UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

o		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)

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

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

Indicate by check mark whether the Registrant 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

As of August 3, 2007, the Registrant had outstanding 10,765,033 Common Shares of Beneficial Interest, par value $.01 per share.

 

 

PMC COMMERCIAL TRUST AND SUBSIDIARIES

INDEX

		PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) — June 30, 2007 and December 31, 2006			2
Consolidated Statements of Income (Unaudited) — Three and Six Months Ended June 30, 2007 and 2006			3
Consolidated Statements of Comprehensive Income (Unaudited) — Three and Six Months Ended June 30, 2007 and 2006			4
Consolidated Statements of Beneficiaries’ Equity (Unaudited) — Six Months Ended June 30, 2007 and 2006			5
Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2007 and 2006			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			47
PART II. Other Information
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Security Holders			48
Item 5. Other Information			49
Item 6. Exhibits			49
Employment Agreement with Lance B. Rosemore
Employment Agreement with Andrew S. Rosemore
Employment Agreement with Jan F. Salit
Employment Agreement with Barry N. Berlin
Employment Agreement with Ron Dekelbaum
Section 302 Officer Certification - CEO
Section 302 Officer Certification - CFO
Section 906 Officer Certification - CEO
Section 906 Officer Certification - CFO

PART I

Financial Information

ITEM 1.

Financial Statements

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		June 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Loans receivable, net		$	169,020			$	169,181
Retained interests in transferred assets			53,399				55,724
Cash and cash equivalents			11,943				3,739
Restricted investments			1,392				995
Mortgage-backed security of affiliate			559				643
Deferred tax asset, net			189				203
Due from affiliates, net			24				—
Real estate investments, net			—				4,414
Other assets			3,480				5,505
Total assets		$	240,006			$	240,404
LIABILITIES AND BENEFICIARIES’ EQUITY
Liabilities:
Credit facilities		$	29,143			$	26,968
Junior subordinated notes			27,070				27,070
Mortgage notes and debentures payable			8,162				10,803
Borrower advances			4,754				3,694
Redeemable preferred stock of subsidiary			3,718				3,668
Dividends payable			3,292				4,365
Deferred gains on property sales			2,640				1,574
Accounts payable and accrued expenses			1,476				2,578
Due to affiliates, net			—				683
Other liabilities			855				810
Total liabilities			81,110				82,213
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; 11,051,383 and 11,040,153 shares issued at June 30, 2007 and December 31, 2006, respectively, 10,765,033 and 10,753,803 shares outstanding at June 30, 2007 and December 31, 2006, respectively			111				110
Additional paid-in capital			152,282				152,178
Net unrealized appreciation of retained interests in transferred assets			3,322				3,256
Cumulative net income			144,974				137,984
Cumulative dividends			(139,462	)			(133,006	)
			161,227				160,522
Less: Treasury stock; at cost, 286,350 shares at June 30, 2007 and December 31, 2006			(3,231	)			(3,231	)
Total beneficiaries’ equity			157,996				157,291
Total liabilities and beneficiaries’ equity		$	240,006			$	240,404

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(Unaudited)
Revenues:
Interest income		$	8,254			$	7,611			$	4,198			$	3,929
Income from retained interests in transferred assets			3,978				4,935				2,077				2,682
Hotel property revenues			—				275				—				169
Other income			1,381				1,863				640				972
Total revenues			13,613				14,684				6,915				7,752
Expenses:
Interest			2,745				2,784				1,420				1,379
Salaries and related benefits			2,381				2,273				1,214				1,213
General and administrative			1,296				1,257				580				635
Provision for loss on rent and related receivables			239				425				—				125
Permanent impairments on retained interests in transferred assets			123				584				99				536
Provision for (reduction of) loan losses, net			52				53				(13	)			2
Hotel property expenses			—				254				—				140
Total expenses			6,836				7,630				3,300				4,030
Income before income tax provision, minority interest and discontinued operations			6,777				7,054				3,615				3,722
Income tax provision			(347	)			(334	)			(205	)			(250	)
Minority interest (preferred stock dividend of subsidiary)			(45	)			(45	)			(23	)			(23	)
Income from continuing operations			6,385				6,675				3,387				3,449
Discontinued operations:
Net gains on sales of real estate			1,279				2,019				1,252				142
Impairment losses			(233	)			(94	)			—				(21	)
Net earnings (losses)			(441	)			91				(470	)			80
			605				2,016				782				201
Net income		$	6,990			$	8,691			$	4,169			$	3,650
Weighted average shares outstanding:
Basic			10,755				10,745				10,756				10,744
Diluted			10,764				10,745				10,762				10,744
Basic and diluted earnings per share:
Income from continuing operations		$	0.59			$	0.62			$	0.32			$	0.32
Discontinued operations			0.06				0.19				0.07				0.02
Net income		$	0.65			$	0.81			$	0.39			$	0.34

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(Unaudited)
Net income		$	6,990			$	8,691			$	4,169			$	3,650
Change in unrealized appreciation (depreciation) of retained interests in transferred assets:
Net unrealized appreciation (depreciation) arising during period			287				(517	)			108				(28	)
Net realized gains included in net income			(221	)			(334	)			(111	)			(156	)
			66				(851	)			(3	)			(184	)
Comprehensive income		$	7,056			$	7,840			$	4,166			$	3,466

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY
(In thousands, except share and per share data)

		Six Months Ended June 30, 2006
		(Unaudited)
														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, 2006			10,766,021			$	110			$	152,047			$	4,519			$	122,300			$	(119,031	)		$	(2,928	)		$	157,017
Net unrealized depreciation			—				—				—				(851	)			—				—				—				(851	)
Shares repurchased			(24,100	)			—				—				—				—				—				(303	)			(303	)
Share-based compensation expense			9,060				—				91				—				—				—				—				91
Dividends ($0.60 per share)			—				—				—				—				—				(6,449	)			—				(6,449	)
Net income			—				—				—				—				8,691				—				—				8,691
Balances, June 30, 2006			10,750,981			$	110			$	152,138			$	3,668			$	130,991			$	(125,480	)		$	(3,231	)		$	158,196

		Six Months Ended June 30, 2007
		(Unaudited)
														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, 2007			10,753,803			$	110			$	152,178			$	3,256			$	137,984			$	(133,006	)		$	(3,231	)		$	157,291
Net unrealized appreciation			—				—				—				66				—				—				—				66
Share-based compensation expense			11,230				1				104				—				—				—				—				105
Dividends ($0.60 per share)			—				—				—				—				—				(6,456	)			—				(6,456	)
Net income			—				—				—				—				6,990				—				—				6,990
Balances, June 30, 2007			10,765,033			$	111			$	152,282			$	3,322			$	144,974			$	(139,462	)		$	(3,231	)		$	157,996

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Six Months Ended
		June 30,
		2007				2006
		(Unaudited)
Cash flows from operating activities:
Net income		$	6,990			$	8,691
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			67				128
Permanent impairments on retained interests in transferred assets			123				584
Net gains on sales of real estate			(1,279	)			(2,019	)
Deferred income taxes			14				(15	)
Provision for loan losses			52				53
Provision for losses on rent and related receivables			239				425
Impairment losses			233				94
Premium income adjustment			49				76
Amortization and accretion, net			(121	)			(147	)
Share-based compensation			104				91
Capitalized loan origination costs			(108	)			(140	)
Loans funded, held for sale			(1,195	)			(3,807	)
Proceeds from sale of guaranteed loans			2,349				4,201
Loan fees collected (refunded), net			142				(32	)
Change in operating assets and liabilities:
Due to/from affiliates, net			(700	)			(723	)
Other assets			451				(196	)
Borrower advances			651				(559	)
Accounts payable and accrued expenses			(929	)			(399	)
Other liabilities			104				(255	)
Net cash provided by operating activities			7,236				6,051
Cash flows from investing activities:
Loans funded			(22,175	)			(7,515	)
Principal collected on loans receivable			27,001				22,433
Principal collected on retained interests in transferred assets			2,539				2,498
Proceeds from assets acquired in liquidation, net			1,116				1,163
Proceeds from sales of hotel properties, net			1,060				3,126
Proceeds from mortgage-backed security of affiliate			110				83
Investment in retained interests in transferred assets			(253	)			—
Release of (investment in) restricted investments, net			(397	)			1,019
Purchase of furniture, fixtures and equipment			(37	)			(72	)
Net cash provided by investing activities			8,964				22,735
Cash flows from financing activities:
Purchase of treasury shares			—				(303	)
Proceeds from (payment of principal on) credit facilities, net			2,175				(7,000	)
Payment of principal on mortgages payable and debentures			(2,642	)			(10,245	)
Payment of dividends			(7,529	)			(6,454	)
Net cash used in financing activities			(7,996	)			(24,002	)
Net increase in cash and cash equivalents			8,204				4,784
Cash and cash equivalents, beginning of year			3,739				3,967
Cash and cash equivalents, end of period		$	11,943			$	8,751

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

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

Note 1. Interim Financial Statements:

The accompanying consolidated balance sheet of PMC Commercial Trust (“PMC Commercial” or together with its wholly-owned subsidiaries, “we,” “us” or “our”) as of June 30, 2007 and the consolidated statements of income and comprehensive income for the three and six months ended June 30, 2007 and 2006 and beneficiaries’ equity and cash flows for the six months ended June 30, 2007 and 2006 have not been audited by independent accountants. In the opinion of management, the financial statements reflect all adjustments necessary to fairly present our financial position at June 30, 2007 and results of operations for the three and six months ended June 30, 2007 and 2006. These adjustments are of a normal recurring nature.

Certain notes and other information have been omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.

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

The results for the three and six months ended June 30, 2007 are not necessarily indicative of future financial results.

Note 2. Business:

PMC Commercial is a real estate investment trust (“REIT”) that either directly or through its subsidiaries, primarily originates loans to small businesses collateralized by first liens on the real estate of the related business. The majority of these loans are to borrowers in the hospitality industry. We also originate loans on commercial real estate to borrowers in the service, retail, multi-family and manufacturing industries and loans guaranteed by the Small Business Administration (“SBA”) collateralized by business assets and/or real estate. Our common shares are traded on the American Stock Exchange under the symbol “PCC.”

Note 3. 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 VIE for which we are not the primary beneficiary. 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 specialized small business investment companies under the Small Business Investment Act of 1958, as amended (“SBIA”). PMCT Trust was formed in conjunction with our 1998 structured loan financing transaction. The 1998 structured notes were repaid on December 1, 2006. PMC Funding, Asset Holding and PMC Conduit hold assets on our behalf. PMC Properties is the operator, through third party managers, of any hospitality properties. No properties are currently being operated by PMC 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.

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

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 the QSPEs. Accordingly, the assets, liabilities, partners’ capital and results of operations of the QSPEs are not included in our consolidated financial statements.

Note 4. 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 VIE’s expected losses, receive a majority of the VIE’s 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, PMC Conduit is consolidated in the financial statements of PMC Commercial.

PMC Preferred Capital Trust-A
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 (“Preferred Trust”). The Junior Subordinated Notes, included in our consolidated balance sheets, are subordinated to PMC Commercial’s existing debt.

Since PMC Commercial is not considered to be the primary beneficiary, Preferred Trust is not consolidated in PMC Commercial’s financial statements. The equity method is used to account for our investment in the Preferred Trust.

PMCT Plainfield, L.P.
During 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. Based on the terms of this lease agreement including the fixed price purchase option, the subsidiary was determined to be a VIE.

Since PMC Commercial is not considered to be the primary beneficiary, PMCT Plainfield, L.P. is not consolidated in PMC Commercial’s financial statements. The equity method is used to account for our investment in PMCT Plainfield, L.P.

Note 5. Reclassifications:

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or total beneficiaries’ equity.

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

Note 6. Share-Based Compensation 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.

We granted 20,000 option awards on June 9, 2007 at an exercise price of $14.01 (the closing price on June 8, 2007). The fair value of this option award was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

				Assumption
				Expected Term (years)			3.0
				Risk-Free Interest Rate			4.99	%
				Expected Dividend Yield			8.57	%
				Expected Volatility			13.41	%
				Expected Forfeiture Rate			5.0	%

The expected term of the options granted represents the period of time that the options are expected to be outstanding and was based on historical data. The risk-free rate was based on the three-year U.S. Treasury rate corresponding to the expected term of the options. We used historical information to determine our expected volatility and forfeiture rates. We recorded compensation expense of approximately $11,000 during the three and six months ended June 30, 2007 related to this option grant. We granted 33,250 option awards on June 10, 2006 at an exercise price of $12.72 (the closing price on June 9, 2006) and recorded compensation expense of approximately $19,000 during the three and six months ended June 30, 2006 related to this option grant.

In addition, we issued an aggregate of 11,400 restricted shares to executive officers and our Board of Trust Managers on June 9, 2007 at the then current market price of the shares of $14.01. 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 prices of the shares. 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).

Compensation expense related to the restricted shares is being recognized over the vesting periods. We recorded compensation expense of approximately $73,000 and $55,000 and $93,000 and $72,000 during the three and six months ended June 30, 2007 and 2006, respectively, related to the restricted shares. As of June 30, 2007, there was approximately $116,000 of total unrecognized compensation expense related to the restricted shares which will be recognized over the next two years.

Note 7. Recently Issued Accounting Pronouncements:

The Financial Accounting Standards Board (“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.

The FASB issued SFAS No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities” in February 2007. SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value at specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have not yet determined the impact, if any, of SFAS No. 159 on our consolidated financial statements.

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

Statement of Position 07-01 (“SOP 07-01”), Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies, was issued in June 2007. SOP 07-01 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies. For entities that are determined to be investment companies, SOP 07-01 also addresses whether investment company accounting should be retained by a parent company in consolidation. SOP 07-01 is effective for fiscal years beginning on or after December 15, 2007. We have not yet determined the impact, if any, of SOP 07-01 on our consolidated financial statements.

Note 8. Loans Receivable, net:

Loans receivable, net, consisted of the following:

		June 30,				December 31,
		2007				2006
		(In thousands)
SBIC commercial mortgage loans		$	26,910			$	36,243
SBA 7(a) Guaranteed Loan Program loans			12,845				14,749
Conduit Facility loans (1)			47,920				43,612
Other commercial mortgage loans			81,797				75,089
Total loans receivable			169,472				169,693
Less:
Deferred commitment fees, net			(403	)			(449	)
Loan loss reserves			(49	)			(63	)
Loans receivable, net		$	169,020			$	169,181

(1)		These loans are collateral for our Conduit Facility.

The activity in our loan loss reserves was as follows:

		Six Months Ended
		June 30,
		2007				2006
		(In thousands)
Balance, beginning of year		$	63			$	427
Provision for loan losses			66				94
Reduction of loan losses			(14	)			(41	)
Principal balances written-off, net			(66	)			(467	)
Balance, end of period		$	49			$	13

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

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

		June 30,				December 31,
		2007				2006
		(In thousands)
Impaired loans requiring reserves		$	90			$	82
Impaired loans expected to be fully recoverable (1)			558				1,837
Total impaired loans		$	648			$	1,919
		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Average impaired loans		$	1,663			$	1,698			$	1,795			$	516
Interest income on impaired loans (2)		$	—			$	70			$	—			$	—

Note 9. Real Estate Investments:

In April 2007, we sold a hotel property for $2.6 million and recognized a gain of approximately $228,000. We financed the sale of the property through origination of a loan of $2.1 million with an interest rate of LIBOR plus 3.75% and maturity and amortization periods of 20 years. The loan was repaid during July 2007.

During June 2007, we sold a hotel property for approximately $2.9 million and recognized a gain of approximately $852,000. We financed the sale of the property through origination of a loan of approximately $2.3 million with an interest rate of LIBOR plus 3.75% and maturity and amortization periods of 20 years.

Note 10. 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. 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, Inc., our affiliate through common management. 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 Capital, Inc.’s Retained Interests in the Joint Ventures and 100% of

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

the 1998 Partnership and the 1999 Partnership (collectively, the “Acquired Structured Loan Sale Transactions”).

Information pertaining to our Originated Structured Loan Sale Transactions as of June 30, 2007 was as follows:

		2000				2001				2002				2003
		Joint Venture				Joint Venture				Joint Venture				Joint Venture
		(Dollars in thousands)
Principal outstanding on sold loans		$	27,713			$	5,526			$	13,282			$	18,888
Structured Notes balance outstanding		$	22,900			$	2,923			$	10,597			$	15,783
Cash in the collection account		$	975			$	60			$	156			$	1,627
Cash in the reserve account		$	1,654			$	624			$	803			$	1,225
Weighted average interest rate on loans (1)			9.56	%			9.63	%			9.46	%			L+4.02	%
Discount rate assumptions (2)		7.9% to 12.6%				7.9% to 12.6%				7.9% to 12.6%				8.5% to 12.6%
Constant prepayment rate assumption (3)			18.00	%			18.00	%			18.00	%			16.00	%
Weighted average remaining life of Retained Interests (4)		1.83 years				1.45 years				2.17 years				2.25 years
Aggregate losses assumed (5)			1.25	%			—	%			1.45	%			1.02	%
Aggregate principal losses to date (6)			0.33	%			0.56	%			—	%			—	%

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

Information pertaining to our Acquired Structured Loan Sale Transactions as of June 30, 2007 was as follows:

										2000				2001				2002				2003
		1998				1999				Joint				Joint				Joint				Joint
		Partnership				Partnership				Venture				Venture				Venture				Venture
		(Dollars in thousands)
Principal outstanding on sold loans		$	10,703			$	13,347			$	8,301			$	15,091			$	16,556			$	30,785
Structured Notes balance outstanding		$	10,228			$	11,070			$	5,622			$	11,211			$	12,549			$	26,822
Cash in the collection account		$	253			$	1,444			$	133			$	191			$	496			$	2,087
Cash in the reserve account		$	1,335			$	1,215			$	563			$	989			$	1,017			$	1,965
Weighted average interest rate of loans (1)			P+0.95	%			9.09	%			9.00	%			9.62	%			9.52	%			L+4.02	%
Discount rate assumptions (2)		7.9% to 12.6%				7.9% to 12.6%				7.9% to 12.6%				7.9% to 12.6%				7.9% to 12.6%				8.5% to 12.6%
Constant prepayment rate assumption (3)			16.00	%			18.00	%			18.00	%			18.00	%			18.00	%			16.00	%
Weighted average remaining life of Retained Interests (4)		2.58 years				2.22 years				1.98 years				1.42 years				1.92 years				2.37 years
Aggregate principal losses assumed (5)			1.22	%			1.22	%			1.81	%			1.04	%			1.33	%			1.24	%
Aggregate principal losses to date (6)			—	%			—	%			4.28	%			1.78	%			1.31	%			—	%

At June 30, 2007, none of the loans sold to the QSPEs were delinquent over 60 days as to principal and interest.

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 Western’s 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 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. At June 30, 2007, the aggregate principal balance of First Western’s serviced loans receivable on which we had an excess spread was approximately $37.5 million and the weighted average excess spread was approximately 0.6%. In determining the fair value of our Retained Interests related to Secondary Market Loan Sales, our assumptions at June 30, 2007 included a prepayment speed of 20% per annum and a discount rate of 12.6%.

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

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

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.

Our Retained Interests consisted of the following:

		June 30, 2007
		Estimated Fair Value
		OC Piece				Reserve Fund				IO Receivable				Total				Cost
		(In thousands)
First Western		$	—			$	—			$	618			$	618			$	582
1998 Partnership			610				1,089				309				2,008				1,926
1999 Partnership			3,769				1,035				274				5,078				4,895
2000 Joint Venture			8,698				1,969				1,071				11,738				10,353
2001 Joint Venture			6,816				1,475				529				8,820				8,507
2002 Joint Venture			7,441				1,644				820				9,905				9,069
2003 Joint Venture			10,702				2,888				1,642				15,232				14,745
		$	38,036			$	10,100			$	5,263			$	53,399			$	50,077

		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

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.

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

The following sensitivity analysis of our Retained Interests as of June 30, 2007 highlights the volatility that results when prepayments, losses and discount rates are different than our assumptions:

		Estimated
		Fair				Asset
Changed Assumption		Value				Change (1)
		(In thousands)
Losses increase by 50 basis points per annum (2)		$	52,283				($1,116	)
Losses increase by 100 basis points per annum (2)		$	51,189				($2,210	)
Rate of prepayment increases by 5% per annum (3)		$	53,109				($   290	)
Rate of prepayment increases by 10% per annum (3)		$	52,759				($   640	)
Discount rates increase by 100 basis points		$	52,159				($1,240	)
Discount rates increase by 200 basis points		$	50,956				($2,443	)

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

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 June 30, 2007 and December 31, 2006 our consolidated balance sheets do not include $179.7 million and $207.7 million of assets, respectively, and $130.1 million and $156.5 million of liabilities, respectively, related to our structured loan sale transactions recorded by the QSPEs. At June 30, 2007, the partners’ capital of the QSPEs was approximately $49.6 million compared to the value of the associated Retained Interests of $52.8 million.

The annualized yield on our Retained Interests, which is comprised of the income earned less permanent impairments, was as follows:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Annualized yield			12.8	%			13.9	%			12.5	%			13.6	%

During March 2007, PMC Commercial repurchased a loan from the 2003 Joint Venture which had become “charged-off” as defined in the transaction documents with an outstanding principal balance of approximately $3.5 million. We foreclosed on the underlying collateral of the loan, a full service hospitality property, during May 2007. In June 2007, we sold the hotel property for $4.4 million. The gain at the time of sale was approximately $722,000 of which approximately $578,000 was deferred until full gain recognition criteria are met. We financed the sale of the property through origination of a loan of approximately $3.5 million with an interest rate of LIBOR plus 2.5% and maturity and amortization periods of 20 years.

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

Note 11. Other Assets:

Other assets consisted of the following:

		June 30,				December 31,
		2007				2006
		(In thousands)
Deferred borrowing costs, net		$	962			$	1,069
Investment in Preferred Trust			838				820
Interest receivable			824				1,016
Prepaid expenses and deposits			325				614
Investment in PMCT Plainfield, L.P.			90				6
Asset acquired in liquidation, net (1)			—				975
Rent and related receivables			—				567
Other			441				438
Other assets		$	3,480			$	5,505

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

Note 12. Debt:

Information on our debt was as follows:

																						Weighted Average
		June 30, 2007								December 31, 2006												Coupon Rate at
		Face				Carrying				Face				Carrying				Range of				June 30,				December 31,
		Amount				Value				Amount				Value				Maturities				2007				2006
		(Dollars in thousands, except footnote)
Mortgage notes and debentures payable:
Debentures		$	8,190			$	8,162			$	8,190			$	8,161				2013 to 2015				5.90%				5.90%
Mortgage notes (1)			—				—				2,642				2,642				N/A				N/A				8.02%
			8,190				8,162				10,832				10,803
Junior Subordinated Notes			27,070				27,070				27,070				27,070				2035				8.60%				8.62%
Credit facilities:
Conduit Facility			29,143				29,143				26,968				26,968				2008				6.19%				6.35%
Revolving credit facility			—				—				—				—				2007				N/A				N/A
			29,143				29,143				26,968				26,968
Redeemable preferred stock of subsidiary			4,000				3,718				4,000				3,668				2009 to 2010				4.00%				4.00%
Debt		$	68,403			$	68,093			$	68,870			$	68,509

Principal payments required on our consolidated debt at June 30, 2007 were as follows (face amount):

Twelve Months
Ending June 30,		Total
		(In thousands)
2008		$	29,143
2009			—
2010			4,000
2011			—
2012			—
Thereafter			35,260
		$	68,403

Debentures
Debentures represent amounts due to the SBA as a result of borrowings made pursuant to the SBIA. The debentures have a weighted average cost of funds of approximately 6.0% and require semi-annual interest only payments.

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

Mortgage Notes
During April 2007, we repaid a mortgage note with a principal balance of approximately $1.2 million. As a result of the prepayment, we incurred a fee of approximately $166,000. During May 2007, we repaid the remaining mortgage note with a principal balance of approximately $1.4 million. As a result of the prepayment, we incurred a fee of approximately $286,000.

Junior Subordinated Notes
The Junior Subordinated Notes bear interest at a floating rate which resets on a quarterly basis at the 90-day LIBOR plus 3.25%. The Junior Subordinated Notes may be redeemed at our option, without penalty, beginning on March 30, 2010. Interest payments are due on a quarterly basis.

Conduit Facility
Interest payments are payable by PMC Conduit on a monthly basis at a rate approximating LIBOR, plus 0.85% and PMC Conduit’s 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. The Conduit Facility allows for advances based on the amount of eligible collateral sold and has minimum collateral requirements. At June 30, 2007, PMC Commercial had available approximately $23.5 million of loans which are conduit eligible loans. 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. At June 30, 2007, we were in compliance with the covenants of this facility.

Revolving Credit Facility
PMC Commercial has a revolving credit facility which 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 and Retained Interests as a ratio to our senior debt and (2) limits our ability to pay out returns of capital as part of our dividends. At June 30, 2007, 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”). The 4% Preferred Stock is 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. Dividends of approximately $39,000 and $79,000 were recognized on the 4% Preferred Stock during the three and six months ended June 30, 2007 and 2006 and are included in interest expense on our consolidated statements of income.

Note 13. 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. Dividends of approximately $23,000 and $45,000 were recognized on the 3% Preferred Stock during the three months and six ended June 30, 2007 and 2006, respectively, and are reflected in our consolidated statements of income as minority interest.

Note 14. 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 10,756,000 and 10,744,000 for the three months ended June 30, 2007 and 2006, respectively. The weighted average number of common shares outstanding was approximately 10,755,000 and 10,745,000 for the six months ended June 30, 2007 and 2006, respectively. For purposes of calculating the dilutive effect of options to purchase common shares, the weighted average shares outstanding were increased by approximately 6,000 and 9,000 shares during the three and six months ended June 30, 2007, respectively. During the three

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

and six months ended June 30, 2006, no shares were added to the weighted average shares outstanding for purposes of calculating diluted earnings per share as options were anti-dilutive.

Not included in the computation of diluted earnings per share were outstanding options to purchase approximately 54,000 and 150,000 common shares during the three months ended June 30, 2007 and 2006, respectively, and options to purchase approximately 34,000 and 150,000 common shares during the six months ended June 30, 2007 and 2006, respectively, because the options’ exercise prices were greater than the average market price of the shares.

Note 15. Dividends Declared:

Dividends declared during 2007 were as follows:

						Amount
Date Paid		Record Date				Per Share
April 9, 2007		March 30, 2007				$	0.30
July 9, 2007		June 29, 2007					0.30
						$	0.60

Note 16. Taxable Income:

PMC Commercial has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, PMC Commercial must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our 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 prior year taxable income distribution requirements, we may make an election under the Code to treat a portion of the distributions declared in the current year as distributions of the prior year’s taxable income.

PMC Commercial has wholly-owned taxable REIT subsidiaries (“TRS’s”) which are subject to Federal income taxes: PMCIC, First Western, PMC Funding and PMC Properties. The income generated from the TRS’s 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.

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.

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

Income tax provision consisted of the following:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Federal:
Current provision		$	333			$	349			$	182			$	229
Deferred provision (benefit)			14				(15	)			23				21
Income tax provision		$	347			$	334			$	205			$	250

Included within the current provision is approximately $20,000 in Federal income taxes of PMC Commercial Trust relating to a gain on the sale of one of our assets acquired in liquidation on which we made a foreclosure property election which requires PMC Commercial Trust to pay a 35% tax on the gain.

The provision for income taxes related to the TRS’s 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 related to the TRS’s was as follows:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Income before income taxes for TRS’s		$	893			$	955			$	507			$	693
Expected Federal income tax provision		$	311			$	334			$	177			$	242
Preferred dividend of subsidiary recorded as minority interest			16				16				8				8
Other adjustment			—				(16	)			—				—
Income tax provision related to TRS’s		$	327			$	334			$	185			$	250

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 attributes 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. We were subject to the provisions of FIN 48 as of January 1, 2007, and to the extent applicable, have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in those jurisdictions. We have identified our federal tax returns and our state returns in Texas as “major” tax jurisdictions, as defined. The periods subject to examination for our federal tax returns and state returns in Texas are the 2003 through 2006 tax years. We believe that all income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain tax positions have been recorded pursuant to FIN 48. In addition, we did not record a cumulative effect adjustment related to the adoption of FIN 48.

In accordance with FIN 48, we have established a policy on classification of penalties and interest related to audits of our federal and state income tax returns. If incurred, our policy for recording interest and penalties associated with audits will be to record such items as a component of income before income tax provision, minority interest and discontinued operations. Penalties, if incurred, will be recorded in general and administrative expense and interest paid or received will be recorded in interest expense or interest income, respectively, in the consolidated statements of income.

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

Note 17. Other Income:

Other income consisted of the following:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Prepayment fees		$	549			$	764			$	301			$	318
Servicing income (1)			406				545				192				265
Premium income (2)			174				325				14				291
Other loan related income			140				180				77				82
Equity in earnings of unconsolidated subsidiaries			50				32				26				16
Other			62				17				30				—
Other income		$	1,381			$	1,863			$	640			$	972

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

Note 18. Discontinued Operations:

Discontinued operations of our hotel properties (two and 14 hotel properties during the six months ended June 30, 2007 and 2006, respectively) and assets acquired in liquidation (primarily three and two limited service hospitality properties during the six months ended June 30, 2007 and 2006, respectively) consisted of the following:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands)
Hotel and Lease Operations:
Revenues:
Hotel operating revenues		$	507			$	1,853			$	147			$	817
Lease income — base			—				186				—				—
Total revenues			507				2,039				147				817
Expenses:
Hotel operating expenses			399				1,590				128				633
Interest expense (1)			522				229				469				67
Depreciation			57				98				15				42
Total expenses			978				1,917				612				742
Net earnings (losses), hotel and lease operations			(471	)			122				(465	)			75
Assets Acquired in Liquidation Operations:
Revenues			281				155				214				26
Expenses			251				186				219				21
Net earnings (losses), assets acquired in liquidation operations			30				(31	)			(5	)			5
Total net earnings (losses)			(441	)			91				(470	)			80
Net gains on sales of real estate			1,279				2,019				1,252				142
Impairment losses			(233	)			(94	)			—				(21	)
Discontinued operations		$	605			$	2,016			$	782			$	201