|
|
|
(Dollars in thousands) |
|
Fixed-rate debt (2) |
|
$ |
6,816 |
|
|
$ |
644 |
|
|
$ |
704 |
|
|
$ |
2,300 |
|
|
$ |
4,077 |
|
|
$ |
18,220 |
|
|
$ |
32,761 |
|
|
$ |
32,951 |
|
Variable-rate debt (LIBOR
and prime based) (3) |
|
|
143 |
|
|
|
154 |
|
|
|
24,371 |
|
|
|
1,282 |
|
|
|
1,245 |
|
|
|
27,659 |
|
|
|
54,854 |
|
|
|
54,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
6,959 |
|
|
$ |
798 |
|
|
$ |
25,075 |
|
|
$ |
3,582 |
|
|
$ |
5,322 |
|
|
$ |
45,879 |
|
|
$ |
87,615 |
|
|
$ |
87,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2005 was 6.5%. |
|
(3) |
|
The weighted average interest rate of our variable-rate debt at December 31, 2005 was 6.4%. |
RETAINED INTERESTS
Our Retained Interests are valued based on various factors including estimates of appropriate
discount rates. Changes in the discount rates used in estimating the fair value of the Retained
Interests will impact their carrying value. Any appreciation of our Retained Interests is included
on our consolidated balance sheet in beneficiaries equity. Any depreciation of our Retained
Interests is either included in the consolidated statements of income as a permanent impairment (if
there is a reduction in expected future cash flows) or on our balance sheet in beneficiaries
equity as an unrealized loss. Assuming all other factors (i.e., prepayments, losses, etc.)
remained unchanged, if discount rates were 100 basis points and 200 basis points higher than rates
estimated at December 31, 2006, the estimated fair value of our Retained Interests at December 31,
2006 would have decreased by approximately $1.6 million and $3.1 million, respectively. Assuming
all other factors (i.e., prepayments, losses, etc.) remained unchanged, if discount rates were 100
basis points and 200 basis points higher than rates estimated at December 31, 2005, the estimated
fair value of our Retained Interests at December 31, 2005 would have decreased by approximately
$2.3 million and $4.5 million, respectively.
57
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is hereby incorporated by reference to our Financial
Statements beginning on page F-1 of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. 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 (the Exchange Act)) as of December 31, 2006. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective in ensuring that information required to be disclosed by the Company in the reports
that it files or submits to the SEC under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the SECs rules and forms and include controls and
procedures designed to ensure the information required to be disclosed by the Company in such
reports is accumulated and communicated to management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Companys internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2006. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on their assessment, management determined that as of December
31, 2006, the Companys internal control over financial reporting was effective based on those
criteria.
Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm as stated in their report which appears herein.
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 December 31, 2006 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
58
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 with regard to directors and executive officers of
the Company and compliance with Section 16(a) of the Exchange Act is hereby incorporated by
reference to our definitive proxy statement to be filed with the SEC within 120 days after the year
covered by this Form 10-K with respect to the Annual Meeting of Shareholders.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics for trust managers, officers and
employees which is available on our website at www.pmctrust.com. Shareholders may request a free
copy of the code of Business Conduct and Ethics from:
PMC Commercial Trust
Attention: Chief Financial Officer
17950 Preston Road, Suite 600
Dallas, Texas 75252
(972) 349-3235
www.pmctrust.com
We have also adopted a Code of Ethical Conduct for Senior Financial Officers setting forth a
code of ethics applicable to our principal executive officer, principal financial officer and
principal accounting officer, which is available on our website at
www.pmctrust.com. Shareholders
may request a free copy of the Code of Ethical Conduct for Senior Financial Officers from the
address and phone number set forth above.
Corporate Governance Guidelines
We have adopted Corporate Governance Guidelines which are available on our website at
www.pmctrust.com. Shareholders may request a free copy of the Corporate Governance Guidelines from
the address and phone number set forth above under -Code of Ethics.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 regarding executive compensation is hereby
incorporated by reference to our definitive proxy statement to be filed with the SEC within 120
days after the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders.
59
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS
All of our equity compensation plans were approved by our security holders. Information
regarding our equity compensation plans at December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
|
future issuances under |
|
|
|
|
|
|
|
|
|
|
|
equity compensation |
|
|
|
Number of securities to |
|
|
Weighted average |
|
|
plans (excluding |
|
Plan |
|
be issued upon exercise |
|
|
exercise price of |
|
|
securities reflected in |
|
Category |
|
of outstanding options |
|
|
outstanding options |
|
|
column (a)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders |
|
|
142,511 |
|
|
$ |
14.06 |
|
|
|
414,430 |
|
|
|
|
|
|
|
|
|
|
|
Additional information regarding security ownership of certain beneficial owners and
management and related shareholder matters is hereby incorporated by reference to our definitive
proxy statement to be filed with the SEC within 120 days after the year covered by this Form 10-K
with respect to the Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 regarding certain relationships and related
transactions is hereby incorporated by reference to our definitive proxy statement to be filed with
the SEC within 120 days after the year covered by this Form 10-K with respect to the Annual Meeting
of Shareholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 regarding principal accountant fees and services is
hereby incorporated by reference to our definitive proxy statement to be filed with the SEC within
120 days after the year covered by this Form 10-K with respect to the Annual Meeting of
Shareholders.
60
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
|
(1) |
|
Financial Statements - |
See index to Financial Statements set forth on page F-1 of this
Form 10-K.
|
(2) |
|
Financial Statement Schedules - |
Schedule II Valuation and Qualifying Accounts
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loans on Real Estate
See Exhibit Index beginning on page E-1 of this Form 10-K.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on our behalf by the undersigned, hereunto
duly authorized.
|
|
|
|
|
|
PMC Commercial Trust
|
|
By: |
/s/ Lance B. Rosemore
|
|
|
|
Lance B. Rosemore, President |
|
|
|
|
|
|
Dated March 15, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ DR. ANDREW S. ROSEMORE
|
|
Chairman of the Board of Trust
|
|
March 15, 2007 |
|
|
|
|
|
Dr. Andrew S. Rosemore
|
|
Managers, Chief Operating |
|
|
|
|
Officer and Trust Manager |
|
|
|
|
|
|
|
/s/ LANCE B. ROSEMORE
|
|
President, Chief Executive
|
|
March 15, 2007 |
|
|
|
|
|
Lance B. Rosemore
|
|
Officer, Secretary and Trust |
|
|
|
|
Manager (principal executive officer) |
|
|
|
|
|
|
|
/s/ BARRY N. BERLIN
|
|
Chief Financial Officer (principal
|
|
March 15, 2007 |
|
|
|
|
|
Barry N. Berlin
|
|
financial and accounting officer) |
|
|
|
|
|
|
|
/s/ NATHAN COHEN
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Nathan Cohen |
|
|
|
|
|
|
|
|
|
/s/ DR. MARTHA GREENBERG
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Dr. Martha Greenberg |
|
|
|
|
|
|
|
|
|
/s/ ROY H. GREENBERG
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Roy H. Greenberg |
|
|
|
|
|
|
|
|
|
/s/ BARRY A. IMBER
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Barry A. Imber |
|
|
|
|
|
|
|
|
|
/s/ IRVING MUNN
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Irving Munn |
|
|
|
|
|
|
|
|
|
/s/ DR. IRA SILVER
|
|
Trust Manager
|
|
March 15, 2007 |
|
|
|
|
|
Dr. Ira Silver |
|
|
|
|
62
PMC COMMERCIAL TRUST A ND SUBSIDIARIES
FORM 10-K
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page |
|
|
F-2 |
|
|
|
Financial Statements: |
|
|
|
|
|
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
|
|
|
F-9 |
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
F-47 |
|
|
|
Schedule III Real Estate and Accumulated Depreciation |
|
F-48 |
|
|
|
Schedule IV Mortgage Loans on Real Estate |
|
F-51 |
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trust Managers of
PMC Commercial Trust:
We have completed integrated audits of PMC Commercial Trusts consolidated financial statements and
of its internal control over financial reporting as of December 31, 2006 in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on
our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, comprehensive income, beneficiaries equity, and cash flows present fairly,
in all material respects, the financial position of PMC Commercial Trust (the Company) and its
subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2)
present fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report On Internal Control
Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2006 based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance
F-2
with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2007
F-3
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Loans receivable, net |
|
$ |
169,181 |
|
|
$ |
157,574 |
|
Retained interests in transferred assets |
|
|
55,724 |
|
|
|
62,991 |
|
Real estate investments, net |
|
|
4,414 |
|
|
|
8,080 |
|
Real estate investments held for sale, net |
|
|
|
|
|
|
15,470 |
|
Cash and cash equivalents |
|
|
3,739 |
|
|
|
3,967 |
|
Restricted investments |
|
|
995 |
|
|
|
3,532 |
|
Mortgage-backed security of affiliate |
|
|
643 |
|
|
|
833 |
|
Rent and related receivables, net |
|
|
567 |
|
|
|
1,489 |
|
Deferred tax asset, net |
|
|
203 |
|
|
|
349 |
|
Other assets |
|
|
4,938 |
|
|
|
4,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
240,404 |
|
|
$ |
259,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND BENEFICIARIES EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Junior subordinated notes |
|
$ |
27,070 |
|
|
$ |
27,070 |
|
Credit facilities |
|
|
26,968 |
|
|
|
24,205 |
|
Notes and debentures payable |
|
|
10,803 |
|
|
|
32,765 |
|
Dividends payable |
|
|
4,365 |
|
|
|
3,293 |
|
Borrower advances |
|
|
3,694 |
|
|
|
4,418 |
|
Redeemable preferred stock of subsidiary |
|
|
3,668 |
|
|
|
3,575 |
|
Accounts payable and accrued
expenses |
|
|
2,578 |
|
|
|
3,328 |
|
Deferred gains on property sales |
|
|
1,574 |
|
|
|
345 |
|
Due to affiliates, net |
|
|
683 |
|
|
|
856 |
|
Other liabilities |
|
|
810 |
|
|
|
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
82,213 |
|
|
|
101,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred stock of subsidiary |
|
|
900 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficiaries equity: |
|
|
|
|
|
|
|
|
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01
par value;
11,040,153 and 11,028,271 shares issued at December 31, 2006 and 2005,
respectively, 10,753,803 and 10,766,021 shares outstanding at December 31,
2006
and 2005, respectively |
|
|
110 |
|
|
|
110 |
|
Additional paid-in
capital
|
|
|
152,178 |
|
|
|
152,047 |
|
Net unrealized appreciation of retained interests in transferred assets |
|
|
3,256 |
|
|
|
4,519 |
|
Cumulative net income |
|
|
137,984 |
|
|
|
122,300 |
|
Cumulative dividends |
|
|
(133,006 |
) |
|
|
(119,031 |
) |
|
|
|
|
|
|
|
|
|
|
160,522 |
|
|
|
159,945 |
|
|
|
|
|
|
|
|
|
|
Less: Treasury stock; at cost, 286,350 shares and 262,250 shares at December
31, 2006
and 2005, respectively |
|
|
(3,231 |
) |
|
|
(2,928 |
) |
|
|
|
|
|
|
|
Total beneficiaries equity |
|
|
157,291 |
|
|
|
157,017 |
|
|
|
|
|
|
|
|
Total liabilities and beneficiaries equity |
|
$ |
240,404 |
|
|
$ |
259,192 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
15,460 |
|
|
$ |
11,578 |
|
|
$ |
8,162 |
|
Income from retained interests in transferred
assets |
|
|
9,390 |
|
|
|
9,458 |
|
|
|
8,763 |
|
Hotel property revenues |
|
|
2,113 |
|
|
|
|
|
|
|
|
|
Lease income |
|
|
58 |
|
|
|
942 |
|
|
|
1,017 |
|
Other income |
|
|
3,656 |
|
|
|
3,121 |
|
|
|
2,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
30,677 |
|
|
|
25,099 |
|
|
|
20,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
5,435 |
|
|
|
4,688 |
|
|
|
3,873 |
|
Salaries and related benefits |
|
|
4,739 |
|
|
|
4,553 |
|
|
|
3,557 |
|
General and administrative |
|
|
2,648 |
|
|
|
2,995 |
|
|
|
1,882 |
|
Hotel property expenses |
|
|
1,614 |
|
|
|
|
|
|
|
|
|
Permanent impairments on retained interests in
transferred assets |
|
|
1,167 |
|
|
|
467 |
|
|
|
1,182 |
|
Provision for loss on rent and related receivables |
|
|
925 |
|
|
|
1,255 |
|
|
|
|
|
Depreciation |
|
|
222 |
|
|
|
281 |
|
|
|
316 |
|
Provision for (reduction of) loan losses, net |
|
|
103 |
|
|
|
298 |
|
|
|
(253 |
) |
Advisory and servicing fees to affiliate, net |
|
|
|
|
|
|
|
|
|
|
245 |
|
Impairment losses |
|
|
|
|
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
16,853 |
|
|
|
14,973 |
|
|
|
10,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt |
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision, minority interest,
discontinued operations and extraordinary item |
|
|
14,387 |
|
|
|
10,126 |
|
|
|
10,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(649 |
) |
|
|
(658 |
) |
|
|
(116 |
) |
Minority interest (preferred stock dividend of
subsidiary) |
|
|
(90 |
) |
|
|
(90 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
13,648 |
|
|
|
9,378 |
|
|
|
9,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on sales of real estate |
|
|
2,064 |
|
|
|
2,256 |
|
|
|
(252 |
) |
Impairment losses |
|
|
(94 |
) |
|
|
(1,774 |
) |
|
|
|
|
Net earnings |
|
|
66 |
|
|
|
1,437 |
|
|
|
3,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,036 |
|
|
|
1,919 |
|
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
|
15,684 |
|
|
|
11,297 |
|
|
|
13,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item: |
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill |
|
|
|
|
|
|
|
|
|
|
11,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,684 |
|
|
$ |
11,297 |
|
|
$ |
24,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,748 |
|
|
|
10,874 |
|
|
|
10,134 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
10,751 |
|
|
|
10,879 |
|
|
|
10,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.27 |
|
|
$ |
0.86 |
|
|
$ |
0.98 |
|
Discontinued operations |
|
|
0.19 |
|
|
|
0.18 |
|
|
|
0.32 |
|
Extraordinary item |
|
|
|
|
|
|
|
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1.46 |
|
|
$ |
1.04 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
15,684 |
|
|
$ |
11,297 |
|
|
$ |
24,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized appreciation (depreciation) of
retained interests
in transferred assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation) arising
during period |
|
|
(648 |
) |
|
|
23 |
|
|
|
2,012 |
|
Realized gains included in net income |
|
|
(615 |
) |
|
|
(624 |
) |
|
|
(510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,263 |
) |
|
|
(601 |
) |
|
|
1,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,421 |
|
|
$ |
10,696 |
|
|
$ |
26,283 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Appreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
of Retained |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial |
|
|
|
|
|
|
Additional |
|
|
Interests in |
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Interest |
|
|
Par |
|
|
Paid-in |
|
|
Transferred |
|
|
Net |
|
|
Cumulative |
|
|
Treasury |
|
|
Beneficiaries |
|
|
|
Outstanding |
|
|
Value |
|
|
Capital |
|
|
Assets |
|
|
Income |
|
|
Dividends |
|
|
Stock |
|
|
Equity |
|
Balances, January 1, 2004 |
|
|
6,452,791 |
|
|
$ |
66 |
|
|
$ |
94,792 |
|
|
$ |
3,618 |
|
|
$ |
86,222 |
|
|
$ |
(91,322 |
) |
|
$ |
(1,285 |
) |
|
$ |
92,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,502 |
|
Treasury shares, net |
|
|
(21,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311 |
) |
|
|
(311 |
) |
Shares issued through
exercise of
stock options |
|
|
59,500 |
|
|
|
|
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
|
|
689 |
|
Shares issued in connection with
merger with PMC Capital, Inc. |
|
|
4,385,800 |
|
|
|
44 |
|
|
|
57,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,454 |
|
Merger costs |
|
|
|
|
|
|
|
|
|
|
(769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(769 |
) |
Issuance of stock options |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Dividends ($1.40 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,140 |
) |
|
|
|
|
|
|
(14,140 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,781 |
|
|
|
|
|
|
|
|
|
|
|
24,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004 |
|
|
10,876,961 |
|
|
|
110 |
|
|
|
151,818 |
|
|
|
5,120 |
|
|
|
111,003 |
|
|
|
(105,462 |
) |
|
|
(1,285 |
) |
|
|
161,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(601 |
) |
Shares repurchased |
|
|
(129,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,643 |
) |
|
|
(1,643 |
) |
Shares
issued through exercise of stock options |
|
|
9,400 |
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
Issuance of share options and
restricted shares |
|
|
9,060 |
|
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Dividends ($1.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,569 |
) |
|
|
|
|
|
|
(13,569 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,297 |
|
|
|
|
|
|
|
|
|
|
|
11,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005 |
|
|
10,766,021 |
|
|
|
110 |
|
|
|
152,047 |
|
|
|
4,519 |
|
|
|
122,300 |
|
|
|
(119,031 |
) |
|
|
(2,928 |
) |
|
|
157,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,263 |
) |
Shares repurchased |
|
|
(24,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
(303 |
) |
Treasury shares, net |
|
|
(32,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(464 |
) |
|
|
(464 |
) |
Shares
issued through exercise of stock options |
|
|
35,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464 |
|
|
|
464 |
|
Issuance of share options and
restricted shares |
|
|
9,060 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
Dividends ($1.30 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,975 |
) |
|
|
|
|
|
|
(13,975 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,684 |
|
|
|
|
|
|
|
|
|
|
|
15,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006 |
|
|
10,753,803 |
|
|
$ |
110 |
|
|
$ |
152,178 |
|
|
$ |
3,256 |
|
|
$ |
137,984 |
|
|
$ |
(133,006 |
) |
|
$ |
(3,231 |
) |
|
$ |
157,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,684 |
|
|
$ |
11,297 |
|
|
$ |
24,781 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
231 |
|
|
|
1,240 |
|
|
|
1,872 |
|
Permanent impairments on retained interests in
transferred assets |
|
|
1,167 |
|
|
|
467 |
|
|
|
1,182 |
|
Extraordinary item negative goodwill |
|
|
|
|
|
|
|
|
|
|
(11,593 |
) |
Losses (gains) on sales of real estate |
|
|
(2,064 |
) |
|
|
(2,256 |
) |
|
|
252 |
|
Gain on early extinguishment of debt |
|
|
(563 |
) |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
146 |
|
|
|
(22 |
) |
|
|
(36 |
) |
Provision for (reduction of) loan losses, net |
|
|
103 |
|
|
|
298 |
|
|
|
(253 |
) |
Provision for loss on rent and related receivables |
|
|
925 |
|
|
|
1,255 |
|
|
|
|
|
Impairment losses |
|
|
94 |
|
|
|
2,210 |
|
|
|
|
|
Release of debt obligation |
|
|
|
|
|
|
|
|
|
|
(175 |
) |
Premium income adjustment |
|
|
116 |
|
|
|
85 |
|
|
|
91 |
|
Amortization and acccretion, net |
|
|
(270 |
) |
|
|
(237 |
) |
|
|
(313 |
) |
Share-based compensation |
|
|
131 |
|
|
|
106 |
|
|
|
7 |
|
Capitalized loan origination costs |
|
|
(233 |
) |
|
|
(160 |
) |
|
|
(185 |
) |
Loans funded, held for sale |
|
|
(5,976 |
) |
|
|
(7,492 |
) |
|
|
(6,611 |
) |
Proceeds from sale of guaranteed loans |
|
|
6,373 |
|
|
|
7,785 |
|
|
|
6,222 |
|
Loan fees collected, net |
|
|
94 |
|
|
|
512 |
|
|
|
396 |
|
Lease termination fee income |
|
|
|
|
|
|
|
|
|
|
(287 |
) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrower advances |
|
|
(724 |
) |
|
|
1,686 |
|
|
|
(603 |
) |
Due to affiliates, net |
|
|
(173 |
) |
|
|
1,011 |
|
|
|
(215 |
) |
Accounts payable and accrued expenses |
|
|
(740 |
) |
|
|
618 |
|
|
|
(575 |
) |
Other liabilities |
|
|
(234 |
) |
|
|
(490 |
) |
|
|
42 |
|
Rent and related receivables, net |
|
|
(3 |
) |
|
|
(1,496 |
) |
|
|
(1,337 |
) |
Other assets |
|
|
(252 |
) |
|
|
(388 |
) |
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
13,832 |
|
|
|
16,029 |
|
|
|
12,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans funded |
|
|
(45,710 |
) |
|
|
(42,865 |
) |
|
|
(45,248 |
) |
Principal collected on loans receivable |
|
|
49,582 |
|
|
|
16,006 |
|
|
|
24,817 |
|
Principal collected on notes receivable |
|
|
|
|
|
|
292 |
|
|
|
|
|
Proceeds from sales of hotel properties, net |
|
|
3,127 |
|
|
|
8,035 |
|
|
|
3,513 |
|
Principal collected on retained interests in
transferred assets |
|
|
5,219 |
|
|
|
5,923 |
|
|
|
6,361 |
|
Investment in retained interests in transferred assets |
|
|
(134 |
) |
|
|
(1,843 |
) |
|
|
(2,027 |
) |
Proceeds from mortgage-backed security of
affiliate |
|
|
227 |
|
|
|
207 |
|
|
|
143 |
|
Purchase of furniture, fixtures, and equipment |
|
|
(103 |
) |
|
|
(366 |
) |
|
|
(605 |
) |
Cash and cash equivalents received in connection with
merger |
|
|
|
|
|
|
|
|
|
|
31,488 |
|
Merger related costs |
|
|
|
|
|
|
|
|
|
|
(1,006 |
) |
Distribution from unconsolidated subsidiary |
|
|
452 |
|
|
|
|
|
|
|
|
|
Investment in PMC Preferred Trust-A |
|
|
|
|
|
|
(820 |
) |
|
|
|
|
Proceeds received from assets acquired in liquidation,
net |
|
|
1,180 |
|
|
|
2,905 |
|
|
|
1,540 |
|
Release of (investment in) restricted investments, net |
|
|
2,537 |
|
|
|
(436 |
) |
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
16,377 |
|
|
|
(12,962 |
) |
|
|
19,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
|
|
|
|
|
123 |
|
|
|
378 |
|
Purchase of treasury shares |
|
|
(303 |
) |
|
|
(1,643 |
) |
|
|
|
|
Payment of borrowing costs |
|
|
|
|
|
|
(1,487 |
) |
|
|
(81 |
) |
Proceeds from (payments on) revolving credit
facility, net |
|
|
|
|
|
|
(14,600 |
) |
|
|
14,600 |
|
Proceeds from issuance of SBA
debentures |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
Proceeds from conduit facility, net |
|
|
2,763 |
|
|
|
24,205 |
|
|
|
|
|
Proceeds from issuance of junior subordinated
notes |
|
|
|
|
|
|
27,070 |
|
|
|
|
|
Payment of principal on notes, mortgages payable and
debentures |
|
|
(19,994 |
) |
|
|
(31,796 |
) |
|
|
(26,944 |
) |
Payment of dividends |
|
|
(12,903 |
) |
|
|
(14,037 |
) |
|
|
(12,872 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(30,437 |
) |
|
|
(8,165 |
) |
|
|
(24,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(228 |
) |
|
|
(5,098 |
) |
|
|
7,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
3,967 |
|
|
|
9,065 |
|
|
|
1,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
3,739 |
|
|
$ |
3,967 |
|
|
$ |
9,065 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
Business
PMC Commercial Trust (PMC Commercial or together with its wholly-owned subsidiaries, we, us
or our) was organized in 1993 as a Texas real estate investment trust (REIT). Our common
shares of beneficial interest (Common Shares) are traded on the American Stock Exchange (symbol
PCC). We primarily obtain income from the yield and other related fee income earned on our
investments from our lending activities. To date, these investments have principally been in the
hospitality industry.
Principles of Consolidation
We consolidate entities that we control as well as variable interest entities (VIEs) for which we
are the primary beneficiary. To the extent we do not have a majority voting interest, we use the
equity method to account for investments for which we have the ability to exercise significant
influence over operating and financial policies. Consolidated net income includes our share of the
net earnings of any entity accounted for using the equity method. All material intercompany
balances and transactions have been eliminated.
The consolidated financial statements include the accounts of PMC Commercial, First Western SBLC,
Inc. (First Western), PMC Investment Corporation (PMCIC), Western Financial Capital Corporation
(Western Financial), PMC Commercial Trust, Ltd. 1998-1 (PMCT Trust), PMC Funding Corp. (PMC
Funding), PMC Asset Holding, LLC (Asset Holding), PMC Conduit, L.P. (PMC Conduit), PMC
Properties, Inc. (PMC Properties) and separate subsidiaries created in conjunction with the
purchase of certain hotel properties in 1999.
First Western is licensed as a small business lending company that originates loans through the SBA
7(a) Guaranteed Loan Program. PMCIC and Western Financial are licensed small business investment
companies under the Small Business Investment Act of 1958, as amended (SBIA). PMCT Trust was
formed in conjunction with the 1998 structured loan financing transaction. PMC Funding, Asset
Holding and PMC Conduit hold assets on our behalf. PMC Properties is the operator, through third
party management companies, of our limited service hospitality properties.
In addition, we own subordinate financial interests in several non-consolidated special purpose
entities (i.e., retained interests in transferred assets (Retained Interests)). These are PMC
Capital, L.P. 1998-1 (the 1998 Partnership), PMC Capital, L.P. 1999-1 (the 1999 Partnership),
PMC Joint Venture, L.P. 2000 (the 2000 Joint Venture), PMC Joint Venture, L.P. 2001 (the 2001
Joint Venture), PMC Joint Venture, L.P. 2002-1 (the 2002 Joint Venture) and PMC Joint Venture,
L.P. 2003 (the 2003 Joint Venture, and together with the 2000 Joint Venture, the 2001 Joint
Venture and the 2002 Joint Venture, the Joint Ventures, and the Joint Ventures together with the
1998 Partnership and the 1999 Partnership, the QSPEs) created in connection with structured loan
sale transactions.
We account for our Retained Interests in accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS No. 140) and Emerging Issues Task Force Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. While we are the servicer of the assets held by these QSPEs, we are
required under the transaction documents to comply with strict servicing standards and are subject
to the approval of the trustees and/or noteholders regarding any significant issues associated with
the assets. As a result, we believe we have relinquished control of the assets sold to our QSPEs.
Accordingly, the assets, liabilities, partners capital and results of operations of the QSPEs are
not included in our consolidated financial statements.
Loans Receivable, net
We primarily originate loans to small businesses collateralized by first liens on the real estate
of the related business. Loans receivable are carried at their unamortized principal balance less
net loan origination fees, discounts and loan loss reserves. For loans originated under the Small
Business Administrations (SBA) 7(a) Guaranteed Loan Program, when we sell the SBA guaranteed
portion of the loans, a portion of the sale proceeds representing the difference in the face amount
of the unguaranteed portion of the loans and the value of the loans (the Retained Loan Discount)
is determined on a relative fair value basis and is recorded as a reduction in basis of the
retained
portion of the loan rather than premium income. For purchased loans, we may have discounts
representing the difference between the unamortized principal balance of the loan and its estimated
fair value at the date of purchase.
A loan loss reserve is established based on a determination, through an evaluation of the
recoverability of individual loans receivable, that significant doubt exists as to the ultimate
realization of the loan receivable.
The determination of
F-9
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
whether significant doubt exists and
whether a loan loss reserve is necessary for each loan receivable requires judgment and considers
the facts and circumstances existing at the evaluation date. Our evaluation of the adequacy of the
reserve is based on a review of our historical loss experience, known and inherent risks in the
loan portfolio, adverse circumstances that may affect the ability of the borrower to repay interest
and/or principal and, to the extent the payment of the loan appears impaired, the estimated fair
value of the collateral.
Retained Interests
Retained Interests represent the subordinate interest in QSPEs created in conjunction with
structured loan sale transactions. Retained Interests are carried at estimated fair value, with
realized gains and permanent impairments included in net income and unrealized gains and losses
recorded in beneficiaries equity. The estimated fair value of our Retained Interests is based on
estimates of the present value of future cash flows we expect to receive. Estimated future cash
flows are based in part upon an estimate of prepayment speeds and loan losses. Prepayment speeds
and loan losses are estimated based on the current and anticipated interest rate and competitive
environments, the performance of the loan pool and our historical experience with these and similar
loans receivable. The discount rates that we utilize are determined for each of the components of
the Retained Interests as estimates of market rates based on interest rate levels considering the
risks inherent in the transaction. There can be no assurance of the accuracy of these estimates.
Real Estate Investments, net
Real estate investments are initially recorded at cost. Depreciation is provided on the
straight-line method based upon estimated useful lives of 35 years for buildings and improvements
and seven years for furniture, fixtures and equipment. Upon retirement or sale, the cost and
related accumulated depreciation are removed from our books and any resulting gains or losses are
included in the consolidated statements of income. Routine maintenance and repairs are charged to
expense as incurred. Major replacements, renewals and improvements are capitalized.
We periodically review our real estate investments for impairment. If facts or circumstances
support the possibility of impairment, we will prepare a projection of the undiscounted future cash
flows without interest charges for the specific property. Impairment exists if the estimate of
future cash flows expected to result from the use and ultimate disposition of the specific property
is less than the carrying value. If impairment is indicated, an adjustment will be made to the
carrying value of the property based on the difference between the current estimated fair value and
the depreciated cost of the asset.
Real Estate Investments Held for Sale, net
We consider each individual hotel property to be an identifiable component of our business. In
accordance with SFAS No. 144, Accounting for the Impairment of or Disposal of Long-Lived Assets,
(SFAS No. 144), we do not consider properties as held for sale until it is probable that the
sale will be completed within one year. The determination of held for sale status is assessed
based on all available facts and circumstances, including managements intent and ability to
eliminate the cash flows of the property from our operations and managements intent and ability
not to have significant continuing involvement in the operations of the property.
We discontinue depreciation on properties if they are classified as held for sale. Upon
designation of a hotel property as held for sale, we compare the carrying value of the hotel
property to its estimated fair value, less costs to sell. We will reclassify the hotel property to
real estate investment held for sale in our consolidated balance sheet at the lesser of the
carrying value of the property or its estimated fair value, less costs to sell. Any adjustment to
the carrying value of a hotel property classified as held for sale is reflected in discontinued
operations in our consolidated statements of income. In addition, the operating results of those
properties classified as held for sale or that have been sold are included in discontinued
operations.
Cash and Cash Equivalents
We generally consider all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. At various times during the year we maintain cash, cash
equivalents and restricted investments in
accounts in excess of federally insured limits with various financial institutions. We regularly
monitor the financial institutions and do not believe a significant credit risk is associated with
the deposits in excess of federally insured amounts.
F-10
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Investments
Restricted investments represent primarily cash reserve accounts required to be held as collateral
pursuant to debt facilities and escrow and capital expenditure accounts related to our hotel
properties.
Rent and Related Receivables, net
We have claims pertaining to unpaid rent, property taxes, legal fees incurred, termination damages,
notes receivable and other charges. Quarterly, we perform an analysis of the anticipated future
proceeds related to these claims to determine the collectibility of our investment based on best
available information provided to us.
Mortgage-Backed Security of Affiliate
The mortgage-backed security represents our ownership interest in a special purpose entity and is
valued consistent with the techniques used to value our Retained Interests.
Deferred Borrowing Costs
Costs incurred in connection with the issuance of debt are being amortized to expense over the life
of the related obligation using a method that approximates the effective interest method. Deferred
borrowing costs are included in other assets in our consolidated balance sheets.
Borrower Advances
In general, as part of the monitoring process to verify that the borrowers cash equity is utilized
for its intended purpose, we receive deposits from our borrowers and release funds upon
presentation of appropriate documentation. Funds held on behalf of borrowers are included as a
liability on the consolidated balance sheets.
Deferred Gains on Property Sales
We evaluate our hotel property sales individually to determine if they qualify for full accrual
gain treatment. If the down payment received was not sufficient to qualify for full gain
treatment, we record initial installment gains and defer the remaining gains. The remaining 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 purchasers to qualify for full accrual gain
treatment. In addition, upon receipt of updated financial information from the purchaser, if the
requirements are met, the transaction would qualify for the full accrual method and the remaining
deferred gain would be recognized.
Net Unrealized Appreciation of Retained Interests
Net unrealized appreciation of Retained Interests represents the difference between the cost and
estimated fair value of our Retained Interests.
Revenue Recognition
Interest Income
Interest income includes interest earned on loans and our short-term investments and the
amortization of net loan origination fees and discounts. Interest income on loans is accrued as
earned with the accrual of interest generally suspended when the related loan becomes a non-accrual
loan. A loan receivable is generally classified as non-accrual (a Non-Accrual Loan) if (1) it is
past due as to payment of principal or interest for a period of more than 60 days, (2) any portion
of the loan is classified as doubtful or is charged-off or (3) if the repayment in full of the
principal and/or interest is in doubt. Generally, loans are charged-off when management determines
that we will be unable to collect any remaining amounts due under the loan agreement, either
through liquidation of collateral or other means. Interest income on a Non-Accrual Loan is
recognized on either the cash basis or the cost recovery basis.
When originating a loan receivable, we generally charge a commitment fee. These fees, net of
costs, are deferred and recognized as an adjustment of yield over the life of the related loan
receivable using a method which approximates the effective interest method.
For purchased loans, we may have discounts representing the difference between the unamortized
principal balance of the loan and its estimated fair value at the date of purchase. For performing
loans, these discounts are recognized as an adjustment of yield over the life of the related loan
receivable using a method which approximates the effective interest method.
F-11
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Retained Loan Discount is amortized to interest income over the life of the underlying loan
using the effective interest method unless the underlying loan receivable is prepaid or sold.
Income from Retained Interests
The income from our Retained Interests represents the accretion (recognized using the effective
interest method) on our Retained Interests which is determined based on estimates of future cash
flows and includes any fees collected (i.e., late fees, prepayment fees, etc.) by the QSPEs in
excess of anticipated fees. We update our cash flow assumptions on a quarterly basis and any
changes to cash flow assumptions impact the yield on our Retained Interests.
Lease Income
Lease income consists of base rent and when applicable, straight-line rental income. We record
lease income on a straight-line basis (when applicable) over the estimated lease term to the extent
collectibility is reasonably assured.
Hotel Property Revenues
The majority of our hotel property revenues are comprised of room revenue. This revenue is
recorded net of any sales or occupancy taxes collected from our guests. All revenues are recorded
on an accrual basis, as earned. Appropriate allowances are made for doubtful accounts and are
recorded as expense.
Other Income
Other income consists primarily of servicing income, premium income, prepayment fees and other loan
related income. Servicing income is recognized in income when earned. Prepayment fees are
recognized in income when loans are prepaid. Late fees and other loan related fees are recognized
in income when chargeable, assuming collectibility is reasonably assured. Premium income
represents the difference between the relative fair value attributable to the sale of the
guaranteed portion of a loan originated under the SBA 7(a) Guaranteed Loan Program and the
principal balance (cost) of the loan. The sale price includes the value attributable to any excess
servicing spread retained by us plus any cash received.
Income Taxes
We have elected to be taxed as a REIT under the provisions of the Internal Revenue Code of 1986, as
amended (the Code). To the extent we qualify for taxation as a REIT, we generally will not be
subject to a Federal corporate income tax on our taxable income that is distributed to our
shareholders. In order to remain qualified as a REIT under the Code, we must satisfy various
requirements in each taxable year, including, among others, limitations on share ownership, asset
diversification, sources of income, and the distribution of at least 90% of our taxable income
within the specified time in accordance with the Code.
PMC Commercial has wholly-owned taxable REIT subsidiaries which are subject to Federal income
taxes. The taxable REIT subsidiaries (TRSs) are PMCIC, First Western, PMC Properties and PMC
Funding. The income generated from the taxable REIT subsidiaries is taxed at normal corporate
rates. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
which uses the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Earnings per Share
Earnings per share is computed by dividing net income by the weighted-average number of shares
outstanding. Diluted earnings per share includes the dilutive effect, if any, of share-based
compensation awards.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Derivatives
As a result of certain of our variable-rate loans receivable having interest rate floors, we are
deemed to have derivative investments. However, in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS No. 133), we are not required to
bifurcate these investments; therefore, they are not accounted for as derivatives. We do not use
derivatives for speculative purposes.
F-12
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Plans
At December 31, 2006, we have options outstanding under share-based compensation plans described
more fully in Note 18. We use the fair value recognition provisions of SFAS No. 123R, Accounting
for Stock-Based Compensation, to account for all awards granted, modified or settled.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles
requires us 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 reporting period.
Actual results could differ from our estimates. Our most sensitive estimates involve the valuation
of our Retained Interests and determination of reserves on our receivables.
Recently Issued Accounting Pronouncements
The FASB issued SFAS No. 155 (SFAS No. 155), Accounting for Certain Hybrid Financial Instruments
an amendment of FASB Statements No. 133 and 140 in February 2006. SFAS No. 155 (1) permits fair
value remeasurement for hybrid financial instruments that contain an embedded derivative that would
otherwise require bifurcation, (2) clarifies which interest-only strip receivables are not subject
to the requirements of SFAS No. 133, (3) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding derivatives or hybrid
financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives and (5)
amends SFAS No. 140 to eliminate the prohibition on a QSPE from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial
instrument. The Statement is effective for all financial instruments acquired or issued after
fiscal years beginning after September 15, 2006. We do not expect the adoption of SFAS No. 155 to
have a material impact on our consolidated financial statements.
The FASB issued SFAS No. 156 (SFAS No. 156), Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140 in March 2006. SFAS No. 156 requires that all separately
recognized servicing assets and servicing liabilities be initially measured at fair value, if
practicable. Subsequent to initial measurement, an entity may choose to use the amortization method
or the fair value method for future measurements. SFAS No. 156 also requires additional
disclosures related to servicing assets and servicing liabilities. SFAS No. 156 is effective for
fiscal years beginning after September 15, 2006. We do not expect the adoption of SFAS No. 156 to
have a material impact on our consolidated financial statements.
The FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109, in July 2006. FIN 48 clarifies the accounting and
disclosure for uncertainty in income tax positions, as defined, imposes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken in a tax return and provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48
on our consolidated financial statements; however, we do not expect the adoption to have a material
impact on our consolidated financial statements.
The FASB issued SFAS No. 157 (SFAS No. 157), Fair Value Measurements in September 2006. SFAS
No. 157 clarifies the principle that fair value should be based on the assumptions market
participants would use when pricing an asset or liability, establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years. We are currently
evaluating the impact of SFAS No. 157 on our consolidated financial statements; however, we do not
expect the adoption to have a material impact on our consolidated financial statements.
Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements, was issued by the Securities
and Exchange Commission (SEC) during September 2006. SAB 108 expresses SEC staff views regarding
the process by which misstatements in financial statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal
years ending after November 15, 2006, and early application is encouraged. The adoption of SAB 108
did not have a material impact on our consolidated financial statements.
F-13
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation. These
reclassifications had no effect on previously reported net income or total beneficiaries equity.
Note 2. Variable Interest Entities:
A VIE is an entity for which control is achieved through means other than voting rights. An entity
should consolidate a VIE if that entity will absorb a majority of the VIEs expected losses,
receive a majority of the VIEs expected residual returns, or both. The following entities have
been determined to be VIEs.
PMC Conduit
During 2005, we entered into a $100.0 million conduit warehouse facility (the Conduit Facility).
The Conduit Facility operates as a revolving line of credit, collateralized by loans originated by
us, which have been or will be sold to PMC Conduit. The transfers of loans to PMC Conduit did not
meet the requirements of SFAS No. 140 for sale treatment. PMC Commercial has not guaranteed the
repayment of the obligations of the Conduit Facility.
Since PMC Commercial is the primary beneficiary of PMC Conduit it is consolidated in the financial
statements of PMC Commercial.
Preferred Trust
During 2005, PMC Commercial issued notes payable (the Junior Subordinated Notes) of approximately
$27.1 million due March 30, 2035 to a special purpose subsidiary, PMC Preferred Capital Trust-A, a
Delaware statutory trust (the Preferred Trust). The Junior Subordinated Notes, included in our
consolidated balance sheets, are subordinated to PMC Commercials existing debt.
Since PMC Commercial is not considered to be the primary beneficiary of the Preferred Trust, it is
not consolidated in PMC Commercials financial statements. The equity method is used to account
for our investment in the Preferred Trust.
PMCT Plainfield, L.P.
On September 29, 2006, we leased a hotel property owned by a separate subsidiary (PMCT Plainfield,
L.P.) which was previously consolidated. The hotel property is the primary asset of the
subsidiary. The lessee has the option, and is expected to exercise this option, to purchase the
property for $1,825,000 at termination of the lease in January 2011 or earlier if certain events
occur. Our subsidiary received a substantial non-refundable up-front payment of $452,000. Based on
this lease agreement including the fixed price purchase option, the subsidiary was determined to be
a variable interest entity.
Since we do not expect to absorb the majority of the entitys future expected losses or receive the
entitys expected residual returns, PMC Commercial is not considered to be the primary beneficiary.
Thus, the subsidiary is no longer consolidated in PMC Commercials financial statements and the
equity method is used to account for our investment in the subsidiary effective September 29, 2006.
The following table summarizes the assets and liabilities of PMCT Plainfield, L.P.:
|
|
|
|
|
|
|
September 29, |
|
|
|
2006 |
|
|
|
(In thousands) |
|
Real estate investment, net |
|
$ |
1,709 |
|
Other assets |
|
|
105 |
|
|
|
|
|
Total assets |
|
$ |
1,814 |
|
|
|
|
|
|
|
|
|
|
Mortgage payable |
|
$ |
1,315 |
|
Other liabilities |
|
|
499 |
|
|
|
|
|
Total liabilities |
|
$ |
1,814 |
|
|
|
|
|
F-14
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Merger:
PMC Capital, Inc. (PMC Capital), a regulated investment company related to us through common
management, merged with and into PMC Commercial on February 29, 2004. Each issued and outstanding
share of PMC Capital, Inc. common stock was converted into 0.37 of a common share of PMC
Commercial. As a result, we issued 4,385,800 common shares of beneficial interest on February 29,
2004 valued at $13.10 per share, which was the average closing price of our common shares for the
three days preceding the date of the announcement, adjusted by declared but unpaid dividends.
The merger was accounted for using the purchase method of accounting in accordance with SFAS No.
141, Business Combinations as we were not deemed to be under common control. Accordingly, our
consolidated results of operations have incorporated PMC Capitals activities on a consolidated
basis from the merger date. The cost of the merger was allocated to the assets acquired,
liabilities assumed and preferred stock of subsidiary based on managements estimates of their
respective fair values at the date of merger. The fair value of the net assets acquired exceeded
the cost of the merger, resulting in negative goodwill. The amount of negative goodwill was
allocated proportionately to reduce the assigned values of the acquired assets excluding current
assets, financial assets and assets held for sale. Substantially all of the assets acquired were
considered to be financial assets or assets to be disposed of by sale. Accordingly, we recorded
negative goodwill of $11,593,000 during 2004 representing the excess of the fair value of net
assets acquired over the cost of the merger.
The cost of the merger was as follows (dollars in thousands):
|
|
|
|
|
Fair value of 4,385,800 common shares of beneficial interest |
|
$ |
57,454 |
|
Transaction costs |
|
|
1,034 |
|
|
|
|
|
Total |
|
$ |
58,488 |
|
|
|
|
|
The following table summarizes the estimated fair values of assets acquired, liabilities assumed
and preferred stock of subsidiary as of February 29, 2004 (in thousands):
|
|
|
|
|
Loans receivable |
|
$ |
55,144 |
|
Retained Interests |
|
|
43,597 |
|
Cash and cash equivalents |
|
|
31,488 |
|
Assets acquired in liquidation |
|
|
1,829 |
|
Mortgage-backed security of affiliate |
|
|
1,164 |
|
Deferred tax asset, net |
|
|
278 |
|
Other assets |
|
|
599 |
|
|
|
|
|
Total fair value of assets acquired |
|
|
134,099 |
|
|
|
|
|
|
|
|
|
|
Notes and debentures payable |
|
|
54,487 |
|
Redeemable preferred stock of subsidiary |
|
|
3,420 |
|
Accounts payable and accrued expenses |
|
|
2,751 |
|
Borrower advances |
|
|
2,075 |
|
Other liabilities |
|
|
385 |
|
Cumulative preferred stock of subsidiary |
|
|
900 |
|
|
|
|
|
Total liabilities assumed and preferred stock of subsidiary |
|
|
64,018 |
|
|
|
|
|
|
Fair value of net assets acquired |
|
$ |
70,081 |
|
|
|
|
|
F-15
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma results of operations are based on our financial statements and
the financial statements of PMC Capital and assumed the merger occurred on January 1:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
|
(In thousands, except |
|
|
|
per share data) |
|
Total revenues |
|
$ |
23,062 |
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations |
|
$ |
10,125 |
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
$ |
13,390 |
|
|
|
|
|
|
|
|
|
|
Extraordinary item negative goodwill |
|
$ |
11,593 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,983 |
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
$ |
2.30 |
|
|
|
|
|
These unaudited pro forma results have been prepared for comparative purposes only. In the
opinion of management, all material adjustments necessary to reflect the effects of the merger
transaction have been made. This unaudited pro forma information is not necessarily indicative of
what the actual results of operations would have been had the merger transaction occurred on the
indicated date, nor does it purport to represent our results of operations for future periods.
Note 4. Loans Receivable, net:
Loans receivable, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
SBIC commercial mortgage
loans |
|
$ |
36,243 |
|
|
$ |
41,749 |
|
SBA 7(a) Guaranteed Loan Program loans |
|
|
14,749 |
|
|
|
16,367 |
|
Conduit Facility loans (1) |
|
|
43,612 |
|
|
|
35,331 |
|
Other commercial mortgage
loans |
|
|
75,089 |
|
|
|
65,121 |
|
|
|
|
|
|
|
|
Total loans receivable |
|
|
169,693 |
|
|
|
158,568 |
|
Less: |
|
|
|
|
|
|
|
|
Deferred commitment fees, net |
|
|
(449 |
) |
|
|
(567 |
) |
Loan loss reserves |
|
|
(63 |
) |
|
|
(427 |
) |
|
|
|
|
|
|
|
Loans receivable, net |
|
$ |
169,181 |
|
|
$ |
157,574 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These loans serve as collateral for our Conduit Facility. |
F-16
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional information on our loans receivable, net, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Loans Receivable, net |
|
|
Interest |
|
|
Loans Receivable, net |
|
|
Interest |
|
|
|
Amount |
|
|
% |
|
|
Rate |
|
|
Amount |
|
|
% |
|
|
Rate |
|
|
|
(Dollars in thousands) |
|
Variable-rate LIBOR |
|
$ |
127,931 |
|
|
|
75.6 |
% |
|
|
9.4 |
% |
|
$ |
120,645 |
|
|
|
76.6 |
% |
|
|
8.3 |
% |
Fixed-rate |
|
|
23,419 |
|
|
|
13.9 |
% |
|
|
8.8 |
% |
|
|
18,651 |
|
|
|
11.8 |
% |
|
|
9.4 |
% |
Variable-rate prime |
|
|
17,831 |
|
|
|
10.5 |
% |
|
|
10.2 |
% |
|
|
18,278 |
|
|
|
11.6 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
169,181 |
|
|
|
100.0 |
% |
|
|
9.4 |
% |
|
$ |
157,574 |
|
|
|
100.0 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loans receivable were approximately 94% concentrated in the hospitality industry at December
31, 2006. Any economic factors that negatively impact the hospitality industry could have a
material adverse effect on our financial condition or results of operations. At December 31, 2006,
approximately 22% and 10% of our loans receivable consisted of loans receivable to borrowers in
Texas and Ohio, respectively. No other state had a concentration of 10% or greater at December 31,
2006.
The activity in our loan loss reserves was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Balance, beginning of
year |
|
$ |
427 |
|
|
$ |
164 |
|
|
$ |
675 |
|
Provision for loan losses |
|
|
174 |
|
|
|
325 |
|
|
|
422 |
|
Reduction of loan losses |
|
|
(71 |
) |
|
|
(18 |
) |
|
|
(675 |
) |
Recovery of loans written-off |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
Principal balances
written-off |
|
|
(467 |
) |
|
|
(35 |
) |
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
$ |
63 |
|
|
$ |
427 |
|
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
F-17
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 based on the original
contractual terms of the loan. Information on loans considered to be impaired loans was as
follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Impaired loans requiring reserves |
|
$ |
82 |
|
|
$ |
1,073 |
|
Impaired loans expected to be fully recoverable (1) |
|
|
1,837 |
|
|
|
5,056 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
1,919 |
|
|
$ |
6,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
(In thousands) |
|
|
Average impaired
loans |
|
$ |
1,235 |
|
|
$ |
4,566 |
|
|
$ |
5,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on
impaired loans
(2) |
|
$ |
72 |
|
|
$ |
219 |
|
|
$ |
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans acquired were recorded at their estimated fair value and as such are
reflected at discounted amounts. Certain of these loans have no reserves and are thus
shown in impaired loans expected to be fully recoverable with respect to our recorded
investment in the loan; however, we do not expect to collect all amounts due based on
the original contractual terms of the note. |
|
(2) |
|
Recorded primarily on the cash basis. |
Our impaired loans have decreased from 2005 to 2006 due primarily to the foreclosure of the
underlying collateral of three limited service hospitality properties.
Our recorded investment in Non-Accrual Loans at December 31, 2006 and 2005 was approximately $2.1
million and $5.9 million, respectively. We did not have any loans receivable past due 90 days or
more which were accruing interest at December 31, 2006 or 2005.
F-18
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Real Estate Investments and Rent and Related Receivables, net:
Our real estate investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Real |
|
|
|
|
|
|
|
|
|
|
|
Estate |
|
|
|
Real |
|
|
Real |
|
|
Investments |
|
|
|
Estate |
|
|
Estate |
|
|
Held for |
|
|
|
Investments |
|
|
Investments |
|
|
Sale |
|
|
|
(Dollars in thousands) |
|
Land |
|
$ |
494 |
|
|
$ |
1,044 |
|
|
$ |
2,041 |
|
Buildings and improvements |
|
|
4,468 |
|
|
|
7,484 |
|
|
|
15,110 |
|
Furniture, fixtures and equipment |
|
|
292 |
|
|
|
271 |
|
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,254 |
|
|
|
8,799 |
|
|
|
18,879 |
|
Accumulated depreciation |
|
|
(840 |
) |
|
|
(719 |
) |
|
|
(3,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,414 |
|
|
$ |
8,080 |
|
|
$ |
15,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hotel properties |
|
|
2 |
|
|
|
4 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, two of the three hotel properties that we own are included in our
consolidated financial statements. The properties were originally part of a sale and leaseback
transaction commencing in 1998 with Arlington Hospitality, Inc. (AHI) whereby we purchased 30
properties from AHI and then leased the properties to a wholly-owned subsidiary of AHI, Arlington
Inns, Inc. (AII and together with AHI, Arlington). We concurrently entered into a Master Lease
Agreement with AHI and AII covering all the properties and entered into a guaranty agreement with
AHI whereby AHI guaranteed all obligations of AII under the individual property lease agreements.
During June 2005, AII filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (Bankruptcy). On August 31, 2005, AHI filed for Bankruptcy (the Arlington
Bankruptcy). The January through April 2005 lease payments due from AII were paid while the May
and June 2005 lease payments due from AII were not paid. AII made rent payments from July 2005 to
January 2006 which were recorded as income when earned.
On January 13, 2006, we received rejection notices on 12 individual property leases and as a
result, we took possession and operated 13 hotel properties through third party management
companies. During 2006, we sold ten hotel properties for approximately $20.6 million and
recognized net gains of approximately $1.9 million and deferred gains of approximately $1.2
million. We financed the sale of these properties through origination of loans aggregating
approximately $17.1 million with interest rates of LIBOR plus spreads ranging from 3.75% to 4.80%
and maturity and amortization periods of 20 years.
At December 31, 2006, our remaining hotel properties had mortgages (which were assumed in the
original purchase from AHI) with significant prepayment penalties. Therefore, we do not anticipate
selling these properties until the properties market values increase or the prepayment penalties
decrease. Until the properties are sold, we will either operate the properties through third party
management companies or lease the properties.
On September 29, 2006, we leased a hotel property owned by a separate subsidiary which was
previously consolidated. The lessee has the option, and is expected to exercise this option, to
purchase the property for $1,825,000 at termination of the lease in January 2011 or earlier if
certain events occur. Our subsidiary received a substantial non-refundable up-front payment of
$452,000. As a VIE, the subsidiary which owns the hotel property is no longer consolidated in PMC
Commercials financial statements effective September 29, 2006. The operations relating to this
property were included in continuing operations in our consolidated statement of income through
September 29, 2006.
F-19
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We generated hotel property revenues of approximately $2.1 million consisting primarily of room
revenues and $1.6 million in hotel property expenses consisting primarily of operating and general
and administrative expenses related to our hotel properties included in continuing operations
during 2006.
At December 31, 2006, our rent and related receivables consisted of unpaid rent, property taxes,
legal fees incurred, termination damages, notes receivable and other charges (the Arlington
Claims) of approximately $2,747,000 before reserves. As a result of the uncertainty and timing of
collection, our claim in the Arlington Bankruptcy is well in excess of our recorded investment in
the Arlington Claims.
We performed an analysis of our anticipated future proceeds related to the Arlington Bankruptcy to
determine the collectibility of our investment in the rent and related receivables based on best
available information provided to us through the bankruptcy proceedings. As a result, we
established an allowance of approximately $1,255,000 during 2005. We recorded additional
allowances of $925,000 during 2006 primarily resulting from reductions in available cash due to
unanticipated and unforecasted cash expenditures by Arlington. Accordingly, our net recorded
investment was $567,000 as of December 31, 2006. To the extent there is a reduction of the
anticipated future proceeds, we would record an additional allowance against these receivables.
Note 6. Retained Interests:
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 (the Structured
Notes) to unaffiliated parties (Structured Noteholders). The QSPE then distributed a portion of
the proceeds from the Structured Notes to us. The Structured Notes are collateralized solely by
the assets of the QSPE which means that should the financial assets in the QSPE be insufficient for
the trustee to make payments on the Structured Notes, the Structured Noteholders have no recourse
against us. Upon the completion of our structured loan sale transactions, we recorded the transfer
of loans receivable as a sale in accordance with SFAS No. 140. As a result, the loans receivable
contributed to the QSPE, the Structured Notes issued by the QSPE, and the operating results of the
QSPE are not included in our consolidated financial statements. The difference between (1) the
carrying value of the loans receivable sold and (2) the sum of (a) the cash received and (b) the
relative fair value of our Retained Interests, constituted the gain or loss on sale. Retained
Interests are carried at estimated fair value, with realized gains and permanent impairments
recorded in net income and unrealized gains and losses recorded in beneficiaries equity.
We completed joint structured loan sale transactions with PMC Capital. Our interests related to
the loans receivable we contributed to these structured loan sale transactions are the Originated
Structured Loan Sale Transactions. During 2004, we acquired PMC Capitals Retained Interests in
the Joint Ventures and 100% of the 1998 Partnership and the 1999 Partnership (collectively, the
Acquired Structured Loan Sale Transactions).
F-20
PMC COMMERCIAL TRUST A ND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information pertaining to the Originated Structured Loan Sale Transactions was as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
|
Joint |
|
|
Joint |
|
|
Joint |
|
|
Joint |
|
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Transaction date |
|
|
12/18/00 |
|
|
|
6/27/01 |
|
|
|
4/12/02 |
|
|
|
10/7/03 |
|
At inception: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of sold loans |
|
$ |
55,675 |
|
|
$ |
32,662 |
|
|
$ |
27,286 |
|
|
$ |
45,456 |
|
Structured Notes issued |
|
$ |
49,550 |
|
|
$ |
30,063 |
|
|
$ |
24,557 |
|
|
$ |
40,910 |
|
Interest rate on the Structured Notes (1) |
|
|
7.28% |
|
|
|
6.36% |
|
|
|
6.67% |
|
|
|
L+1.25% |
|
Structured Notes rating (2) |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
Weighted average interest rate on loans (1) |
|
|
9.63% |
|
|
|
9.62% |
|
|
|
9.23% |
|
|
|
L+4.02% |
|
Weighted average remaining life of
Retained Interests (3) |
|
5.16 years |
|
|
5.15 years |
|
|
5.38 years |
|
|
4.79 years |
|
Aggregate principal losses assumed (4) |
|
|
2.37% |
|
|
|
2.80% |
|
|
|
2.88% |
|
|
|
3.03% |
|
Constant prepayment rate assumption |
|
|
8.0% |
|
|
|
9.0% |
|
|
|
9.0% |
|
|
|
10.0% |
|
Discount rate assumptions |
|
9.3% to 14.0% |
|
|
8.5% to 13.3% |
|
|
8.2% to 12.9% |
|
|
7.8% to 11.6% |
|
Value of Retained Interests |
|
$ |
11,174 |
|
|
$ |
5,871 |
|
|
$ |
5,293 |
|
|
$ |
8,698 |
|
At December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding on sold loans |
|
$ |
29,018 |
|
|
$ |
9,161 |
|
|
$ |
15,510 |
|
|
$ |
25,480 |
|
Structured Notes balance
outstanding |
|
$ |
23,597 |
|
|
$ |
6,562 |
|
|
$ |
12,740 |
|
|
$ |
22,182 |
|
Cash in the collection account |
|
$ |
303 |
|
|
$ |
59 |
|
|
$ |
112 |
|
|
$ |
1,544 |
|
Cash in the reserve account |
|
$ |
1,710 |
|
|
$ |
622 |
|
|
$ |
932 |
|
|
$ |
1,611 |
|
Weighted average interest rate on loans (1) |
|
|
9.54% |
|
|
|
9.70% |
|
|
|
9.55% |
|
|
|
L+4.02% |
|
Constant prepayment rate assumption (5) |
|
|
18.00% |
|
|
|
18.00% |
|
|
|
18.00% |
|
|
|
16.00% |
|
Discount rate assumptions (6) |
|
7.7% to 12.4% |
|
|
7.9% to 12.6% |
|
|
7.7% to 12.4% |
|
|
8.2% to 12.5% |
|
Weighted average remaining life of
Retained Interests (3) |
|
2.36 years |
|
|
1.25 years |
|
|
2.10 years |
|
|
2.53 years |
|
Aggregate principal losses assumed (4) |
|
|
1.45% |
|
|
|
% |
|
|
|
1.42 |
% |
|
|
1.36% |
|
Aggregate principal losses to date (7) |
|
|
0.33% |
|
|
|
0.56% |
|
|
|
% |
|
|
|
% |
|
|
|
|
(1) |
|
Variable interest rates are denoted by the spread over the 90-day LIBOR (L). |
|
(2) |
|
Structured Notes issued by the QSPEs were rated by Moodys Investors Service, Inc. |
|
(3) |
|
The weighted average remaining life of Retained Interests was calculated by summing the
product of (i) the sum of the principal collections expected in each future period multiplied
by (ii) the number of periods until collection, and then dividing that total by (iii) the
initial or remaining principal balance, as applicable. |
|
(4) |
|
Represents aggregate estimated future losses as a percentage of the principal outstanding
based upon per annum losses ranging from 0.0% to 1.0%. To the extent any loans are likely to
be liquidated in the next twelve months, estimated losses were assumed to occur during that
period. Generally, no losses are assumed for the year ending December 31, 2007 for those
structured loan sale transactions with no current potential impaired loans. |
|
(5) |
|
The prepayment rate was based on the actual performance of the loan pools, adjusted for
anticipated principal prepayments considering similar loans. |
|
(6) |
|
Discount rates utilized were (i) 7.7% to 8.2% for our required overcollateralization, (ii)
9.4% to 9.6% for our reserve funds and (iii) 12.4% to 12.6% for our interest-only strip
receivables. |
|
(7) |
|
Represents aggregate principal losses incurred to date as a percentage of the principal
outstanding at inception. For the 2000 Joint Venture, represents the loss on a loan
receivable repurchased by PMC Commercial due to a loan modification and assumption. For the
2001 Joint Venture, represents the loss on a delinquent loan receivable with a charged-off
status repurchased by PMC Commercial. |
F-21
PMC COMMERCIAL TRUST A ND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information
pertaining to the Acquired Structured Loan Sale Transactions was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
|
1998 |
|
|
1999 |
|
|
Joint |
|
|
Joint |
|
|
Joint |
|
|
Joint |
|
|
|
Partnership |
|
|
Partnership |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
Venture |
|
|
|
(Dollars in thousands) |
|
At February 29, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of sold loans |
|
$ |
21,702 |
|
|
$ |
29,800 |
|
|
$ |
17,345 |
|
|
$ |
37,191 |
|
|
$ |
36,102 |
|
|
$ |
56,424 |
|
Structured Notes balance outstanding |
|
$ |
21,221 |
|
|
$ |
26,394 |
|
|
$ |
15,636 |
|
|
$ |
33,324 |
|
|
$ |
32,932 |
|
|
$ |
50,774 |
|
Interest rate on the Structured Notes (1) |
|
|
P- 1% |
|
|
|
6.60% |
|
|
|
7.28% |
|
|
|
6.36% |
|
|
|
6.67% |
|
|
|
L+1.25% |
|
Structured Notes rating (2) |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
|
Aaa |
Weighted average interest rate on loans
(1) |
|
|
P+1.22% |
|
|
|
9.40% |
|
|
|
9.20% |
|
|
|
9.64% |
|
|
|
9.58% |
|
|
|
L+4.02% |
|
Weighted average remaining life of
Retained Interests (3) |
|
3.17 years |
|
|
2.95 years |
|
|
2.96 years |
|
|
3.89 years |
|
|
4.04 years |
|
|
4.63 years |
|
Aggregate principal losses assumed (4) |
|
|
3.38% |
|
|
|
2.32% |
|
|
|
4.19% |
|
|
|
5.51% |
|
|
|
3.51% |
|
|
|
3.10% |
|
Constant prepayment rate assumption (5) |
|
|
12.00% |
|
|
|
14.00% |
|
|
|
14.00% |
|
|
|
11.00% |
|
|
|
10.00% |
|
|
|
10.00% |
|
Discount rate assumptions |
|
4.0% to 11.9% |
|
|
7.1% to 11.8% |
|
|
7.2% to 11.9% |
|
|
7.2% to 11.9% |
|
|
7.3% to 12.0% |
|
|
7.3% to 11.8% |
At December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding on sold loans |
|
$ |
11,795 |
|
|
$ |
15,060 |
|
|
$ |
8,561 |
|
|
$ |
17,931 |
|
|
$ |
17,133 |
|
|
$ |
38,631 |
|
Structured Notes balance outstanding |
|
$ |
11,757 |
|
|
$ |
11,579 |
|
|
$ |
5,860 |
|
|
$ |
15,875 |
|
|
$ |
12,877 |
|
|
$ |
32,954 |
|
Cash in the collection account |
|
$ |
806 |
|
|
$ |
245 |
|
|
$ |
79 |
|
|
$ |
1,296 |
|
|
$ |
211 |
|
|
$ |
417 |
|
Cash in the reserve account |
|
$ |
1,335 |
|
|
$ |
1,215 |
|
|
$ |
563 |
|
|
$ |
1,123 |
|
|
$ |
1,037 |
|
|
$ |
2,334 |
|
Weighted average interest rate of loans (1) |
|
|
P+0.96% |
|
|
|
9.07% |
|
|
|
9.00% |
|
|
|
9.67% |
|
|
|
9.52% |
|
|
|
L+4.02% |
|
Discount rate assumptions (6) |
|
9.3% to 12.4% |
|
|
7.7% to 12.4% |
|
|
7.7% to 12.4% |
|
|
7.7% to 12.4% |
|
|
7.7% to 12.4% |
|
|
8.2% to 12.4% |
|
Constant prepayment rate assumption (5) |
|
|
16.00% |
|
|
|
18.00% |
|
|
|
18.00% |
|
|
|
18.00% |
|
|
|
18.00% |
|
|
|
16.00% |
|
Weighted average remaining life of
Retained Interests (3) |
|
2.52 years |
|
|
2.10 years |
|
|
2.28 years |
|
|
1.70 years |
|
|
2.34 years |
|
|
2.88 years |
|
Aggregate principal losses assumed (4) |
|
|
1.71% |
|
|
|
1.82% |
|
|
|
1.39% |
|
|
|
1.20% |
|
|
|
1.79% |
|
|
|
1.48% |
|
Aggregate principal losses to date (7) |
|
|
% |
|
|
|
% |
|
|
|
4.28% |
|
|
|
1.78% |
|
|
|
1.31% |
|
|
|
% |
|
|
|
|
(1) |
|
Variable interest rates are denoted by the spread over (under) the prime rate (P)
or the 90-day LIBOR (L). |
|
(2) |
|
Structured Notes issued by the QSPEs were rated by Moodys Investors Service, Inc. |
|
(3) |
|
The weighted average remaining life of Retained Interests was calculated by summing the
product of (i) the sum of the principal collections expected in each future period multiplied
by (ii) the number of periods until collection, and then dividing that total by (iii) the
remaining principal balance. |
|
(4) |
|
Represents aggregate estimated future losses as a percentage of the principal outstanding
based upon per annum estimated losses that ranged from 0.0% to 1.5%. To the extent any loans
are likely to be liquidated in the next twelve months, estimated losses were assumed to occur
during that period. Generally, no losses are assumed in the year ending December 31, 2007 for
those structured loan sale transactions with no current potential impaired loans. |
|
(5) |
|
The prepayment rate was based on the actual performance of the loan pools, adjusted for
anticipated principal prepayments considering other similar loans. |
|
(6) |
|
The discount rates utilized on the components of our Retained Interests (as described
below) were (i) 7.7% to
9.3% for our required overcollateralization, (ii) 9.4% for our reserve funds and (iii)
12.4% for our interest-only
strip receivables. |
|
(7) |
|
Represents aggregate principal losses incurred to date as a percentage of the principal
outstanding at inception. For the 2000 Joint Venture, represents historical losses incurred
prior to our acquisition. For the 2001 Joint Venture and the 2002 Joint Venture, represents
losses on delinquent loans receivable with a charged-off status repurchased by PMC
Commercial. |
Approximately 94% of the loans sold to the QSPEs were concentrated in the limited service
hospitality industry and approximately 24% were to borrowers in Texas. No other state had a
concentration of 10% or greater at December 31, 2006.
F-22
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2006, one of the loans sold to the QSPEs with a principal balance of
approximately $3.5 million, included in our Originated Structured Loan Sale Transactions, was
delinquent 60 days as to payment of principal and interest. If we had to liquidate this loan, the
loss could exceed estimates and the estimated fair value of our Retained Interests would decline.
First Western has Retained Interests related to the sale of loans originated pursuant to the SBA
7(a) Guaranteed Loan Program. The SBA guaranteed portions of First Westerns loans receivable are
sold to either dealers in government guaranteed loans receivable or institutional investors
(Secondary Market Loan Sales) as the loans are fully funded. On all 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 note and servicing costs (Excess
Spread). At December 31, 2006, the aggregate principal balance of First Westerns serviced loans
receivable on which we had an Excess Spread was approximately $39.2 million and the weighted
average Excess Spread was approximately 0.6%. In determining the estimated fair value of our
Retained Interests related to Secondary Market Loan Sales, our assumptions at December 31, 2006
included a prepayment speed of 20% per annum and a discount rate of 12.4%.
The estimated fair value of our Retained Interests is based upon an estimate of the discounted
future cash flows we will receive. In determining the present value of expected future cash flows,
estimates are made in determining the amount and timing of those cash flows and the discount rates.
The amount and timing of cash flows is generally determined based on estimates of loan losses and
anticipated prepayment speeds relating to the loans receivable contributed to the QSPE. Actual
loan losses and prepayments may vary significantly from assumptions. The discount rates that we
utilize in computing the estimated fair value are based upon estimates of the inherent risks
associated with each cash flow stream. Due to the limited number of entities that conduct
transactions with similar assets, the relatively small size of our Retained Interests and the
limited number of buyers for such assets, no readily ascertainable market exists. Therefore, our
estimate of the fair value may or may not vary from what a willing buyer would pay for these
assets.
The components of our Retained Interests are as follows:
|
(1) |
|
Our required overcollateralization (the OC Piece). The OC Piece represents
the excess of the loans receivable contributed to the QSPE over the principal amount of
the Structured Notes issued by the QSPE, which serves as additional collateral for the
Structured Noteholders. |
|
|
(2) |
|
The Reserve Fund and the interest earned thereon. The Reserve Fund
represents cash that is required to be kept in a liquid cash account by the QSPE
pursuant to the terms of the transaction documents, as collateral for the Structured
Noteholders, a portion of which was contributed by us to the QSPE upon formation and a
portion which is built up over time by the QSPE from the cash flows of the underlying
loans receivable. |
|
|
(3) |
|
The interest-only strip receivable (the IO Receivable). The IO Receivable is
comprised of the cash flows that are expected to be received by us in the future after
payment by the QSPE of (a) all interest and principal due to the Structured
Noteholders, (b) all principal and interest on the OC Piece, (c) any required funding
of the Reserve Fund and (d) on-going costs of the transaction. |
F-23
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our Retained Interests consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
|
Estimated Fair Value |
|
|
|
|
|
|
OC Piece |
|
|
Reserve Fund |
|
|
IO Receivable |
|
|
Total |
|
|
Cost |
|
|
|
(In thousands) |
|
|
First Western |
|
$ |
|
|
|
$ |
|
|
|
$ |
652 |
|
|
$ |
652 |
|
|
$ |
641 |
|
1998 Partnership |
|
|
699 |
|
|
|
1,094 |
|
|
|
321 |
|
|
|
2,114 |
|
|
|
2,013 |
|
1999 Partnership |
|
|
3,795 |
|
|
|
973 |
|
|
|
311 |
|
|
|
5,079 |
|
|
|
4,932 |
|
2000 Joint Venture |
|
|
8,763 |
|
|
|
2,058 |
|
|
|
728 |
|
|
|
11,549 |
|
|
|
10,295 |
|
2001 Joint Venture |
|
|
6,844 |
|
|
|
1,627 |
|
|
|
768 |
|
|
|
9,239 |
|
|
|
8,788 |
|
2002 Joint Venture |
|
|
7,649 |
|
|
|
1,700 |
|
|
|
1,066 |
|
|
|
10,415 |
|
|
|
9,751 |
|
2003 Joint Venture |
|
|
10,817 |
|
|
|
3,316 |
|
|
|
2,543 |
|
|
|
16,676 |
|
|
|
16,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,567 |
|
|
$ |
10,768 |
|
|
$ |
6,389 |
|
|
$ |
55,724 |
|
|
$ |
52,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
|
Estimated Fair Value |
|
|
|
|
|
|
OC Piece |
|
|
Reserve Fund |
|
|
IO Receivable |
|
|
Total |
|
|
Cost |
|
|
|
(In thousands) |
|
|
First Western |
|
$ |
|
|
|
$ |
|
|
|
$ |
779 |
|
|
$ |
779 |
|
|
$ |
741 |
|
1998 Partnership |
|
|
915 |
|
|
|
1,048 |
|
|
|
412 |
|
|
|
2,375 |
|
|
|
2,306 |
|
1999 Partnership |
|
|
3,885 |
|
|
|
955 |
|
|
|
499 |
|
|
|
5,339 |
|
|
|
5,240 |
|
2000 Joint Venture |
|
|
8,953 |
|
|
|
2,231 |
|
|
|
892 |
|
|
|
12,076 |
|
|
|
10,809 |
|
2001 Joint Venture |
|
|
7,227 |
|
|
|
2,619 |
|
|
|
2,440 |
|
|
|
12,286 |
|
|
|
11,023 |
|
2002 Joint Venture |
|
|
7,890 |
|
|
|
2,147 |
|
|
|
1,831 |
|
|
|
11,868 |
|
|
|
10,803 |
|
2003 Joint Venture |
|
|
10,878 |
|
|
|
4,304 |
|
|
|
3,086 |
|
|
|
18,268 |
|
|
|
17,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,748 |
|
|
$ |
13,304 |
|
|
$ |
9,939 |
|
|
$ |
62,991 |
|
|
$ |
58,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the estimated fair value and cost of our Retained Interests is reflected in
our consolidated balance sheets as unrealized appreciation of Retained Interests.
F-24
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sensitivity analysis of our Retained Interests at December 31, 2006 highlights the
volatility that results when prepayments, loan losses and discount rates are different than our
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Fair |
|
|
|
|
Changed Assumption |
|
Value |
|
|
Asset Change (1) |
|
|
|
(In thousands) |
|
Losses increase by 50 basis points per annum (2) |
|
$ |
54,157 |
|
|
|
($1,567 |
) |
Losses increase by 100 basis points per annum (2) |
|
$ |
52,583 |
|
|
|
($3,141 |
) |
Rate of prepayment increases by 5% per annum (3) |
|
$ |
55,136 |
|
|
|
($ 588 |
) |
Rate of prepayment increases by 10% per annum (3) |
|
$ |
54,709 |
|
|
|
($1,015 |
) |
Discount rates increase by 100 basis points |
|
$ |
54,127 |
|
|
|
($1,597 |
) |
Discount rates increase by 200 basis points |
|
$ |
52,595 |
|
|
|
($3,129 |
) |
|
|
|
(1) |
|
Any depreciation of our Retained Interests is either included in the
accompanying statement of income as a permanent impairment (if there is a reduction in
expected future cash flows) or on our consolidated balance sheet in beneficiaries
equity as an unrealized loss. |
|
(2) |
|
If we experience significant losses (i.e., in excess of anticipated losses),
the effect on our Retained Interests would first reduce the value of our IO
Receivables. To the extent the IO Receivables could not fully absorb the losses, the
effect would then be to reduce the value of our Reserve Funds and then the value of
our OC Pieces. |
|
(3) |
|
For example, a 16% assumed rate of prepayment would be increased to 21% or 26%
based on increases of 5% or 10% per annum, respectively. |
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
assumptions to the change in estimated fair value is not linear. The effect of a variation in a
particular assumption on the estimated 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.
We monitor the governing pooling and servicing agreements for each of our structured loan sale
transactions and believe the servicing-related terms set forth therein are industry standard and
consistent with QSPE criteria. However, views about permitted servicing activities involving QSPEs
may not be consistent among organizations. As
accounting standard setters continue to interpret QSPE criteria under SFAS No. 140, there may be a
material resultant impact on our consolidated financial statements.
In accordance with SFAS No. 140, our consolidated financial statements do not include the assets,
liabilities, partners capital, revenues or expenses of the QSPEs. As a result, at December 31,
2006 and 2005, our consolidated balance sheets do not include $207.7 million and $276.1 million in
assets, respectively, and $156.5 million and $220.8 million in liabilities, respectively, related
to these structured loan sale transactions recorded by the QSPEs. At December 31, 2006, the
partners capital of our QSPEs was approximately $51.2 million compared to the estimated value of
the associated Retained Interests of approximately $55.1 million.
F-25
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information summarizes the financial position of the QSPEs at December 31, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Partnership |
|
|
1999 Partnership |
|
|
2000 Joint Venture |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
|
Loans receivable, net |
|
$ |
11,784 |
|
|
$ |
15,969 |
|
|
$ |
15,060 |
|
|
$ |
20,203 |
|
|
$ |
37,579 |
|
|
$ |
42,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,978 |
|
|
$ |
17,682 |
|
|
$ |
16,608 |
|
|
$ |
21,947 |
|
|
$ |
40,484 |
|
|
$ |
48,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Notes |
|
$ |
11,757 |
|
|
$ |
15,240 |
|
|
$ |
11,579 |
|
|
$ |
16,795 |
|
|
$ |
29,457 |
|
|
$ |
36,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
11,829 |
|
|
$ |
15,314 |
|
|
$ |
11,644 |
|
|
$ |
16,889 |
|
|
$ |
29,546 |
|
|
$ |
36,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners capital |
|
$ |
2,149 |
|
|
$ |
2,368 |
|
|
$ |
4,964 |
|
|
$ |
5,058 |
|
|
$ |
10,938 |
|
|
$ |
11,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Joint Venture |
|
|
2002 Joint Venture |
|
|
2003 Joint Venture |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
|
Loans receivable, net |
|
$ |
27,092 |
|
|
$ |
49,175 |
|
|
$ |
32,643 |
|
|
$ |
42,843 |
|
|
$ |
64,111 |
|
|
$ |
75,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
31,065 |
|
|
$ |
52,918 |
|
|
$ |
35,257 |
|
|
$ |
46,256 |
|
|
$ |
70,333 |
|
|
$ |
89,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Notes |
|
$ |
22,437 |
|
|
$ |
42,731 |
|
|
$ |
25,617 |
|
|
$ |
35,844 |
|
|
$ |
55,137 |
|
|
$ |
72,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
22,497 |
|
|
$ |
42,845 |
|
|
$ |
25,688 |
|
|
$ |
35,944 |
|
|
$ |
55,288 |
|
|
$ |
72,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners capital |
|
$ |
8,568 |
|
|
$ |
10,073 |
|
|
$ |
9,569 |
|
|
$ |
10,312 |
|
|
$ |
15,045 |
|
|
$ |
16,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following information summarizes the results of operations for the QSPEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
1998 Partnership |
|
|
1999 Partnership |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
|
Interest income |
|
$ |
1,329 |
|
|
$ |
1,363 |
|
|
$ |
1,174 |
|
|
$ |
1,620 |
|
|
$ |
2,005 |
|
|
$ |
2,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,414 |
|
|
$ |
1,410 |
|
|
$ |
1,203 |
|
|
$ |
1,816 |
|
|
$ |
2,180 |
|
|
$ |
2,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of losses |
|
$ |
(14 |
) |
|
$ |
(10 |
) |
|
$ |
(206 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
924 |
|
|
$ |
856 |
|
|
$ |
639 |
|
|
$ |
904 |
|
|
$ |
1,200 |
|
|
$ |
1,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
966 |
|
|
$ |
914 |
|
|
$ |
509 |
|
|
$ |
969 |
|
|
$ |
1,279 |
|
|
$ |
1,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
448 |
|
|
$ |
496 |
|
|
$ |
694 |
|
|
$ |
847 |
|
|
$ |
901 |
|
|
$ |
1,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2000 Joint Venture |
|
|
2001 Joint Venture |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
|
Interest income |
|
$ |
3,920 |
|
|
$ |
4,680 |
|
|
$ |
5,729 |
|
|
$ |
3,783 |
|
|
$ |
5,185 |
|
|
$ |
5,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,128 |
|
|
$ |
5,295 |
|
|
$ |
6,534 |
|
|
$ |
4,390 |
|
|
$ |
5,843 |
|
|
$ |
6,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reduction of) losses |
|
$ |
(17 |
) |
|
$ |
17 |
|
|
$ |
84 |
|
|
$ |
182 |
|
|
$ |
(415 |
) |
|
$ |
812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
2,343 |
|
|
$ |
2,977 |
|
|
$ |
3,791 |
|
|
$ |
2,066 |
|
|
$ |
2,945 |
|
|
$ |
3,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
2,460 |
|
|
$ |
3,155 |
|
|
$ |
4,068 |
|
|
$ |
2,376 |
|
|
$ |
2,703 |
|
|
$ |
4,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,668 |
|
|
$ |
2,140 |
|
|
$ |
2,466 |
|
|
$ |
2,014 |
|
|
$ |
3,140 |
|
|
$ |
1,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2002 Joint Venture |
|
|
2003 Joint Venture |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
|
Interest income |
|
$ |
3,924 |
|
|
$ |
4,681 |
|
|
$ |
5,417 |
|
|
$ |
6,791 |
|
|
$ |
6,408 |
|
|
$ |
5,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
4,261 |
|
|
$ |
5,070 |
|
|
$ |
6,165 |
|
|
$ |
7,157 |
|
|
$ |
6,603 |
|
|
$ |
5,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reduction of) losses |
|
$ |
|
|
|
$ |
204 |
|
|
$ |
364 |
|
|
$ |
(6 |
) |
|
$ |
6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
2,172 |
|
|
$ |
2,666 |
|
|
$ |
3,380 |
|
|
$ |
3,923 |
|
|
$ |
3,485 |
|
|
$ |
2,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
2,303 |
|
|
$ |
3,024 |
|
|
$ |
3,927 |
|
|
$ |
4,152 |
|
|
$ |
3,771 |
|
|
$ |
2,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,958 |
|
|
$ |
2,046 |
|
|
$ |
2,238 |
|
|
$ |
3,005 |
|
|
$ |
2,832 |
|
|
$ |
3,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income from our Retained Interests represents the accretion (recognized using the effective
interest method) on our Retained Interests which is determined based on estimates of future cash
flows and includes any fees collected (i.e., late fees, prepayment fees, etc.) by the QSPEs in
excess of anticipated fees. We update our cash flow assumptions on a quarterly basis and any
changes to cash flow assumptions impact the yield on our Retained Interests. The yield on our
Retained Interests, which is comprised of the income earned less permanent impairments, was 14.1%,
13.8% and 11.5% during 2006, 2005 and 2004, respectively.
Servicing fee income for the years ended December 31, 2006, 2005 and 2004 for loans held by the
QSPEs was approximately $676,000, $833,000 and $781,000, respectively. We have not established a
servicing asset or liability related to the loans held by the QSPEs as the servicing fees are
considered adequate compensation.
We received approximately $14.6 million, $15.4 million and $15.1 million in cash distributions from
the Joint Ventures during 2006, 2005 and 2004, respectively.
During November 2006, PMC Commercial repurchased a loan from the 2001 Joint Venture which had
become charged-off as defined in the transaction documents with an outstanding principal balance
of approximately $1.5 million. The estimated fair value of the loan receivable included on our
consolidated balance sheet was approximately $1.3 million at December 31, 2006.
F-27
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Restricted Investments:
Restricted investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Structured noteholders and Conduit Facility reserve accounts |
|
$ |
542 |
|
|
$ |
1,927 |
|
Structured noteholders and Conduit Facility collection accounts |
|
|
448 |
|
|
|
483 |
|
Capital expenditures account |
|
|
|
|
|
|
1,104 |
|
Other |
|
|
5 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
$ |
995 |
|
|
$ |
3,532 |
|
|
|
|
|
|
|
|
The structured noteholders and Conduit Facility reserve and collection accounts represented
cash collected that had not yet been remitted to the noteholders or holder and reserve account
balances that were required to be held as collateral on behalf of the noteholders or holder. The
Conduit Facility reserve account is equal to 2% of borrowings outstanding under the facility. The
collection and reserve accounts consist of cash and liquid money market funds.
The capital expenditures account represented restricted investments maintained pursuant to our
lease agreement with Arlington. Upon lease rejection in January 2006, these funds were no longer
restricted.
Note 8. Other Assets:
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Deferred borrowing costs, net |
|
$ |
1,069 |
|
|
$ |
1,340 |
|
Interest receivable |
|
|
1,016 |
|
|
|
698 |
|
Assets acquired in liquidation |
|
|
975 |
|
|
|
1,014 |
|
Investment in Preferred Trust |
|
|
820 |
|
|
|
820 |
|
Prepaid expenses and deposits |
|
|
614 |
|
|
|
653 |
|
Other |
|
|
444 |
|
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
4,938 |
|
|
$ |
4,907 |
|
|
|
|
|
|
|
|
F-28
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Debt:
Information on our debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
|
|
|
Weighted Average |
|
|
|
2006 |
|
|
2005 |
|
|
Current |
|
|
Coupon Rate |
|
|
|
Face |
|
|
Carrying |
|
|
Face |
|
|
Carrying |
|
|
Range of |
|
|
at December 31, |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
Maturities |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except footnote) |
|
|
|
|
|
|
|
|
|
|
Notes and debentures payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures |
|
$ |
8,190 |
|
|
$ |
8,161 |
|
|
$ |
15,500 |
|
|
$ |
16,125 |
|
|
|
2013 to 2015 |
|
|
|
5.90 |
% |
|
|
7.10 |
% |
Mortgage notes (1) |
|
|
2,642 |
|
|
|
2,642 |
|
|
|
11,473 |
|
|
|
11,473 |
|
|
|
2011 to 2017 |
|
|
|
8.02 |
% |
|
|
7.45 |
% |
Structured notes |
|
|
|
|
|
|
|
|
|
|
5,167 |
|
|
|
5,167 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
6.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,832 |
|
|
|
10,803 |
|
|
|
32,140 |
|
|
|
32,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Subordinated Notes |
|
|
27,070 |
|
|
|
27,070 |
|
|
|
27,070 |
|
|
|
27,070 |
|
|
|
2035 |
|
|
|
8.62 |
% |
|
|
7.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conduit Facility |
|
|
26,968 |
|
|
|
26,968 |
|
|
|
24,205 |
|
|
|
24,205 |
|
|
|
2008 |
|
|
|
6.35 |
% |
|
|
5.26 |
% |
Revolving credit facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,968 |
|
|
|
26,968 |
|
|
|
24,205 |
|
|
|
24,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock of
subsidiary |
|
|
4,000 |
|
|
|
3,668 |
|
|
|
4,000 |
|
|
|
3,575 |
|
|
|
2009 to 2010 |
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
$ |
68,870 |
|
|
$ |
68,509 |
|
|
$ |
87,415 |
|
|
$ |
87,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt outstanding at December 31, 2006 does not include a mortgage note with a principal
balance of approximately $1.3 million and a fixed interest rate of 8.5% due January 1, 2011 of
an unconsolidated VIE. The mortgage note is included in debt outstanding at December 31,
2005. |
Principal payments required on our consolidated debt at December 31, 2006 were as follows (face
amount):
|
|
|
|
|
Years Ending |
|
|
|
December 31, |
|
Total |
|
|
|
(In thousands) |
|
2007 |
|
$ |
142 |
|
2008 |
|
|
27,121 |
|
2009 |
|
|
2,166 |
|
2010 |
|
|
2,180 |
|
2011 |
|
|
1,042 |
|
Thereafter |
|
|
36,219 |
|
|
|
|
|
|
|
$ |
68,870 |
|
|
|
|
|
Debentures
Debentures represent amounts due to the SBA as a result of borrowings made pursuant to the SBIA,
have a weighted average cost of funds of 6.0% and semi-annual interest only payments. On September
1, 2006, we prepaid, without penalty, approximately $7.3 million of fixed-rate SBA debentures. The
unamortized premiums at the date of repayment of $563,000 were recorded as gain on early
extinguishment of debt.
F-29
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Notes
As of December 31, 2006, we had mortgage notes, each collateralized by a hotel property. During
2006, we sold one hotel property with a mortgage note of approximately $1.5 million and the
mortgage was repaid. These mortgages are amortized over 20 years, mature from January 2011 to
December 2017 and have restrictive provisions which provide for substantial prepayment penalties.
At December 31, 2006 and 2005, approximately $1.4 million and $3.0 million, respectively, of our
mortgage notes were guaranteed by PMC Commercial.
Structured Notes
In June 1998, PMC Commercial formed PMCT Trust, a bankruptcy remote partnership that completed a
private placement of fixed-rate loan-backed notes. We exercised our option and the structured
notes were repaid on December 1, 2006.
Junior Subordinated Notes
In connection with the formation of the Preferred Trust, during 2005, PMC Commercial issued Junior
Subordinated Notes which are subordinated to PMC Commercials existing debt. The Junior
Subordinated Notes bear interest at a floating rate which resets on a quarterly basis at the 90-day
LIBOR plus 3.25% (computed on a 360-day year). The Junior Subordinated Notes may be redeemed at par
at our option beginning on March 30, 2010. Interest payments are due on a quarterly basis.
Conduit Facility
During 2005, we entered into a three-year $100.0 million Conduit Facility expiring February 6,
2008. Interest payments on the advances are payable by PMC Conduit on a monthly basis at a rate
approximating 1% over LIBOR and PMC Conduits principal repayment obligations are expected to be
financed through future securitizations of the loans collateralizing advances under the conduit
facility. In addition, we are charged an unused fee equal to 12.5 basis points computed based on
the daily available balance. During February 2007, the interest rate was modified to a rate
approximating 85 basis points over LIBOR. The Conduit Facility allows for advances based on the
amount of eligible collateral sold to the Conduit Facility and has minimum requirements. The
Conduit Facility has covenants, the most restrictive of which are maximum delinquency ratios for
our contributed loans and serviced portfolio, as defined in the transaction documents. In
addition, the Conduit Facility has cross default provisions with the revolving credit facility. At
December 31, 2006, approximately $43.6 million of our loans were owned by PMC Conduit. We had
availability of approximately $7.4 million under the conduit facility at December 31, 2006 without
additional sales of loans to PMC Conduit. At December 31, 2006, we were in compliance with the
covenants of this facility.
Revolving Credit Facility
PMC Commercial has a revolving credit facility that matures in December 2007 and provides us with
credit availability up to $20 million. We are charged interest on the balance outstanding under
the revolving credit facility at our election of either the prime rate of the lender less 75 basis
points or 162.5 basis points over the 30, 60 or 90-day LIBOR. In addition, we are charged an
unused fee equal to 37.5 basis points computed based on our daily available balance. The credit
facility requires us to meet certain covenants, the most restrictive of which (1) provides for an
asset coverage test based on our cash and cash equivalents, loans receivable, Retained Interests
and real estate investments as a ratio to our senior debt and (2) limits our ability to pay out
returns of capital as part of our dividends. At December 31, 2006, we were in compliance with the
covenants of this facility.
Redeemable Preferred Stock of Subsidiary
PMCIC has outstanding 40,000 shares of $100 par value, 4% cumulative preferred stock (the 4%
Preferred Stock) held by the SBA pursuant to the SBIA.
The 4% Preferred Stock was issued during 1994 ($2.0 million) and 1995 ($2.0 million) and must be
redeemed at par no later than 15 years from the date of issuance. In accordance with SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,
we classified the 4% Preferred Stock as a liability on our consolidated balance sheet. The 4%
Preferred Stock was valued at $3,420,000 on the merger date. Dividends of approximately $160,000
were recognized on the 4% Preferred Stock during both 2006 and 2005 and are included in interest
expense in our consolidated statement of income.
Interest Paid
During 2006, 2005 and 2004 interest paid was approximately $5,430,000, $5,378,000, and $4,727,000,
respectively.
F-30
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Cumulative Preferred Stock of Subsidiary:
PMCIC has outstanding 30,000 shares of $100 par value, 3% cumulative preferred stock (the 3%
Preferred Stock) held by the SBA pursuant to the SBIA.
PMCIC is entitled to redeem, in whole or part, the 3% Preferred Stock by paying the par value ($3.0
million) of these securities plus dividends accumulated and unpaid on the date of redemption.
While the 3% Preferred Stock may be redeemed, redemption is not mandatory. The 3% Preferred Stock
was valued at $900,000 on the merger date. Dividends of approximately $90,000 were recognized on
the 3% Preferred Stock during both 2006 and 2005 and are reflected in our consolidated statements
of income as minority interest.
Note 11. Earnings Per Share:
The computations of basic earnings per common share are based on our weighted average shares
outstanding. The weighted average number of common shares outstanding was approximately
10,748,000, 10,874,000 and 10,134,000 for the years ended December 31, 2006, 2005 and 2004,
respectively. For purposes of calculating diluted earnings per share, the weighted average shares
outstanding were increased by approximately 3,000, 5,000 and 18,000 shares, respectively, during
2006, 2005 and 2004 for the dilutive effect of stock options.
Not included in the computation of diluted earnings per share were outstanding options to purchase
approximately 61,000, 74,000 and 60,000 common shares during 2006, 2005 and 2004, respectively,
because the options exercise prices were greater than the average market price of the stock.
Note 12. Dividends Paid and Declared:
During 2006, our dividends were declared as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Record Date |
|
Date Paid |
|
Per Share |
|
Type |
March 31, 2006
|
|
April 10, 2006
|
|
$ |
0.30 |
|
|
Regular |
June 30, 2006
|
|
July 10, 2006
|
|
|
0.30 |
|
|
Regular |
September 29, 2006
|
|
October 10, 2006
|
|
|
0.30 |
|
|
Regular |
December 29, 2006
|
|
January 8, 2007
|
|
|
0.30 |
|
|
Regular |
December 29, 2006
|
|
January 8, 2007
|
|
|
0.10 |
|
|
Special |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
In March 2007, the Board of Trust Managers declared a $0.30 per share quarterly dividend to
common shareholders of record on March 30, 2007 which will be paid on April 9, 2007.
We have certain covenants within our debt facilities that 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.
F-31
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Taxable Income:
PMC Commercial has elected to be taxed as a REIT under 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 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. We may, however, be subject to certain Federal
excise taxes and state and local taxes on our income and property. If PMC Commercial fails to
qualify as a REIT in any taxable year, it will be subject to Federal income taxes at regular
corporate rates (including any applicable alternative minimum tax) and will not be able to qualify
as a REIT for four subsequent taxable years.
In order to meet our 2006 taxable income distribution requirements, we may make an election under
the Code to treat a portion of the distributions declared and paid in 2007 as distributions of
2006s taxable income.
PMC Commercial has wholly-owned TRSs which are subject to Federal income taxes: PMCIC, First
Western, PMC Funding and PMC Properties. The income generated from the TRSs is taxed at normal
corporate rates. The measurement of net deferred tax assets is adjusted by a valuation allowance,
if, based on our ongoing assessment of future realization, it is more likely than not that they
will not be realized.
We calculate our current and deferred tax provisions based on estimates and assumptions that could
differ from the actual results reflected in income tax returns filed during the subsequent year.
Adjustments based on the final tax returns are generally recorded in the period when the returns
are filed.
The following reconciles our net income to REIT taxable income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
15,684 |
|
|
$ |
11,297 |
|
|
$ |
24,781 |
|
Less: TRS net income, net of tax |
|
|
(1,280 |
) |
|
|
(1,414 |
) |
|
|
(145 |
) |
Add: book depreciation |
|
|
231 |
|
|
|
1,240 |
|
|
|
1,872 |
|
Less: tax depreciation |
|
|
(508 |
) |
|
|
(1,483 |
) |
|
|
(1,935 |
) |
Book/tax difference on property sales |
|
|
171 |
|
|
|
(350 |
) |
|
|
135 |
|
Book/tax difference on Retained Interests, net |
|
|
1,973 |
|
|
|
1,880 |
|
|
|
3,557 |
|
Impairment losses |
|
|
968 |
|
|
|
2,210 |
|
|
|
|
|
Negative goodwill |
|
|
|
|
|
|
|
|
|
|
(11,593 |
) |
Book/tax difference on amortization and
accretion |
|
|
(641 |
) |
|
|
(264 |
) |
|
|
(221 |
) |
Asset valuation |
|
|
(890 |
) |
|
|
181 |
|
|
|
(516 |
) |
Other book/tax differences, net |
|
|
(59 |
) |
|
|
(9 |
) |
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REIT taxable income |
|
$ |
15,649 |
|
|
$ |
13,288 |
|
|
$ |
16,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared |
|
$ |
13,975 |
|
|
$ |
13,569 |
|
|
$ |
14,140 |
|
|
|
|
|
|
|
|
|
|
|
F-32
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends per share for dividend reporting purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Per Share |
|
|
Percent |
|
|
Per Share |
|
|
Percent |
|
|
Per Share |
|
|
Percent |
|
Ordinary income |
|
$ |
1.244 |
|
|
|
95.69 |
% |
|
$ |
1.194 |
|
|
|
95.52 |
% |
|
$ |
1.400 |
|
|
|
100.00 |
% |
Capital gains |
|
|
0.056 |
|
|
|
4.31 |
% |
|
|
0.056 |
|
|
|
4.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.300 |
|
|
|
100.00 |
% |
|
$ |
1.250 |
|
|
|
100.00 |
% |
|
$ |
1.400 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision related to the TRSs consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current provision |
|
$ |
502 |
|
|
$ |
680 |
|
|
$ |
152 |
|
Deferred provision (benefit) |
|
|
147 |
|
|
|
(22 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
649 |
|
|
$ |
658 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes results in effective tax rates that differ from Federal
statutory rates of 35%. The reconciliation of TRS income tax attributable to net income computed
at Federal statutory rates to income tax expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Income before income taxes for
TRSs |
|
$ |
1,929 |
|
|
$ |
2,072 |
|
|
$ |
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Federal income tax provision |
|
$ |
676 |
|
|
$ |
725 |
|
|
$ |
91 |
|
Preferred dividend of subsidiary
recorded as minority interest |
|
|
31 |
|
|
|
31 |
|
|
|
25 |
|
Change in valuation allowance |
|
|
|
|
|
|
(112 |
) |
|
|
|
|
Other adjustments |
|
|
(58 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
649 |
|
|
$ |
658 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
|
F-33
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Retained Interests |
|
$ |
161 |
|
|
$ |
97 |
|
|
$ |
76 |
|
Loans receivable |
|
|
94 |
|
|
|
148 |
|
|
|
105 |
|
Servicing asset |
|
|
69 |
|
|
|
132 |
|
|
|
188 |
|
Premiums on acquired debentures payable |
|
|
|
|
|
|
106 |
|
|
|
133 |
|
Operating loss carryforwards |
|
|
|
|
|
|
8 |
|
|
|
112 |
|
Other |
|
|
|
|
|
|
12 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
324 |
|
|
|
503 |
|
|
|
618 |
|
Valuation allowance |
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324 |
|
|
|
503 |
|
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Discounts on acquired redeemable preferred
stock of
subsidiary and debentures payable |
|
|
121 |
|
|
|
154 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
121 |
|
|
|
154 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net |
|
$ |
203 |
|
|
$ |
349 |
|
|
$ |
327 |
|
|
|
|
|
|
|
|
|
|
|
The net operating loss carryforwards at December 31, 2004 were generated by PMC Funding and were
available to offset future taxable income of PMC Funding. At the time of the merger, management
believed that we would not realize the benefit of PMC Fundings net operating loss carryforwards
and a valuation allowance was established. We realized the full benefit of these net operating
loss carryforwards during 2005 and the valuation allowance was reversed.
We paid $845,000 and $467,500 in income taxes during 2006 and 2005, respectively.
Note 14. Other Income:
Other income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Prepayment fees |
|
$ |
1,653 |
|
|
$ |
590 |
|
|
$ |
656 |
|
Servicing income (1) |
|
|
1,025 |
|
|
|
1,222 |
|
|
|
1,142 |
|
Premium income (2) |
|
|
499 |
|
|
|
618 |
|
|
|
526 |
|
Other loan related income |
|
|
403 |
|
|
|
646 |
|
|
|
475 |
|
Equity in earnings of unconsolidated subsidiaries |
|
|
76 |
|
|
|
45 |
|
|
|
|
|
Debt release income |
|
|
|
|
|
|
|
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
$ |
3,656 |
|
|
$ |
3,121 |
|
|
$ |
2,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We earn fees for servicing all loans held by the QSPEs and First Westerns loans sold into
the secondary market. |
|
(2) |
|
Premium income results from the sale of First Westerns loans pursuant to Secondary Market
Loan Sales. |
F-34
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Discontinued Operations:
Discontinued operations of our hotel properties (12 hotel properties, 15 hotel properties and 17
hotel properties during 2006, 2005 and 2004, respectively) and assets acquired in liquidation
(primarily three limited service hospitality properties during 2005 and 2006) consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Hotel and Lease Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating revenues |
|
$ |
1,115 |
|
|
$ |
624 |
|
|
$ |
|
|
Lease income base and other |
|
|
145 |
|
|
|
2,899 |
|
|
|
4,647 |
|
Straight-line rental income |
|
|
|
|
|
|
922 |
|
|
|
516 |
|
Lease termination fee income |
|
|
|
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,260 |
|
|
|
4,445 |
|
|
|
5,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating expenses |
|
|
1,070 |
|
|
|
563 |
|
|
|
|
|
Interest expense (1) |
|
|
119 |
|
|
|
598 |
|
|
|
676 |
|
Depreciation |
|
|
9 |
|
|
|
959 |
|
|
|
1,556 |
|
Property tax expense |
|
|
|
|
|
|
895 |
|
|
|
|
|
Advisory fees |
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,198 |
|
|
|
3,015 |
|
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings, hotel and lease operations |
|
|
62 |
|
|
|
1,430 |
|
|
|
3,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired in Liquidation Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
224 |
|
|
|
124 |
|
|
|
15 |
|
Expenses |
|
|
220 |
|
|
|
117 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings, assets acquired in liquidation
operations |
|
|
4 |
|
|
|
7 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Total net earnings |
|
|
66 |
|
|
|
1,437 |
|
|
|
3,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of real estate |
|
|
2,064 |
|
|
|
2,256 |
|
|
|
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses |
|
|
(94 |
) |
|
|
(1,774 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
$ |
2,036 |
|
|
$ |
1,919 |
|
|
$ |
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents interest expense on the mortgages payable related to hotel properties included in
discontinued operations. The mortgages payable were either repaid as a result of the sales
or as they matured. No additional interest expense was allocated to discontinued operations. |
F-35
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property sales included in discontinued operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 (1) |
|
|
2005 (1) |
|
|
2004 |
|
|
|
(In thousands, except number of property sales and footnote) |
|
Properties sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Hotel properties |
|
|
10 |
|
|
|
6 |
|
|
|
2 |
|
Assets acquired in liquidation |
|
|
8 |
|
|
|
4 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
10 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales proceeds |
|
$ |
20,553 |
|
|
$ |
12,804 |
|
|
$ |
3,513 |
|
Cost of sales |
|
|
(17,488 |
) |
|
|
(11,508 |
) |
|
|
(3,983 |
) |
Deferred gains, net |
|
|
(1,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,891 |
|
|
|
1,296 |
|
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired in Liquidation: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales proceeds |
|
|
4,124 |
|
|
|
5,978 |
|
|
|
3,052 |
|
Cost of sales |
|
|
(3,896 |
) |
|
|
(4,673 |
) |
|
|
(2,834 |
) |
Deferred gains, net |
|
|
(55 |
) |
|
|
(345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
960 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of real estate |
|
$ |
2,064 |
|
|
$ |
2,256 |
|
|
$ |
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We financed the sale of certain of these properties through origination of loans aggregating
$19,844,000 and $6,969,000 during 2006 and 2005, respectively. As the down payment received
was not sufficient to qualify for full accrual gain treatment on certain of the sales, we
recorded initial installment gains and deferred the remaining gains. |
Note 16. Dividend Reinvestment and Cash Purchase Plan:
We have a dividend reinvestment and cash purchase plan (the Plan). Participants in the Plan have
the option to reinvest all or a portion of dividends received. The purchase price of the Common
Shares is 100% of the average of the closing price of the Common Shares as published for the five
trading days immediately prior to the dividend record date or prior to the optional cash payment
purchase date, whichever is applicable. We use the open market to purchase Common Shares with
proceeds from the dividend reinvestment portion of the Plan.
Note 17. Profit Sharing Plan:
We have a profit sharing plan available to our full-time employees after one year of employment.
Vesting increases ratably to 100% after the sixth year of employment. Pursuant to our profit
sharing plan, approximately $244,000, $244,000 and $183,000 was expensed during 2006, 2005 and
2004, respectively. Contributions to the profit sharing plan are at the discretion of our Board of
Trust Managers.
Note 18. Share-Based Compensation Plans:
At December 31, 2006, we have options outstanding under share-based compensation plans: the 2005
Equity Incentive Plan, the 1993 Employee Share Option Plan and the Trust Manager Share Option Plan.
The 1993 Employee Share Option Plan and the Trust Manager Share Option Plan expired in December
2003; thus, no additional options will be issued under these plans.
We use the fair value recognition provisions of SFAS No. 123R, Accounting for Stock-Based
Compensation, to account for all awards granted, modified or settled.
F-36
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2005 Equity Incentive Plan was approved by our shareholders on June 11, 2005 and permits the
grant of options to our employees, executive officers and Board of Trust Managers and restricted
shares to our executive officers and Board of Trust Managers for up to 500,000 Common Shares. We
believe that these awards better align the interests of our employees, executive officers and Board
of Trust Managers with those of our shareholders. Option awards are granted with an exercise price
equal to the market price of our Common Shares at the date of grant and vest immediately upon grant
with five-year contractual terms.
The Trust Manager Share Option Plan was a nondiscretionary plan pursuant to which options to
purchase 2,000 Common Shares were granted to certain trust managers on the date such trust manager
took office. In addition, options to purchase 1,000 shares were granted on June 1 of each year
through December 31, 2003. Such options were exercisable at the fair market value of the shares on
the date of grant. The options granted under the Trust Manager Share Option Plan became
exercisable one year after date of grant and expired if not exercised on the earlier of (1) 30
days after the option holder no longer held office for any reason or (2) within five years after
date of grant. Due to expiration of the Trust Manager Share Option Plan, we did not grant any
options under the Trust Manager Share Option Plan after 2003.
A summary of the status of our stock options as of December 31, 2006, 2005 and 2004 and the changes
during the years ended on those dates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
|
|
Shares |
|
|
Average |
|
|
Shares |
|
|
Average |
|
|
Shares |
|
|
Average |
|
|
|
Underlying |
|
|
Exercise |
|
|
Underlying |
|
|
Exercise |
|
|
Underlying |
|
|
Exercise |
|
|
|
Options |
|
|
Prices |
|
|
Options |
|
|
Prices |
|
|
Options |
|
|
Prices |
|
Outstanding, January
1 |
|
|
170,113 |
|
|
$ |
14.78 |
|
|
|
164,260 |
|
|
$ |
15.86 |
|
|
|
150,876 |
|
|
$ |
12.64 |
|
Granted |
|
|
33,250 |
|
|
$ |
12.72 |
|
|
|
36,700 |
|
|
$ |
14.54 |
|
|
|
|
|
|
|
|
|
Acquired in the merger |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,483 |
|
|
$ |
19.19 |
|
Exercised |
|
|
(35,500 |
) |
|
$ |
13.06 |
|
|
|
(9,400 |
) |
|
$ |
13.13 |
|
|
|
(59,500 |
) |
|
$ |
11.58 |
|
Forfeited |
|
|
(2,064 |
) |
|
$ |
15.29 |
|
|
|
(5,652 |
) |
|
$ |
20.14 |
|
|
|
(92 |
) |
|
$ |
12.97 |
|
Expired |
|
|
(23,288 |
) |
|
$ |
18.79 |
|
|
|
(15,795 |
) |
|
$ |
24.49 |
|
|
|
(15,507 |
) |
|
$ |
19.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
|
|
142,511 |
|
|
$ |
14.06 |
|
|
|
170,113 |
|
|
$ |
14.78 |
|
|
|
164,260 |
|
|
$ |
15.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31 |
|
|
142,511 |
|
|
$ |
14.06 |
|
|
|
170,113 |
|
|
$ |
14.78 |
|
|
|
164,260 |
|
|
$ |
15.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of stock
options granted
during the year |
|
$ |
0.59 |
|
|
|
|
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The market price of our stock at December 31, 2006 is greater than certain of our stock option
exercise prices (approximately 86,000 shares). The intrinsic value of these stock options
outstanding or exercisable at December 31, 2006 was approximately $129,000.
Upon notification of intent to exercise stock options, our policy is to first verify that the
options are exercisable, then to contact our transfer agent instructing them to issue new shares
and then to collect the cash proceeds. We received approximately $123,000 and $378,000 in cash
proceeds related to the cash exercise of stock options during 2005 and 2004, respectively. There
were no cash exercises of stock options during 2006. In addition, during 2006 and 2004 we issued
2,822 and 6,620 Common Shares, respectively to our executive officers in exchange for 35,500 and
27,750 stock options, respectively, utilizing stock-for-stock exercise provisions of our option
plans.
F-37
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assumption: |
|
|
|
|
|
|
|
|
Expected Term (years) |
|
|
3.0 |
|
|
|
3.0 |
|
Risk-Free Interest Rate |
|
|
4.96 |
% |
|
|
3.74 |
% |
Expected Dividend Yield |
|
|
9.43 |
% |
|
|
9.16 |
% |
Expected Volatility |
|
|
16.24 |
% |
|
|
16.63 |
% |
Forfeiture Rate |
|
|
5.00 |
% |
|
|
5.00 |
% |
The expected term of the options represents the period of time that the options are expected
to be outstanding and was determined based on our historical data. The risk-free rate was based on
the 3-year treasury rate corresponding to the expected term of the options. We used historical
information to determine our expected volatility, dividend yield and forfeiture rates. We recorded
compensation expense of approximately $19,000 and $23,000 during 2006 and 2005, respectively,
related to these option grants. No options were granted during the year ended December 31, 2004.
We issued an aggregate of 9,060 restricted shares to executive officers and our Board of Trust
Managers on both June 10, 2006 and June 11, 2005 at the then current market price of the shares of
$12.72 and $14.54, respectively. The restricted share awards 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). There were no forfeitures of
restricted shares during 2006 or 2005. Compensation expense is being recognized over the vesting
period. We recorded compensation expense of approximately $112,000 and $83,000 during 2006 and
2005, respectively, related to our restricted share issuances. At December 31, 2006, there was
approximately $52,000 of total unrecognized compensation expense related to the unvested restricted
shares which will be recognized over the next one to two years.
We assumed unearned share compensation in the merger representing the intrinsic value of unvested
options assumed that vest as the employees provide future services. Compensation expense was
recognized over the vesting period. We recorded compensation expense of approximately $7,000
during 2004 related to these unvested options.
The following table summarizes information about stock options outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
Range of |
|
|
Number |
|
|
Contract Life |
|
|
Exercise |
|
|
|
Exercise Prices |
|
|
Outstanding |
|
|
(in years) |
|
|
Price |
|
|
|
$ |
12.72 to $14.54 |
|
|
|
119,943 |
|
|
|
2.85 |
|
|
$ |
13.44 |
|
|
|
$ |
14.90 |
|
|
|
4,000 |
|
|
|
0.67 |
|
|
$ |
14.90 |
|
|
|
$ |
17.95 |
|
|
|
18,568 |
|
|
|
0.70 |
|
|
$ |
17.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12.72 to $17.95 |
|
|
|
142,511 |
|
|
|
2.51 |
|
|
$ |
14.06 |
|
F-38
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Supplemental Disclosure of Cash Flow Information:
Our non-cash investing activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Reclassification from loans receivable to assets acquired
in liquidation |
|
$ |
3,730 |
|
|
$ |
5,657 |
|
|
$ |
2,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable originated in connection with sales of
hotel properties |
|
$ |
17,084 |
|
|
$ |
4,770 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable originated in connection with the sale
of assets acquired in liquidation |
|
$ |
2,760 |
|
|
$ |
3,725 |
|
|
$ |
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivable established through due to affiliates, net |
|
$ |
|
|
|
$ |
415 |
|
|
$ |
2,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of due to affiliate and Retained Interests |
|
$ |
|
|
|
$ |
2,126 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable and deferred liability recorded upon
sale of hotel property |
|
$ |
|
|
|
$ |
197 |
|
|
$ |
443 |
|
|
|
|
|
|
|
|
|
|
|
See Note 3 for information on assets acquired and liabilities assumed in connection with the merger
with PMC Capital. See Note 2 for information on the deconsolidation of the assets and liabilities
of PMCT Plainfield, L.P.
Note 20. Fair Values of Financial Instruments:
The estimates of fair value as required by SFAS No. 107, Disclosures about Fair Value of Financial
Instruments 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
below may not be indicative of the amounts we could realize in a current market exchange.
F-39
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of our financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net |
|
$ |
169,181 |
|
|
$ |
170,044 |
|
|
$ |
157,574 |
|
|
$ |
158,579 |
|
Retained Interests |
|
|
55,724 |
|
|
|
55,724 |
|
|
|
62,991 |
|
|
|
62,991 |
|
Cash and cash equivalents |
|
|
3,739 |
|
|
|
3,739 |
|
|
|
3,967 |
|
|
|
3,967 |
|
Restricted investments |
|
|
995 |
|
|
|
995 |
|
|
|
3,532 |
|
|
|
3,336 |
|
Mortgage-backed security of affiliate |
|
|
643 |
|
|
|
643 |
|
|
|
833 |
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and debentures payable |
|
|
10,803 |
|
|
|
10,847 |
|
|
|
32,765 |
|
|
|
27,092 |
|
Redeemable preferred stock of
subsidiary |
|
|
3,668 |
|
|
|
3,760 |
|
|
|
3,575 |
|
|
|
3,575 |
|
Credit facilities |
|
|
26,968 |
|
|
|
26,968 |
|
|
|
24,205 |
|
|
|
24,205 |
|
Junior Subordinated Notes |
|
|
27,070 |
|
|
|
27,070 |
|
|
|
27,070 |
|
|
|
27,070 |
|
Loans receivable, net: We generally estimate the fair value of variable-rate loans to
approximate the remaining unamortized principal of the loan less any purchase or other
discounts, unless there is doubt as to realization of the loan. In addition, we generally
estimate the fair value of fixed-rate loans based on a net present value calculation
utilizing current market interest rates and anticipated principal collections. A valuation
reserve is established for a problem loan based on the creditors payment history, collateral
value, guarantor support and other 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 and mortgage-backed security of affiliate: The assets are reflected in our
consolidated financial statements at estimated fair value based on valuation techniques as
described in Note 6.
Cash and cash equivalents: The carrying amount is a reasonable estimation of fair value due
to the short maturity of these instruments.
Restricted investments: The carrying amounts of the reserve fund associated with the Conduit
Facility and the remaining restricted investments are considered to be a reasonable estimate
of fair value due to the relatively short maturity of these funds.
Notes and debentures payable: 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.
Redeemable preferred stock of subsidiary: 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.
Credit facilities and Junior Subordinated Notes: The carrying amount is a reasonable
estimation of fair value as the interest rates on these instruments are variable.
F-40
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Selected Quarterly Financial Data: (unaudited)
The following represents our selected quarterly financial data which, in the opinion of management,
reflects adjustments (comprising only normal recurring adjustments) necessary for fair
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
Income From |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Net |
|
|
Earnings |
|
|
|
Revenues (1) |
|
|
Operations (1) |
|
|
Income |
|
|
Per Share |
|
|
|
(In thousands, except earnings per share and footnotes) |
|
First Quarter |
|
$ |
7,301 |
|
|
$ |
3,224 |
|
|
$ |
5,041 |
(2) |
|
$ |
0.47 |
|
Second Quarter |
|
|
8,163 |
|
|
|
3,490 |
|
|
|
3,650 |
|
|
|
0.34 |
|
Third Quarter |
|
|
8,324 |
|
|
|
3,945 |
|
|
|
3,976 |
(3) |
|
|
0.37 |
|
Fourth Quarter |
|
|
6,889 |
|
|
|
2,989 |
|
|
|
3,017 |
|
|
|
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,677 |
|
|
$ |
13,648 |
|
|
$ |
15,684 |
|
|
$ |
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
Income From |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
Net |
|
|
Earnings |
|
|
|
Revenues (1) |
|
|
Operations (1) |
|
|
Income |
|
|
Per Share |
|
|
|
(In thousands, except earnings per share and footnotes) |
|
First Quarter |
|
$ |
6,270 |
|
|
$ |
3,151 |
|
|
$ |
4,116 |
|
|
$ |
0.38 |
|
Second Quarter |
|
|
5,913 |
|
|
|
1,893 |
|
|
|
2,233 |
(4) |
|
|
0.20 |
|
Third Quarter |
|
|
6,337 |
|
|
|
1,442 |
|
|
|
2,004 |
(5) |
|
|
0.19 |
|
Fourth Quarter |
|
|
6,579 |
|
|
|
2,892 |
|
|
|
2,944 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,099 |
|
|
$ |
9,378 |
|
|
$ |
11,297 |
|
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain amounts were previously reported in continuing operations in our quarterly filings
on Form 10-Q. Such amounts have been reclassified to discontinued operations in accordance
with SFAS No. 144. |
(2) |
|
Includes gains of $1,877,000 from the sale of six hotel properties and three assets
acquired in liquidation. |
(3) |
|
Includes a gain on extinguishment of debt of $563,000. |
(4) |
|
Includes gains of $978,000 from the sale of two hotel properties |
(5) |
|
Includes gains of $1,038,000 from the sale of two assets acquired in liquidation and two
hotel properties. |
Note 22. 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 new loans were
approximately $32.6 million at December 31, 2006, of which approximately $2.6 million were for
prime-based loans to be originated by First Western, the government guaranteed portion of which
(approximately 75% of each individual loan) will be sold pursuant to Secondary Market Loan Sales.
At December 31, 2006, the majority of our commitments and approvals were for variable-rate loans
based on the prime rate or the 90-day LIBOR at spreads over the prime rate generally ranging from
1.50% to 2.75% and over LIBOR generally ranging from 3.00% to 4.25%. The weighted average interest
rate on our loan commitments and approvals at December 31, 2006 was approximately 9.1%.
Commitments generally have fixed expiration dates and require payment of a fee to us. Since some
commitments are expected to expire without being drawn upon, total commitment amounts do not
necessarily represent future cash requirements.
F-41
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
|
|
|
|
|
Amount |
|
|
|
(In thousands) |
|
2007 |
|
$ |
179 |
|
2008 |
|
|
191 |
|
2009 |
|
|
203 |
|
2010 |
|
|
214 |
|
2011 |
|
|
186 |
|
|
|
|
|
|
|
$ |
973 |
|
|
|
|
|
Rent expense, which is being recorded on a straight-line basis, amounted to approximately $186,000,
$165,000 and $133,000 during 2006, 2005 and 2004, respectively.
Employment Agreements
We have employment agreements with our executive officers for three-year terms expiring June 30,
2009. Annually, the agreements are renewed for new three-year terms unless prior to the end of the
first year, either the Company or the executive officer provides notice to the other party of its
intention not to extend the employment period beyond the current term. In the event of a change in
responsibilities, as defined, during the employment period, the agreements provide for severance
compensation to the executive officer in an amount equal to 2.99 times annual compensation paid to
the executive officer as defined in the agreements.
Structured Loan Sale Transactions
The transaction documents of the QSPEs contain provisions (the Credit Enhancement Provisions)
that govern the assets and the inflow and outflow of funds of the QSPE formed as part of the
structured loan sale transactions. The Credit Enhancement Provisions include specified limits on
the delinquency, default and loss rates on the loans receivable included in each QSPE. If, at any
measurement date, the delinquency, default or loss rate with respect to any QSPE were to exceed the
specified limits, the Credit Enhancement Provisions would automatically increase the level of
credit enhancement requirements for that QSPE. During the period in which the specified
delinquency, default or loss rate was exceeded, excess cash flow from the QSPE, 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 will not occur.
Environmental
PMC Funding has a recorded liability of approximately $300,000 at December 31, 2006 related to a
loan with collateral that has environmental remediation obligations which are the primary
responsibility of our borrower. Under purchase accounting, the liability was assumed and the loan
was acquired by PMC Commercial in the merger with PMC Capital, Inc. The loan was originated in
connection with the sale of the underlying collateral by PMC Funding to the borrower. The sale was
financed by PMC Capital through a loan with a current outstanding principal balance of
approximately $475,000 which is in default. As a result, we filed a lawsuit in the State of
Georgia to appoint a receiver to operate the property and determine if current environmental
remediation plans are being followed. The Court has refused to appoint a receiver at the present
time. The borrower has filed a counterclaim alleging, among other things, breach of contract and
non-default under the loan documents. We do not believe there is any merit to the counterclaim and
intend to vigorously pursue all remedies available to us under the law.
During 2005, we were informed by the Georgia Department of Natural Resources that the current
remediation plan for the property has certain aspects that require revision. While our borrower
has the primary responsibility for the environmental remediation, to the extent we elect to
foreclose, we currently believe that the estimated fair value of the collateral underlying the loan
exceeds the current outstanding principal balance on the loan. At the present time, we have been
unable to quantify additional costs, if any, of the potential changes in remediation methods
requested by the State of Georgia; however, these costs could be material and may exceed the value
of the collateral net of the recorded liability and the current outstanding principal balance of
the loan.
F-42
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
We have significant outstanding claims against Arlingtons bankruptcy estate. Arlington has
objected to our claims and initiated a complaint in the bankruptcy seeking, among other things, the
return of payments Arlington made pursuant to the leases and the Master Lease Agreement. Although
the value of our claims against Arlington is significantly higher than Arlingtons claims against
us, there is no assurance that we will collect our claims from Arlington nor is there any assurance
we will not be required to make payments to the bankruptcy estate in connection with Arlingtons
initiated claim.
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.
Pursuant to SBA rules and regulations, distributions from our consolidated subsidiaries, First
Western, PMCIC and Western Financial are limited. In order to operate as a small business lending
company, a licensee is required to maintain a minimum net worth (as defined by SBA regulations) of
the greater of (1) 10% of the outstanding loans receivable of our SBLC or (2) $1.0 million, as well
as certain other regulatory restrictions such as change in control provisions. At December 31,
2006, dividends available for distribution were approximately $2.1 million.
Note 23. Business Segments:
Operating results and other financial data are presented for our reportable business segments.
These segments are categorized by line of business which also corresponds to how they are operated.
The segments include (1) the Lending Division, which originates loans receivable to small
businesses primarily in the hospitality industry and (2) the Property Division which owns and
operates certain of our hotel properties. The operations of our lending division are reviewed by
our chief operating decision makers in assessing its performance, to make business decisions and to
allocate resources. We do not differentiate between subsidiaries or loan programs for this
purpose.
F-43
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our business segment data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Lending |
|
|
Property |
|
|
|
|
|
|
Lending |
|
|
Property |
|
|
|
Total |
|
|
Division |
|
|
Division |
|
|
Total |
|
|
Division |
|
|
Division |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income loans and
other income |
|
$ |
19,116 |
|
|
$ |
19,110 |
|
|
$ |
6 |
|
|
$ |
14,699 |
|
|
$ |
14,699 |
|
|
$ |
|
|
Lease income and other property
income |
|
|
2,171 |
|
|
|
|
|
|
|
2,171 |
|
|
|
942 |
|
|
|
|
|
|
|
942 |
|
Income from Retained Interests |
|
|
9,390 |
|
|
|
9,390 |
|
|
|
|
|
|
|
9,458 |
|
|
|
9,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
30,677 |
|
|
|
28,500 |
|
|
|
2,177 |
|
|
|
25,099 |
|
|
|
24,157 |
|
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
5,435 |
|
|
|
5,132 |
|
|
|
303 |
|
|
|
4,688 |
|
|
|
4,343 |
|
|
|
345 |
|
Depreciation |
|
|
222 |
|
|
|
10 |
|
|
|
212 |
|
|
|
281 |
|
|
|
3 |
|
|
|
278 |
|
Salaries and related benefits (1) |
|
|
4,739 |
|
|
|
4,502 |
|
|
|
237 |
|
|
|
4,553 |
|
|
|
4,098 |
|
|
|
455 |
|
Hotel property expenses |
|
|
1,614 |
|
|
|
|
|
|
|
1,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
2,648 |
|
|
|
2,444 |
|
|
|
204 |
|
|
|
2,995 |
|
|
|
2,393 |
|
|
|
602 |
|
Impairments and provisions |
|
|
2,195 |
|
|
|
1,270 |
|
|
|
925 |
|
|
|
2,456 |
|
|
|
765 |
|
|
|
1,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16,853 |
|
|
|
13,358 |
|
|
|
3,495 |
|
|
|
14,973 |
|
|
|
11,602 |
|
|
|
3,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of
debt |
|
|
563 |
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
provision, minority interest,
and discontinued operations |
|
|
14,387 |
|
|
|
15,705 |
|
|
|
(1,318 |
) |
|
|
10,126 |
|
|
|
12,555 |
|
|
|
(2,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(649 |
) |
|
|
(638 |
) |
|
|
(11 |
) |
|
|
(658 |
) |
|
|
(658 |
) |
|
|
|
|
Minority interest (preferred
stock dividend of subsidiary) |
|
|
(90 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
(90 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
|
13,648 |
|
|
|
14,977 |
|
|
|
(1,329 |
) |
|
|
9,378 |
|
|
|
11,807 |
|
|
|
(2,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sales of real estate |
|
|
2,064 |
|
|
|
157 |
|
|
|
1,907 |
|
|
|
2,256 |
|
|
|
960 |
|
|
|
1,296 |
|
Impairment losses |
|
|
(94 |
) |
|
|
(51 |
) |
|
|
(43 |
) |
|
|
(1,774 |
) |
|
|
|
|
|
|
(1,774 |
) |
Net earnings |
|
|
66 |
|
|
|
4 |
|
|
|
62 |
|
|
|
1,437 |
|
|
|
7 |
|
|
|
1,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
2,036 |
|
|
|
110 |
|
|
|
1,926 |
|
|
|
1,919 |
|
|
|
967 |
|
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,684 |
|
|
$ |
15,087 |
|
|
$ |
597 |
|
|
$ |
11,297 |
|
|
$ |
12,774 |
|
|
$ |
(1,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Salaries and related benefits were allocated to the property division based on managements
estimate of time spent for oversight. |
F-44
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 |
|
|
|
|
|
|
|
Lending |
|
|
Property |
|
|
|
Total |
|
|
Division |
|
|
Division |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income loans and other income |
|
$ |
11,136 |
|
|
$ |
11,136 |
|
|
$ |
|
|
Lease income |
|
|
1,017 |
|
|
|
|
|
|
|
1,017 |
|
Income from Retained Interests |
|
|
8,763 |
|
|
|
8,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,916 |
|
|
|
19,899 |
|
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
3,873 |
|
|
|
3,512 |
|
|
|
361 |
|
Depreciation |
|
|
316 |
|
|
|
2 |
|
|
|
314 |
|
Salaries and related benefits (1) |
|
|
3,557 |
|
|
|
3,201 |
|
|
|
356 |
|
Advisory and servicing fees to affiliate, net |
|
|
245 |
|
|
|
236 |
|
|
|
9 |
|
General and administrative |
|
|
1,882 |
|
|
|
1,868 |
|
|
|
14 |
|
Permanent impairments on Retained Interests |
|
|
1,182 |
|
|
|
1,182 |
|
|
|
|
|
Reduction of loan losses |
|
|
(253 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,802 |
|
|
|
9,748 |
|
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision, minority interest
discontinued operations and extraordinary item |
|
|
10,114 |
|
|
|
10,151 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(116 |
) |
|
|
(116 |
) |
|
|
|
|
Minority interest (preferred stock dividend of subsidiary) |
|
|
(75 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
9,923 |
|
|
|
9,960 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of real estate |
|
|
(252 |
) |
|
|
218 |
|
|
|
(470 |
) |
Net earnings |
|
|
3,517 |
|
|
|
13 |
|
|
|
3,504 |
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
3,265 |
|
|
|
231 |
|
|
|
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
|
13,188 |
|
|
|
10,191 |
|
|
|
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item: |
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill |
|
|
11,593 |
|
|
|
11,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,781 |
|
|
$ |
21,784 |
|
|
$ |
2,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Salaries and related benefits were allocated to the property division based on managements
estimate of time spent for oversight. |
Total assets were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Lending Division |
|
$ |
235,040 |
|
|
$ |
232,603 |
|
|
$ |
214,252 |
|
Property Division |
|
|
5,364 |
|
|
|
26,589 |
|
|
|
39,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
240,404 |
|
|
$ |
259,192 |
|
|
$ |
253,840 |
|
|
|
|
|
|
|
|
|
|
|
F-45
PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additions to furniture, fixtures and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Lending Division |
|
$ |
38 |
|
|
$ |
|
|
|
$ |
10 |
|
Property Division |
|
|
65 |
|
|
|
366 |
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103 |
|
|
$ |
366 |
|
|
$ |
605 |
|
|
|
|
|
|
|
|
|
|
|
F-46
Schedule II
PMC COMMERCIAL TRUST AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands, except footnotes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
beginning |
|
|
costs and |
|
|
other |
|
|
|
|
|
|
end |
|
Description |
|
of period |
|
|
expenses |
|
|
accounts |
|
|
Deductions |
|
|
of period |
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258) |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675) |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Reserves |
|
$ |
675 |
|
|
$ |
422 |
|
|
$ |
|
|
|
$ |
(933 |
) |
|
$ |
164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
Valuation Allowance |
|
$ |
|
|
|
$ |
|
|
|
$ |
171 |
(3) |
|
$ |
|
|
|
$ |
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35) |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18) |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Reserves |
|
$ |
164 |
|
|
$ |
325 |
|
|
$ |
|
|
|
$ |
(62 |
) |
|
$ |
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
Valuation Allowance |
|
$ |
171 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(171) |
(6) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent and Related Receivables
Reserve |
|
$ |
|
|
|
$ |
1,255 |
(7) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467) |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71) |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Reserves |
|
$ |
427 |
|
|
$ |
174 |
|
|
$ |
|
|
|
$ |
(538 |
) |
|
$ |
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent and Related Receivables
Reserve |
|
$ |
1,255 |
|
|
$ |
925 |
(7) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Principal written-off. |
(2)
|
|
During 2004, $675,000 of previously recorded loan loss reserves was reversed due to the reduction in the expected loss on a loan collateralized
by a limited service hospitality property due to repayment in full of all principal on the loan. |
(3)
|
|
We acquired net operating losses in the merger with PMC Capital, Inc. which were fully reserved at acquisition. |
(4)
|
|
During 2005 and 2006, previously recorded loan loss reserves were reversed due to reductions in expected losses on loans. |
(5)
|
|
Represents recovery of loans previously written-off. |
(6)
|
|
At the time of the merger in 2004, management believed that the benefit of the net operating loss carryforwards from one of our taxable REIT
subsidiaries would not be realized and a valuation allowance was established. However, as a result of operations during 2005, we realized the full
benefit of these net operating loss carryforwards and the valuation allowance was reversed. |
(7)
|
|
During 2005 and 2006, we established reserves against our rent and related receivables from Arlington based on best available information
provided to us through the Arlington bankruptcy proceedings. |
F-47
Schedule III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2006
(In thousands, except footnotes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent |
|
|
Recorded |
|
|
Which Carried at |
|
|
|
|
|
|
|
Initial Cost |
|
|
To Acquisition |
|
|
Impairment (2) |
|
|
Close of Period (1) |
|
|
|
|
|
|
|
|
|
|
|
Building |
|
|
Furniture |
|
|
|
|
|
|
Building |
|
|
Furniture |
|
|
|
|
|
|
Building |
|
|
Furniture |
|
|
|
|
|
|
Building |
|
|
Furniture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
Description of Property |
|
Encumbrances |
|
|
Land |
|
|
Improvements |
|
|
Fixtures |
|
|
Land |
|
|
Improvements |
|
|
Fixtures |
|
|
Land |
|
|
Improvements |
|
|
Fixtures |
|
|
Land |
|
|
Improvements |
|
|
Fixtures |
|
|
Total |
|
The following are hotel
properties operating as
Amerihost Inns |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Macomb, IL |
|
$ |
1,439 |
|
|
$ |
194 |
|
|
$ |
2,277 |
|
|
$ |
180 |
|
|
$ |
|
|
|
$ |
4 |
|
|
$ |
94 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
194 |
|
|
$ |
2,281 |
|
|
$ |
274 |
|
|
$ |
2,749 |
|
Plainfield, IN |
|
|
1,300 |
|
|
|
300 |
|
|
|
1,962 |
|
|
|
180 |
|
|
|
|
|
|
|
4 |
|
|
|
97 |
|
|
|
|
|
|
|
(508 |
) |
|
|
(262 |
) |
|
|
300 |
|
|
|
1,458 |
|
|
|
15 |
|
|
|
1,773 |
|
Marysville, OH |
|
|
1,203 |
|
|
|
300 |
|
|
|
2,712 |
|
|
|
237 |
|
|
|
|
|
|
|
6 |
|
|
|
129 |
|
|
|
|
|
|
|
(531 |
) |
|
|
(348 |
) |
|
|
300 |
|
|
|
2,187 |
|
|
|
18 |
|
|
|
2,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,942 |
|
|
|
794 |
|
|
|
6,951 |
|
|
|
597 |
|
|
|
|
|
|
|
14 |
|
|
|
320 |
|
|
|
|
|
|
|
(1,039 |
) |
|
|
(610 |
) |
|
|
794 |
|
|
|
5,926 |
|
|
|
307 |
|
|
|
7,027 |
|
Less property held by
unconsolidated entity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plainfield, IN |
|
|
(1,300 |
) |
|
|
(300 |
) |
|
|
(1,962 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
508 |
|
|
|
262 |
|
|
|
(300 |
) |
|
|
(1,458 |
) |
|
|
(15 |
) |
|
|
(1,773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,642 |
|
|
$ |
494 |
|
|
$ |
4,989 |
|
|
$ |
417 |
|
|
$ |
|
|
|
$ |
10 |
|
|
$ |
223 |
|
|
$ |
|
|
|
$ |
(531 |
) |
|
$ |
(348 |
) |
|
$ |
494 |
|
|
$ |
4,468 |
|
|
$ |
292 |
|
|
$ |
5,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate cost of our real estate for Federal income tax purposes was $8,675,000
(unaudited). |
(2) |
|
Impairments were recorded during the year ended December 31, 2005. |
F-48
Schedule III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Property |
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation - |
|
|
|
|
|
|
|
|
|
|
Life on Which |
|
|
|
Building and |
|
|
|
|
|
|
|
|
|
|
Depreciation in |
|
The following are all hotel |
|
Improvements; |
|
|
|
|
|
|
|
|
|
|
Latest |
|
properties operating as |
|
Furniture and |
|
|
Date of |
|
|
Date of |
|
|
Income Statement |
|
Amerihost Inns |
|
Fixtures |
|
|
Construction |
|
|
Acquisition |
|
|
is Computed |
|
Macomb, IL |
|
$ |
724 |
|
|
|
5/1/1995 |
|
|
|
3/23/1999 |
|
|
7 - 35 years |
Plainfield, IN |
|
|
64 |
|
|
|
9/1/1992 |
|
|
|
3/5/1999 |
|
|
7 - 35 years |
Marysville, OH |
|
|
116 |
|
|
|
6/1/1990 |
|
|
|
3/5/1999 |
|
|
7 - 35 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less property held by
unconsolidated entity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plainfield, IN |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
Schedule III
PMC COMMERCIAL TRUST AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2006
(In thousands, except footnotes)
Gross amount carried:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
|
|
|
$ |
52,549 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
Acquisitions through foreclosure |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements, etc. |
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (describe) |
|
|
|
|
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Cost of real estate sold |
|
$ |
(4,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other (describe) |
|
|
|
|
|
$ |
(4,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
|
|
|
$ |
48,231 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
Acquisitions through foreclosure |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements, etc |
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (describe) |
|
|
|
|
|
$ |
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Cost of real estate sold |
|
$ |
(13,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other (1) |
|
|
(7,263 |
) |
|
$ |
(20,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (2) |
|
|
|
|
|
$ |
27,678 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
Acquisitions through foreclosure |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements, etc. |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (describe) |
|
|
|
|
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Cost of real estate sold |
|
$ |
(20,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other (1)(3) |
|
|
(1,816 |
) |
|
$ |
(22,489 |
) |
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
|
|
$ |
5,254 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Impairment recorded. |
(2) |
|
Includes properties held for sale with a cost of $18,879,000 and accumulated depreciation of $3,409,000. |
(3) |
|
We deconsolidated an entity which owns a property on September 29, 2006 due to a new lease agreement with a significant
down payment and a purchase agreement. |
Accumulated Depreciation:
|
|
|
|
|
Balance at December 31, 2003 |
|
$ |
9,210 |
|
Additions during period: |
|
|
|
|
Depreciation expense during the period |
|
|
1,870 |
|
|
|
|
|
|
Accumulated Depreciation: |
|
|
|
|
Real estate held for sale |
|
|
|
|
Assets sold or written-off during the period |
|
|
(931 |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
$ |
10,149 |
|
|
|
|
|
Additions during period: |
|
|
|
|
Depreciation expense during the period |
|
|
1,236 |
|
|
|
|
|
|
Accumulated Depreciation: |
|
|
|
|
Real estate held for sale |
|
|
|
|
Assets sold or written-off during the period |
|
|
(7,257 |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (2) |
|
$ |
4,128 |
|
|
|
|
|
Additions during period: |
|
|
|
|
Depreciation expense during the period |
|
|
221 |
|
|
|
|
|
|
Accumulated Depreciation: |
|
|
|
|
Real estate held for sale |
|
|
|
|
Reduction due to deconsolidation of entity during the period (3) |
|
|
(64 |
) |
Assets sold or written-off during the period |
|
|
(3,445 |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
840 |
|
|
|
|
|
F-50
Schedule IV
PMC COMMERCIAL TRUST AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2006
(Dollars in thousands, except footnotes)
Conventional Loans States 2% or greater (1) (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount |
Geographic |
|
Number |
|
|
|
|
|
Final |
|
Carrying |
|
of loans subject to |
Dispersion of |
|
of |
|
Size of Loans |
|
Interest Rate |
|
Maturity |
|
Amount of |
|
delinquent principal |
Collateral |
|
Loans |
|
From |
|
To |
|
Variable |
|
Fixed |
|
Date |
|
Mortgages |
|
or "interest" |
Texas |
|
|
12 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.12% to 9.87% |
|
10.50% |
|
11/30/06--2/25/24 |
|
|
$ 6,289 |
|
|
|
$ |
|
Texas |
|
|
9 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
8.62% to 9.37% |
|
NA |
|
3/04/07--8/13/26 |
|
|
13,831 |
|
|
|
|
|
Texas |
|
|
3 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
8.62% |
|
8.35% |
|
11/29/26--12/04/26 |
|
|
7,985 |
|
|
|
|
|
Texas |
|
|
1 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
NA |
|
8.35% |
|
11/29/26 |
|
|
3,473 |
|
|
|
|
|
Ohio |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
NA |
|
9.00% |
|
3/02/18 |
|
|
940 |
|
|
|
|
|
Ohio |
|
|
6 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.12% to 10.12% |
|
8.28% |
|
12/29/06--5/30/26 |
|
|
8,789 |
|
|
|
|
|
Ohio |
|
|
2 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.37% |
|
8.28% |
|
2/05/24--10/30/26 |
|
|
5,396 |
|
|
|
|
|
Michigan |
|
|
4 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.12% to 9.37% |
|
NA |
|
8/26/25--5/30/26 |
|
|
6,156 |
|
|
|
|
|
Michigan |
|
|
2 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
8.87% |
|
NA |
|
11/02/26 |
|
|
7,323 |
|
|
|
|
|
Florida |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.25% |
|
NA |
|
11/01/25 |
|
|
220 |
|
|
|
|
|
Florida |
|
|
2 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
NA |
|
9.50% |
|
3/02/07--10/01/26 |
|
|
2,911 |
|
|
|
|
|
Florida |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
NA |
|
8.24% |
|
1/01/24 |
|
|
2,767 |
|
|
|
|
|
Florida |
|
|
1 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
9.25% |
|
NA |
|
11/01/25 |
|
|
3,190 |
|
|
|
|
|
Arizona |
|
|
2 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.37% to 9.62% |
|
NA |
|
5/01/23--7/29/25 |
|
|
1,691 |
|
|
|
|
|
Arizona |
|
|
1 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.87% |
|
NA |
|
9/29/24 |
|
|
1,297 |
|
|
|
|
|
Arizona |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.62% |
|
NA |
|
12/21/25 |
|
|
2,500 |
|
|
|
|
|
Arizona |
|
|
1 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
9.37% |
|
NA |
|
10/13/25 |
|
|
3,056 |
|
|
|
|
|
Alabama |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
NA |
|
9.50% |
|
10/27/18 |
|
|
542 |
|
|
|
|
|
Alabama |
|
|
1 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.62% |
|
NA |
|
12/02/24 |
|
|
1,104 |
|
|
|
|
|
Alabama |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.37% |
|
NA |
|
3/01/26 |
|
|
2,891 |
|
|
|
|
|
Alabama |
|
|
1 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
9.37% |
|
NA |
|
10/01/26 |
|
|
3,016 |
|
|
|
|
|
Virginia |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.37% |
|
NA |
|
1/13/26 |
|
|
299 |
|
|
|
|
|
Virginia |
|
|
3 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.37% |
|
NA |
|
2/28/23--10/04/24 |
|
|
4,033 |
|
|
|
|
|
Virginia |
|
|
1 |
|
|
$ |
3,000 |
|
|
$4,000 |
|
9.62% |
|
NA |
|
6/29/24 |
|
|
3,062 |
|
|
|
|
|
California |
|
|
2 |
|
|
$ |
0 |
|
|
$1,000 |
|
NA |
|
8.5% to 11.25% |
|
6/29/07--10/01/09 |
|
|
870 |
|
|
|
|
|
California |
|
|
2 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.11% to 9.62% |
|
NA |
|
9/18/23--12/13/26 |
|
|
3,822 |
|
|
|
|
|
California |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.75% |
|
NA |
|
12/12/26 |
|
|
2,315 |
|
|
|
|
|
Oregon |
|
|
2 |
|
|
$ |
0 |
|
|
$1,000 |
|
8.87% to 9.12% |
|
NA |
|
9/08/25--9/15/25 |
|
|
1,305 |
|
|
|
|
|
Oregon |
|
|
2 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.62% |
|
9.40% |
|
3/20/18--1/14/25 |
|
|
2,399 |
|
|
|
|
|
Oregon |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.62% |
|
NA |
|
9/08/25 |
|
|
2,416 |
|
|
|
|
|
New Mexico |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.62% |
|
NA |
|
3/10/23 |
|
|
811 |
|
|
|
|
|
New Mexico |
|
|
2 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.62% to 9.87% |
|
NA |
|
3/04/24--5/17/24 |
|
|
2,584 |
|
|
|
|
|
New Mexico |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.37% |
|
NA |
|
4/15/25 |
|
|
2,430 |
|
|
|
|
|
Iowa |
|
|
1 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.12% |
|
NA |
|
5/30/26 |
|
|
1,840 |
|
|
|
|
|
Iowa |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.37% |
|
NA |
|
5/12/23 |
|
|
2,811 |
|
|
|
|
|
Louisiana |
|
|
1 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.25% |
|
NA |
|
4/16/23 |
|
|
1,585 |
|
|
|
|
|
Louisiana |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.12% |
|
NA |
|
11/03/25 |
|
|
2,986 |
|
|
|
|
|
New York |
|
|
1 |
|
|
$ |
0 |
|
|
$1,000 |
|
11.62% |
|
NA |
|
9/19/13 |
|
|
345 |
|
|
|
|
|
New York |
|
|
3 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
8.87% to 9.75% |
|
NA |
|
4/09/23--3/01/24 |
|
|
4,182 |
|
|
|
|
|
Tennessee |
|
|
3 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.03% to 9.87% |
|
NA |
|
8/01/22--11/08/25 |
|
|
3,813 |
|
|
|
|
|
Georgia(3) |
|
|
2 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.87% |
|
8.50% |
|
11/01/04--10/10/16 |
|
|
1,290 |
|
|
|
473 |
|
Georgia |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.81% |
|
NA |
|
12/22/24 |
|
|
2,253 |
|
|
|
|
|
Missouri |
|
|
2 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.37% |
|
NA |
|
12/15/25--3/07/26 |
|
|
3,341 |
|
|
|
|
|
Mississippi |
|
|
1 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
NA |
|
9.25% |
|
4/14/18 |
|
|
1,025 |
|
|
|
|
|
Mississippi |
|
|
1 |
|
|
$ |
2,000 |
|
|
$3,000 |
|
9.87% |
|
NA |
|
9/29/23 |
|
|
2,190 |
|
|
|
|
|
Other |
|
|
7 |
|
|
$ |
0 |
|
|
$1,000 |
|
9.62% to 10.37% |
|
9.5% to 10.25% |
|
11/01/04--10/01/26 |
|
|
2,182 |
|
|
|
|
|
Other (4) |
|
|
10 |
|
|
$ |
1,000 |
|
|
$2,000 |
|
9.22% to 10.00% |
|
9.5% to 9.77% |
|
2/27/18--3/15/26 |
|
|
12,839 |
|
|
|
1,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$154,395 |
(5) |
|
|
$2,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes:
|
|
|
(1) |
|
As of December 31, 2006, there were no individual mortgage loans that were 3% of the total loans outstanding.
Approximately 95% of our loans are collateralized by limited service hotels. |
|
(2) |
|
There are nine loans which are secured by second liens on properties which are subordinated to our first liens on the respective
properties. |
|
(3) |
|
Includes one loan with a maturity date of November 1, 2004 which is impaired and currently in default. |
|
(4) |
|
Includes one impaired loan with a face value of $1,545,000 and a discount of $182,000. |
|
(5) |
|
For Federal income tax purposes, the cost basis of our mortgage loans on real estate was approximately $155,350,000 (unaudited). |
F-51
Schedule IV
PMC COMMERCIAL TRUST AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2006
(Dollars in thousands, except footnotes)
SBA 7(a) Loans States 2% or greater(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount |
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final |
|
|
Carrying |
|
|
of loans subject to |
|
|
|
of |
|
|
Size of Loans |
|
|
|
|
|
|
Maturity |
|
|
Amount of |
|
|
delinquent principal |
|
|
|
Loans |
|
|
From |
|
|
To |
|
|
Interest Rate(2) |
|
|
Date |
|
|
Mortgages |
|
|
or "interest" |
|
Texas (3) |
|
|
46 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.25% to 11.0% |
|
|
12/24/09-4/21/31 |
|
|
$ |
4,639 |
|
|
$ |
|
|
Texas (4) |
|
|
5 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
8.25% to 11.0% |
|
|
4/18/01-1/01/21 |
|
|
|
103 |
|
|
|
79 |
|
Texas (5) |
|
|
1 |
|
|
$ |
1,000 |
|
|
$ |
1,500 |
|
|
|
10.50% |
|
|
|
12/18/26 |
|
|
|
1,308 |
|
|
|
|
|
Georgia |
|
|
6 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.25% to 11.0% |
|
|
11/20/08-7/22/30 |
|
|
|
1,144 |
|
|
|
|
|
Georgia (4) |
|
|
1 |
|
|
$ |
500 |
|
|
$ |
1,000 |
|
|
|
9.25% |
|
|
|
6/29/24 |
|
|
|
533 |
|
|
|
|
|
Ohio |
|
|
8 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.25% to 10.75% |
|
|
5/11/13-3/31/30 |
|
|
|
1,123 |
|
|
|
|
|
Oklahoma |
|
|
6 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.75% to 11.0% |
|
|
5/27/24-8/25/30 |
|
|
|
813 |
|
|
|
|
|
Kansas |
|
|
6 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.0% to 11.0% |
|
|
3/17/18-9/01/26 |
|
|
|
700 |
|
|
|
|
|
New Mexico |
|
|
1 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
|
11.00% |
|
|
|
8/30/24 |
|
|
|
214 |
|
|
|
|
|
New Mexico (4) |
|
|
1 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
|
8.25% |
|
|
|
5/11/25 |
|
|
|
384 |
|
|
|
|
|
Missouri |
|
|
4 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.25% to 11.0% |
|
|
2/20/11-12/14/29 |
|
|
|
486 |
|
|
|
|
|
Florida (6) |
|
|
6 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.00% to 11.0% |
|
|
12/14/08-3/18/18 |
|
|
|
426 |
|
|
|
|
|
South Carolina |
|
|
2 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
|
10.25% |
|
|
|
10/02/17-5/30/31 |
|
|
|
360 |
|
|
|
|
|
Arkansas |
|
|
3 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.25% to 11.00% |
|
|
10/25/11-7/30/26 |
|
|
|
353 |
|
|
|
|
|
California |
|
|
4 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.25% to 11.0% |
|
|
2/28/09-8/03/21 |
|
|
|
349 |
|
|
|
|
|
Indiana |
|
|
3 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.25% to 10.50% |
|
|
11/19/19-3/17/25 |
|
|
|
303 |
|
|
|
|
|
Michigan |
|
|
4 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
9.25% to 10.75% |
|
|
9/15/12-10/21/16 |
|
|
|
291 |
|
|
|
|
|
Other |
|
|
12 |
|
|
$ |
0 |
|
|
$ |
500 |
|
|
10.0% to 11.0% |
|
|
11/01/08-9/29/25 |
|
|
|
1,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,786 |
(7) |
|
$ |
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footnotes:
|
|
|
(1) |
|
Includes approximately $558,000 of loans not secured by real estate and $360,000 of loans secured by second liens on properties which are
subordinated to our first liens on the respective properties. |
(2) |
|
Interest rates are variable at spreads over the prime rate unless otherwise noted. |
(3) |
|
Includes an impaired loan with a face value of $79,000 and a valuation reserve of $56,000 and a discount of $23,000. |
(4) |
|
Fixed rate loans |
(5) |
|
Loan funded, guaranteed portion of loan sold into secondary market in January 2007 |
(6) |
|
Includes an impaired loan with a face value of $32,000 and a valuation reserve of $7,000. |
(7) |
|
For Federal income tax purposes, the cost basis of our
loans on real estate was approximately $14,808,000 (unaudited). |
F-52
Schedule IV
PMC COMMERCIAL TRUST AND SUBSIDIARIES
MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2006
(In thousands, except footnotes)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
|
|
|
$ |
50,534 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
New mortgage loans |
|
|
53,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans acquired in merger with PMC Capital, Inc. |
|
|
55,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loan deemed to be repurchased from securitization |
|
|
2,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other reduction of bad debt expense |
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accretion of loan fees and discounts |
|
|
379 |
|
|
|
111,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Collections of principal |
|
|
(24,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures |
|
|
(2,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of mortgages sold, net |
|
|
(6,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferral for collection of commitment fees, net of costs |
|
|
(352 |
) |
|
|
(33,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
|
|
|
$ |
128,234 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
New mortgage loans (1) |
|
|
58,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivable established through due to affiliate, net |
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accretion of loan fees and discounts |
|
|
384 |
|
|
|
59,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Collections of principal |
|
|
(16,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures |
|
|
(5,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of mortgages sold, net |
|
|
(8,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other bad debt expense |
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other deferral for collection of commitment fees, net of costs |
|
|
(152 |
) |
|
|
(30,311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
$ |
157,574 |
|
|
|
|
|
|
|
|
|
Additions during period: |
|
|
|
|
|
|
|
|
New mortgage loans (2)(3) |
|
|
71,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accretion of loan fees and discounts |
|
|
440 |
|
|
|
71,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deductions during period: |
|
|
|
|
|
|
|
|
Collections of principal |
|
|
(49,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosures |
|
|
(3,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of mortgages sold, net |
|
|
(6,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other purchased discount |
|
|
(182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other bad debt expense |
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other deferral for collection of commitment fees, net of costs |
|
|
(72 |
) |
|
|
(60,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
|
|
$ |
169,181 |
|
|
|
|
|
|
|
|
|
Footnotes:
|
|
|
(1)
|
|
Includes three loans of approximately $4,770,000 which were originated in connection with the
sales of hotel properties
and two loans of approximately $3,725,000 which were originated in connection with sales of assets
acquired in liquidation
which did not require cash expenditures. |
(2)
|
|
Includes ten loans of approximately $17,084,000 which were originated in connection with the
sales of hotel properties
and two loans of approximately $2,760,000 which were originated in connection with sales of assets
acquired in liquidation
which did not require cash expenditures. |
(3)
|
|
Includes two loans receivable totalling approximately $2,540,000 repurchased from affiliates. |
F-53
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
2.1
|
|
Agreement of Purchase and Sale, dated as of May 21, 1998, by
and among Registrant and the various corporations identified
on Exhibit A thereto (which includes as Exhibit D thereto,
the form of the Master Agreement relating to the leasing of
the properties), including Amerihost Properties, Inc. and
Amerihost Inns, Inc. (incorporated by reference to Exhibit
2.2 to the Registrants Current Report on Form 8-K dated
June 5, 1998). |
|
|
|
2.2
|
|
Agreement and Plan of Merger by and between PMC Commercial
Trust and PMC Capital, Inc. dated March 27, 2003
(incorporated by reference to Annex A to the Registrants
Registration Statement on Form S-4 dated November 10, 2003). |
|
|
|
2.3
|
|
Amendment No. 1 to Agreement and Plan of Merger between PMC
Commercial Trust and PMC Capital, Inc. dated August 1, 2003
(incorporated by reference to Exhibit 2.5 to the
Registrants Quarterly Report on Form 10-Q filed on August
12, 2003). |
|
|
|
3.1
|
|
Declaration of Trust (incorporated by reference to the
exhibits to the Registrants Registration Statement on Form
S-11 filed with the Commission 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 exhibits to the Registrants Registration
Statement on Form S-11 filed with the Commission 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 dated February 10,
2004 (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 Commission on June 25, 1993, as amended (Registration
No. 33-65910)). |
|
|
|
4.1
|
|
Instruments defining the rights of security holders. The
instruments filed in response to items 3.1 and 3.2 are
incorporated in this item by reference. |
|
|
|
4.2
|
|
Debenture dated March 4, 2005 for $4,000,000 loan with SBA
(incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2005). |
E-1
|
|
|
Exhibit |
|
|
Number |
|
Description |
4.3
|
|
Debenture dated September 9, 2003 for $2,190,000 loan with
SBA (incorporated by reference to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2005). |
|
|
|
4.4
|
|
Debenture dated September 9, 2003 for $2,000,000 loan with
SBA (incorporated by reference to the Registrants Annual
Report on Form 10-K for the year ended December 31, 2005). |
|
|
|
10.1
|
|
1993 Employee Share Option Plan (incorporated by reference
to the exhibits to the Registrants Registration Statement
on Form S-11 filed with the Commission on June 25, 1993, as
amended (Registration No. 33-65910)). |
|
|
|
10.2
|
|
1993 Trust Manager Share Option Plan (incorporated by
reference to the exhibits to the Registrants Registration
Statement on Form S-11 filed with the Commission on June 25,
1993, as amended (Registration No. 33-65910)). |
|
|
|
10.3
|
|
2005 Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2005). |
|
|
|
10.4
|
|
Trust Indenture between PMC Joint Venture, L.P. 2000 and BNY
Midwest Trust Company, dated as of December 15, 2000
(incorporated by reference to Exhibit 2.1 to the
Registrants Current Report on Form 8-K filed on March 13,
2001). |
|
|
|
10.5
|
|
Servicing Agreement by and among BNY Midwest Trust Company,
PMC Joint Venture, L.P. 2000 and PMC Capital, Inc. and PMC
Commercial Trust, dated as of December 15, 2000
(incorporated by reference to Exhibit 2.2 to the
Registrants Current Report on Form 8-K filed on March 13,
2001). |
|
|
|
10.6
|
|
Servicing Agreement by and among BNY Midwest Trust Company
as Trustee and Supervisory Servicer, PMC Joint Venture, L.P.
2001, as Issuer and PMC Capital, Inc. and PMC Commercial
Trust, as Servicers (incorporated by reference to Exhibit
10.1 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2001). |
|
|
|
10.7
|
|
Trust Indenture by and among BNY Midwest Trust Company as
Trustee and PMC Joint Venture, L.P. 2001, as Issuer
(incorporated by reference to Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001). |
|
|
|
10.8
|
|
Amended and Restated Master Agreement, dated as of January
24, 2001, by and among PMC Commercial Trust, and certain of
its subsidiaries, and Amerihost Properties, Inc., doing
business as Arlington Hospitality, Inc. (incorporated by
reference to Exhibit 2.3 to the Registrants Current Report
on Form 8-K filed on March 13, 2001). |
E-2
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.9
|
|
Third Amendment to Amended and Restated Master Agreement
dated October 4, 2004 among PMC Commercial Trust and
Arlington Hospitality, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on October 8, 2004). |
|
|
|
10.10
|
|
Trust Indenture between PMC Joint Venture, L.P. 2002-1 and
BNY Midwest Trust Company, dated April 3, 2002 (incorporated
by reference to Exhibit 2.1 to the Registrants Current
Report on Form 8-K filed on April 19, 2002). |
|
|
|
10.11
|
|
Servicing Agreement by and among BNY Midwest Trust
Company, PMC Joint Venture, L.P. 2002-1, PMC Capital, Inc.
and PMC Commercial Trust, dated April 3, 2002 (incorporated
by reference to Exhibit 2.2 to the Registrants Current
Report on Form 8-K filed on April 19, 2002). |
|
|
|
10.12
|
|
Servicing Agreement by and among Harris Trust Savings Bank,
as Trustee and Supervisory Servicer, PMC Capital L.P.
1998-1, as Issuer, and PMC Capital, Inc. as Servicer
(incorporated by reference to Exhibit 10.12 to PMC Capital,
Inc.s Annual Report on Form 10-K for the fiscal year ended
December 31, 1998). |
|
|
|
10.13
|
|
Servicing Agreement by and among Harris Trust Savings Bank,
as Trustee and Supervisory Servicer, PMC Capital L.P.
1999-1, as Issuer, and PMC Capital, Inc. as Servicer
(incorporated by reference to Exhibit 10.1 to PMC Capital,
Inc.s Quarterly Report on Form 10-Q for the quarterly
period ended June 30,
1999). |
|
|
|
10.14
|
|
Trust Indenture between PMC Joint Venture, L.P. 2003-1 and
The Bank of New York, as Trustee, dated September 16, 2003
(incorporated by reference to the Registrants Current
Report on Form 8-K filed October 10, 2003). |
|
|
|
10.15
|
|
Servicing Agreement by and among The Bank of New York as
Trustee and Supervisory Servicer, PMC Joint Venture, L.P.
2003-1 as Issuer and PMC Capital, Inc. and PMC Commercial
Trust as Servicers, dated September 16, 2003 (incorporated
by reference to the Registrants Current Report on Form 8-K
filed October 10, 2003). |
|
|
|
10.16
|
|
Revolving Credit Agreement dated February
29, 2004 between PMC Commercial and Bank One, Texas, N.A.
(incorporated by reference to the Registrants Annual Report
on Form 10-K filed March 15, 2004). |
|
|
|
10.17
|
|
Employment contract with Lance B. Rosemore dated June 12,
2006 (incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
10.18
|
|
Employment contract with Andrew S. Rosemore dated June 12,
2006 (incorporated by reference to Exhibit 10.2 to the |
E-3
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
10.19
|
|
Employment contract with Barry N. Berlin dated June 12, 2006
(incorporated by reference to Exhibit 10.4 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
10.20
|
|
Employment contract with Jan F. Salit dated June 12, 2006
(incorporated by reference to Exhibit 10.3 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2006). |
|
|
|
10.21
|
|
Employment agreement with Ron Dekelbaum dated April 28, 2005
(incorporated by reference to Exhibit 10.6 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2005). |
|
|
|
10.22
|
|
Purchase Agreement among PMC Commercial Trust, PMC Preferred
Capital Trust-A and Taberna Preferred Funding I, Ltd. dated
March 15, 2005 (incorporated by reference to Exhibit 10.1 to
the Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2005). |
|
|
|
10.23
|
|
Junior Subordinated Indenture between PMC Commercial Trust
and JPMorgan Chase Bank, National Association as Trustee
dated March 15, 2005 (incorporated by reference to Exhibit
10.2 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2005). |
|
|
|
10.24
|
|
Amended and Restated Trust Agreement among PMC Commercial
Trust, JPMorgan Chase Bank, National Association, Chase Bank
USA, National Association and The Administrative Trustees
Named Herein dated March 15, 2005 (incorporated by reference
to Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2005). |
|
|
|
10.25
|
|
Preferred Securities Certificate (incorporated by reference
to Exhibit 10.4 to the Registrants Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2005). |
|
|
|
10.26
|
|
Floating Rate Junior Subordinated Note due 2035
(incorporated by reference to Exhibit 10.5 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2005). |
|
|
|
10.27
|
|
First Amendment to employment agreement
with Ron Dekelbaum dated January 12, 2006 (incorporated by
reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2005). |
|
|
|
10.28
|
|
Amendment No. 1 to Revolving Credit Facility dated March 15,
2004 between PMC Commercial Trust and Bank One, Texas, N.A.
(incorporated by reference to the Registrants |
E-4
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2004). |
|
|
|
10.29
|
|
Servicing Agreement by and among PMC Conduit, L.P. as
Borrower, PMC Commercial Trust as Servicer and JPMorgan
Chase Bank, National Association as Agent dated February 7,
2005 (incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed February 11,
2005). |
|
|
|
10.30
|
|
Purchase and Contribution Agreement by and between PMC
Commercial Trust as Seller and PMC Conduit, L.P. as
Purchaser dated February 7, 2005 (incorporated by reference
to Exhibit 10.3 to the Registrants Current Report on Form
8-K filed February 11, 2005). |
|
|
|
10.31
|
|
Credit and Security Agreement by and among PMC Conduit, L.P.
as Borrower, PMC Conduit, LLC, PMC Commercial Trust as
Servicer, Jupiter Securitization Corporation as the Conduit
Lender, The Alternate Lenders From Time to Time Party Hereto
and JPMorgan Chase Bank, National Association as Agent dated
February 7, 2005 (incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed
February 11, 2005). |
|
|
|
10.32
|
|
Second Amendment to Credit Agreement between PMC Commercial
Trust and JPMorgan Chase Bank, N.A. dated December 29, 2004
(incorporated by reference to Exhibit 10.44 to the
Registrants Annual Report on Form 10-K filed March 16,
2005). |
|
|
|
10.33
|
|
Third Amendment to Credit Agreement between PMC Commercial
Trust and JPMorgan Chase Bank, N.A. dated February 7, 2005
(incorporated by reference to Exhibit 10.45 to the
Registrants Annual Report on Form 10-K filed March 16,
2005). |
|
|
|
10.34
|
|
Fourth Amendment to Credit Agreement between PMC Commercial
Trust and JPMorgan Chase Bank, N.A. dated December 28, 2005
(incorporated by reference to the Registrants Annual Report
on Form 10-K for the year ended December 31, 2005). |
|
|
|
10.35
|
|
Form of Indemnification Agreement (incorporated by reference
to the Registrants Annual Report on Form 10-K for the year
ended December 31, 2005). |
|
|
|
10.36
|
|
Amendment No. 1 to Credit and Security Agreement between PMC
Conduit, L.P. as borrower, PMC Conduit, LLC, PMC Commercial
Trust as servicer, the conduits and financial institutions
from time to time party to the Credit Agreement and JPMorgan
Chase Bank, National Association , as agent for the lenders
dated February 6, 2006 (incorporated by reference to the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2005). |
E-5
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.37
|
|
Second amendment to employment agreement with Ron Dekelbaum
dated July 6, 2006 (incorporated by reference to Exhibit
10.5 to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2006). |
|
|
|
10.38
|
|
Fifth amendment to Credit Agreement between PMC Commercial
Trust and JPMorgan Chase Bank, N.A. dated November 7, 2006
(incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2006). |
|
|
|
*10.39
|
|
Amendment No. 2 to Credit and Security Agreement between PMC
Conduit, L.P. as borrower, PMC Conduit, LLC, PMC Commercial
Trust as servicer, the conduits and financial institutions
from time to time party to the Credit Agreement and JPMorgan
Chase Bank, National Association, as agent for the lenders
dated February 5, 2007 |
|
|
|
*21.1
|
|
Subsidiaries of the Registrant |
|
|
|
*23.1
|
|
Consent of PricewaterhouseCoopers LLP |
|
|
|
*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. |
|
** |
|
Furnished herewith. |
The Registrant agrees to furnish to the Securities and Exchange Commission upon request a
copy of any instrument with respect to long-term debt not filed herewith as to which the
total amount of securities authorized thereunder does not exceed 10 percent of the total
assets of the Registrant and its subsidiaries on a consolidated basis.
E-6
exv10w39
Exhibit 10.39
AMENDMENT NO. 2
TO
CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 TO CREDIT AND SECURITY AGREEMENT (this Amendment) dated as of
February 5, 2007, is entered into among PMC CONDUIT, L.P. as borrower (the Borrower), PMC
CONDUIT, LLC, PMC COMMERCIAL TRUST, as the servicer (the Servicer), the conduits and
financial institutions from time to time party to the Credit Agreement, as lenders (the
Lenders), and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, as agent for the Lenders (in
such capacity, the Agent). Capitalized terms used herein without definition shall have
the meanings ascribed thereto in Exhibit I to the Credit Agreement referred to below.
PRELIMINARY STATEMENTS
A. Reference is made to that certain Credit and Security Agreement dated as of February 7,
2005 among the Borrower, PMC Conduit, LLC, the Servicer, the Lenders from time to time party
thereto and the Agent (as amended, restated, supplemented or modified from time to time, the
Credit Agreement).
B. The parties hereto have agreed to amend certain provisions of the Credit Agreement upon the
terms and conditions set forth herein.
SECTION 1. Amendments. Subject to the satisfaction of the conditions precedent set
forth in Section 3 hereof, the parties hereto hereby agree to:
(a) amend Exhibit I to the Credit Agreement by amending and restating the definition of
Scheduled Termination Date, such definition to read in its entirety as follows:
Scheduled Termination Date means February 4, 2008, as such date is extended
pursuant to Section 1.8 from time to time.
(b) amend and restate Section 9.1(s) to the Credit Agreement, such section to read in
its entirety as follows:
(s) The Borrower shall fail to consummate at least one Term Securitization during the thirty
six (36) month period following the Closing Date or shall fail to consummate at least one Term
Securitization during each subsequent eighteen (18) month period following the most recent Term
Securitization; or
SECTION 2. Representations and Warranties. The Borrower hereby represents and
warrants to each of the other parties hereto, that:
(a) this Amendment and the Credit Agreement amended hereby each constitutes its legal,
valid and binding obligation, enforceable against it in accordance with its terms; and
(b) on the date hereof, before and after giving effect to this Amendment, no Unmatured
Amortization Event or Amortization Event has occurred and is continuing.
SECTION 3. Conditions Precedent. This Amendment shall become effective as of the date
hereof when, and only when:
(a) the Agent or its counsel shall have received counterpart signature pages to this
Amendment, executed by the parties hereto;
(b) each representation and warranty by the Borrower set forth in Section 2
above and contained in the Credit Agreement (as amended hereby) and in each other
Transaction Document shall be true and correct as of the date hereof, except to the extent
that such representation or warranty expressly relates solely to an earlier date; and
(c) no Unmatured Amortization Event or Amortization Event shall have occurred and be
continuing or would result after giving effect to any of the transactions contemplated on
the date hereof.
SECTION 4. Reference to and Effect on the Transaction Documents.
(a) Upon the effectiveness of this Amendment, (i) each reference in the Credit
Agreement to this Credit Agreement, this Agreement, hereunder, hereof, herein or
words of like import shall mean and be a reference to the Credit Agreement as amended or
otherwise modified hereby, and (ii) each reference to the Credit Agreement in any other
Transaction Document or any other document, instrument or agreement executed and/or
delivered in connection therewith, shall mean and be a reference to the Credit Agreement as
amended or otherwise modified hereby.
(b) Except as specifically amended, terminated or otherwise modified above, the terms
and conditions of the Credit Agreement, of all other Transaction Documents and any other
documents, instruments and agreements executed and/or delivered in connection therewith,
shall remain in full force and effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not operate as a
waiver of any right, power or remedy of the Agent, PMC Conduit, LLC, the Servicer or any
Lender under the Credit Agreement or any other Transaction Document or any other document,
instrument or agreement executed in connection therewith, nor
2
constitute a waiver of any provision contained therein, in each case except as
specifically set forth herein.
SECTION 5. Execution in Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument. Delivery of an executed counterpart of a signature
page to this Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York.
SECTION 7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment for any other
purpose.
SECTION 8. Fees and Expenses. The Borrower hereby confirms its agreement to pay on
the Settlement Date immediately following the date hereof, an amendment fee equal to $15,000, and
on demand all reasonable costs and expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment and any of the other instruments, documents and agreements
to be executed and/or delivered in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel to the Agent with respect thereto.
SECTION 9. Entire Agreement. This Amendment, taken together with the Credit Agreement
and all of the other Transaction Documents, embodies the entire agreement and understanding of the
parties hereto and supersedes all prior agreements and understandings, written and oral, relating
to the subject matter hereof.
SECTION 10. No Course of Dealing. The Agent and the Lenders have entered into this
Amendment on the express understanding with the Borrower, PMC Conduit, LLC and the Servicer that in
entering into this Amendment, none of them are establishing any course of dealing with the
Borrower, PMC Conduit, LLC or the Servicer. The rights of the Agent and each Lender to require
strict performance with all the terms and conditions of the Credit Agreement as amended by this
Amendment and the other Transaction Documents shall not in any way be impaired by the execution of
this Amendment. Neither the Agent nor any Lender shall be obligated in any manner to execute any
further amendments or waivers, and if such waivers or amendments are requested in the future,
assuming the terms and conditions thereof are acceptable to them, the Agent and the Lenders may
require the payment of fees in connection therewith.
[Remainder of Page Deliberately Left Blank]
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their
respective officers as of the date first above written.
|
|
|
|
|
|
|
|
|
PMC CONDUIT, L.P., as the Borrower |
|
|
|
|
|
|
|
|
|
|
|
By: PMC CONDUIT, LLC, its General Partner |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jan F. Salit
Name: Jan F. Salit
|
|
|
|
|
|
|
Title: Executive Vice President |
|
|
|
|
|
|
|
|
|
|
|
PMC CONDUIT, LLC |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jan F. Salit
Name: Jan F. Salit
|
|
|
|
|
|
|
Title: Executive Vice President |
|
|
|
|
|
|
|
|
|
|
|
PMC COMMERCIAL TRUST, as Servicer |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jan F. Salit
Name: Jan F. Salit
|
|
|
|
|
|
|
Title: Executive Vice President |
|
|
Signature Page to Amendment No. 2 to Credit Agreement
|
|
|
|
|
|
|
|
|
JUPITER SECURITIZATION CORPORATION, as a Lender |
|
|
|
|
|
|
|
|
|
|
|
By: JPMorgan Chase Bank, National Association, its attorney-in-fact |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Maureen E. Marcon
Name: Maureen E. Marcon
|
|
|
|
|
|
|
Duly Authorized Signatory |
|
|
|
|
|
|
|
|
|
|
|
JPMORGAN CHASE BANK, NATIONAL |
|
|
|
|
ASSOCIATION, as a Lender and as Agent |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Maureen E. Marcon
Name: Maureen E. Marcon
|
|
|
|
|
|
|
Duly Authorized Signatory |
|
|
Signature Page to Amendment No. 2 to Credit Agreement
exv21w1
Exhibit 21.1
Subsidiaries of Registrant
|
|
|
|
|
State |
|
|
of |
Company |
|
Incorporation |
|
|
|
PMC Commercial Trust, Ltd. 1998-1 |
|
Delaware |
PMCT Corp. 1998-1 |
|
Delaware |
PMCT Macomb, L.P. |
|
Delaware |
PMCT AH Macomb, Inc. |
|
Delaware |
PMCT Marysville, L.P. |
|
Delaware |
PMCT AH, Inc. |
|
Delaware |
PMCT Plainfield, L.P. |
|
Delaware |
PMC Joint Venture, L.P. 2000 |
|
Delaware |
PMC Joint Venture LLC 2000 |
|
Delaware |
PMC Joint Venture, L.P. 2001 |
|
Delaware |
PMC Joint Venture LLC 2001 |
|
Delaware |
PMC Joint Venture, L.P. 2002-1 |
|
Delaware |
PMC Joint Venture LLC 2002-1 |
|
Delaware |
PMC Joint Venture, L.P. 2003-1 |
|
Delaware |
PMC Joint Venture LLC 2003-1 |
|
Delaware |
PMC Investment Corporation |
|
Florida |
Western Financial Capital Corporation |
|
Florida |
First Western SBLC, Inc. |
|
Florida |
PMC Funding Corp. |
|
Florida |
PMC Capital, L.P. 1998-1 |
|
Delaware |
PMC Capital Corp. 1998-1 |
|
Delaware |
PMC Capital, L.P. 1999-1 |
|
Delaware |
PMC Capital Corp. 1999-1 |
|
Delaware |
PMC Asset Holding, LLC |
|
Delaware |
PMC Conduit, L.P. |
|
Delaware |
PMC Conduit, LLC |
|
Delaware |
PMC Preferred Capital Trust-A |
|
Delaware |
PMC Properties, Inc. |
|
Delaware |
exv23w1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3
(No. 333-24767) and Form S-8 (No. 333-127531) of PMC Commercial Trust of our report dated March 15,
2007 relating to the financial statements, financial statement schedules, managements assessment
of the effectiveness of internal control over financial reporting and the effectiveness of internal
control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2007
exv31w1
Exhibit 31.1
CERTIFICATION
I, Lance B. Rosemore, Chief Executive Officer, certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of PMC Commercial Trust; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal
quarter in the case of annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over
financial reporting; and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
|
a) |
|
all significant deficiencies in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants internal
control over financial reporting. |
|
|
|
|
|
Date: 3/15/07
|
|
/s/ Lance B. Rosemore
Lance B. Rosemore
|
|
|
|
|
Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
CERTIFICATION
I, Barry N. Berlin, Chief Financial Officer, certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of PMC Commercial Trust; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report; |
|
|
4. |
|
The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the registrants
most recent fiscal quarter (the registrants fourth quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of directors
(or persons performing the equivalent functions): |
|
a) |
|
all significant deficiencies in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting. |
|
|
|
|
|
Date: 3/15/07
|
|
/s/ Barry N. Berlin
Barry N. Berlin
|
|
|
|
|
Chief Financial Officer |
|
|
exv32w1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PMC Commercial Trust (the Company) on Form 10-K for
the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Lance B. Rosemore, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that
to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Lance B. Rosemore
Lance B. Rosemore
Chief Executive Officer
March 15, 2007
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed
filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.
A signed original of this statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has
been provided to the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
exv32w2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of PMC Commercial Trust (the Company) on Form 10-K for
the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Barry N. Berlin, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that
to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Barry N. Berlin
Barry N. Berlin
Chief Financial Officer
March 15, 2007
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed
filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.
A signed original of this statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has
been provided to the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.