UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One);

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

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

Commission File Number 1-13610

PMC COMMERCIAL TRUST

(Exact name of registrant as specified in its charter)

TEXAS		75-6446078
(State or other jurisdiction 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES o NO o

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

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

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 July 31, 2009, the Registrant had outstanding 10,548,354 Common Shares of Beneficial Interest, par value $.01 per share.

 

 

PMC COMMERCIAL TRUST AND SUBSIDIARIES

INDEX

		PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - June 30, 2009 and December 31, 2008			2
Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 30, 2009 and 2008			3
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2009 and 2008			4
Consolidated Statements of Beneficiaries’ Equity (Unaudited) - Six Months Ended June 30, 2009 and 2008			5
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2009 and 2008			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			41
PART II. Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults upon Senior Securities			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 5. Other Information			43
Item 6. Exhibits			43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Financial Information

ITEM 1.

Financial Statements

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		June 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Loans receivable, net		$	184,415			$	179,807
Retained interests in transferred assets			25,399				33,248
Cash and cash equivalents			8,945				10,606
Restricted investments			2,723				—
Other assets			3,961				3,863
Total assets		$	225,443			$	227,524
LIABILITIES AND BENEFICIARIES’ EQUITY
Liabilities:
Junior subordinated notes		$	27,070			$	27,070
Revolving credit facility			23,800				22,700
Structured notes and debentures payable			13,428				8,168
Redeemable preferred stock of subsidiary			1,947				3,876
Dividends payable			1,741				3,967
Accounts payable and accrued expenses			1,629				2,884
Borrower advances			1,557				2,819
Deferred gains on property sales			1,358				1,408
Other liabilities			264				270
Total liabilities			72,794				73,162
Commitments and contingencies
Beneficiaries’ equity:
Common shares of beneficial interest; authorized 100,000,000 shares of $0.01 par value; 11,084,683 and 11,066,283 shares issued at June 30, 2009 and December 31, 2008, respectively, 10,548,354 and 10,694,788 shares outstanding at June 30, 2009 and December 31, 2008, respectively			111				111
Additional paid-in capital			152,563				152,460
Net unrealized appreciation of retained interests in transferred assets			759				620
Cumulative net income			164,115				160,925
Cumulative dividends			(160,898	)			(156,829	)
			156,650				157,287
Less: Treasury stock; at cost, 536,329 and 371,495 shares at June 30, 2009 and December 31, 2008, respectively			(4,901	)			(3,825	)
Total parent company beneficiaries’ equity			151,749				153,462
Noncontrolling interests — cumulative preferred stock of subsidiary			900				900
Total beneficiaries’ equity			152,649				154,362
Total liabilities and beneficiaries’ equity		$	225,443			$	227,524

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Unaudited)
Revenues:
Interest income		$	5,636			$	7,285			$	2,785			$	3,519
Income from retained interests in transferred assets			1,697				4,196				781				2,277
Other income			530				1,155				306				418
Total revenues			7,863				12,636				3,872				6,214
Expenses:
Salaries and related benefits			1,920				2,591				999				1,352
Interest			1,596				2,210				790				977
General and administrative			977				1,123				534				654
Provision for (reduction of) loan losses, net			203				12				56				(61	)
Permanent impairments on retained interests in transferred assets			77				377				17				96
Total expenses			4,773				6,313				2,396				3,018
Income before income tax benefit (provision) and discontinued operations			3,090				6,323				1,476				3,196
Income tax benefit (provision)			50				(173	)			68				(91	)
Income from continuing operations			3,140				6,150				1,544				3,105
Discontinued operations:
Gains on sales of real estate			50				762				20				424
Net income		$	3,190			$	6,912			$	1,564			$	3,529
Weighted average shares outstanding:
Basic			10,599				10,766				10,548				10,767
Diluted			10,599				10,766				10,548				10,767
Basic and diluted earnings per share:
Income from continuing operations		$	0.30			$	0.57			$	0.15			$	0.29
Discontinued operations			—				0.07				—				0.04
Net income		$	0.30			$	0.64			$	0.15			$	0.33

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Unaudited)
Net income		$	3,190			$	6,912			$	1,564			$	3,529
Change in unrealized appreciation of retained interests in transferred assets:
Net unrealized appreciation (depreciation) arising during period			182				(844	)			80				(901	)
Net realized gains included in net income			(43	)			(102	)			(28	)			(42	)
			139				(946	)			52				(943	)
Comprehensive income		$	3,329			$	5,966			$	1,616			$	2,586

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Six Months Ended June 30, 2008
		(Unaudited)
														Net
														Unrealized
		Common												Appreciation
		Shares of												of Retained																Cumulative
		Beneficial								Additional				Interests in				Cumulative												Preferred				Total
		Interest				Par				Paid-in				Transferred				Net				Cumulative				Treasury				Stock of				Beneficiaries’
		Outstanding				Value				Capital				Assets				Income				Dividends				Stock				Subsidiary				Equity
Balances, January 1, 2008			10,765,033			$	111			$	152,331			$	1,945			$	151,119			$	(145,921	)		$	(3,231	)		$	900			$	157,254
Net unrealized depreciation			—				—				—				(946	)			—				—				—				—				(946	)
Share-based compensation expense			16,500				—				96				—				—				—				—				—				96
Dividends ($0.425 per share)			—				—				—				—				—				(4,579	)			—				—				(4,579	)
Net income			—				—				—				—				6,912				—				—				—				6,912
Balances, June 30, 2008			10,781,533			$	111			$	152,427			$	999			$	158,031			$	(150,500	)		$	(3,231	)		$	900			$	158,737

		Six Months Ended June 30, 2009
		(Unaudited)
														Net
														Unrealized
		Common												Appreciation
		Shares of												of Retained																Cumulative
		Beneficial								Additional				Interests in				Cumulative												Preferred				Total
		Interest				Par				Paid-in				Transferred				Net				Cumulative				Treasury				Stock of				Beneficiaries’
		Outstanding				Value				Capital				Assets				Income				Dividends				Stock				Subsidiary				Equity
Balances, January 1, 2009			10,694,788			$	111			$	152,460			$	620			$	160,925			$	(156,829	)		$	(3,825	)		$	900			$	154,362
Net unrealized appreciation			—				—				—				139				—				—				—				—				139
Share-based compensation expense			18,400				—				103				—				—				—				—				—				103
Treasury shares, net			(164,834	)			—				—				—				—				—				(1,076	)			—				(1,076	)
Dividends ($0.385 per share)			—				—				—				—				—				(4,069	)			—				—				(4,069	)
Net income			—				—				—				—				3,190				—				—				—				3,190
Balances, June 30, 2009			10,548,354			$	111			$	152,563			$	759			$	164,115			$	(160,898	)		$	(4,901	)		$	900			$	152,649

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2009				2008
		(Unaudited)
Cash flows from operating activities:
Net income		$	3,190			$	6,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			13				13
Permanent impairments on retained interests in transferred assets			77				377
Gains on sales of real estate			(50	)			(762	)
Deferred income taxes			(109	)			6
Provision for loan losses, net			203				12
Premium income adjustment			156				(6	)
Amortization and accretion, net			(223	)			(128	)
Share-based compensation			103				96
Capitalized loan origination costs			(85	)			(92	)
Loans funded, held for sale			(6,454	)			(3,404	)
Proceeds from sale of guaranteed loans			7,677				1,856
Loan fees remitted, net			(17	)			(3	)
Change in operating assets and liabilities:
Other assets			199				214
Borrower advances			(1,262	)			49
Accounts payable and accrued expenses			(1,236	)			(177	)
Other liabilities			(19	)			(82	)
Net cash provided by operating activities			2,163				4,881
Cash flows from investing activities:
Loans funded			(1,348	)			(24,700	)
Principal collected on loans			7,541				20,661
Principal collected on retained interests in transferred assets			143				818
Principal collected on mortgage-backed security of affiliate			22				51
Investment in retained interests in transferred assets			(338	)			(2,820	)
Release of (investment in) restricted investments, net			(1,313	)			1,046
Net cash provided by (used in) investing activities			4,707				(4,944	)
Cash flows from financing activities:
Purchase of treasury shares			(1,076	)			—
Proceeds from (repayment of) revolving credit facility, net			1,100				(1,350	)
Payment of principal on structured notes			(260	)			—
Redemption of redeemable preferred stock of subsidiary			(2,000	)			—
Payment of dividends			(6,295	)			(5,384	)
Net cash used in financing activities			(8,531	)			(6,734	)
Net decrease in cash and cash equivalents			(1,661	)			(6,797	)
Cash and cash equivalents, beginning of year			10,606				11,485
Cash and cash equivalents, end of period		$	8,945			$	4,688

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

PMC COMMERCIAL TRUST AND SUBSIDIARIES

Note 1. Basis of Presentation:

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

Certain prior period amounts have been reclassified to conform to the current year presentation. Upon adoption of Financial Accounting Standards Board (“FASB”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), cumulative preferred stock of subsidiary was reclassified from the mezzanine section of the balance sheet to beneficiaries’ equity and minority interest as presented in the income statement was reclassified to interest expense. These reclassifications had no effect on previously reported consolidated net income or cash flows, but the adoption of FAS 160 and resulting prior period reclassification does increase our overall consolidated beneficiaries’ equity.

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

In preparing the accompanying unaudited consolidated financial statements, we have reviewed, as determined necessary by our management, events that have occurred after June 30, 2009, up until the issuance of the financial statements on August 7, 2009.

Each of our qualified special purpose entities (“QSPEs”) contains a “clean-up” call provision which gives PMC Commercial the option to repay the outstanding structured notes of the QSPE. PMC Joint Venture, L.P. 2002 (the “2002 Joint Venture”) reached this option during January 2009 becoming a non-qualifying SPE; however, based on our current liquidity needs, the option was not exercised. The subsidiary was determined to be a variable interest entity. Since we have regained control as a result of our “clean-up” call option, expect to absorb the majority of the entity’s future expected losses, and receive the entity’s expected residual returns, PMC Commercial Trust is considered to be the primary beneficiary. As a result, effective in January 2009, this subsidiary was consolidated in our financial statements. The operations of the 2002 Joint Venture were previously accounted for as retained interests in transferred assets. The following table summarized the assets and liabilities of the 2002 Joint Venture (which represented a noncash transaction with the exception of the restricted investments):

		January
		2009
		(In thousands)
Loans receivable		$	12,570
Restricted investments			1,410
Other assets			102
Total assets		$	14,082
Structured notes payable		$	5,517
Total liabilities		$	5,517

In addition, during the third quarter of 2009, we anticipate that PMC Joint Venture, L.P. 2003 (“the 2003 Joint Venture”) will reach its “clean-up” call option becoming a non-qualifying SPE. Based on our current liquidity needs, the option will not be exercised. Since we expect to regain control as a result of our “clean-up” call option, expect to absorb the majority of the entity’s future expected losses, and receive the entity’s expected residual returns, PMC Commercial Trust would be considered the primary beneficiary. As a result, this subsidiary would be consolidated in our third quarter 2009 financial statements.

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

Note 2. Recently Issued Accounting Pronouncements:

FASB No. 165, “Subsequent Events” (“FAS 165”) was issued in June 2009. FAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. FAS 165 is effective for financial periods ending after June 15, 2009. We adopted FAS 165 during the second quarter of 2009. See Note 1.

FASB No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“FAS 166”) was issued in June 2009. FAS 166 eliminates the concept of QSPEs for prospective securitizations. In addition, disclosures related to transfers of financial assets were added. FAS 166 is effective at the beginning of the first annual reporting period that begins after November 15, 2009, for interim reports within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We are currently evaluating the impact of FAS 166 on our consolidated financial statements.

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

Note. 3. Share-Based Compensation Plans:

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

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

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

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

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

Compensation expense related to the restricted shares is being recognized over the vesting periods. We recorded compensation expense of $72,000 and $65,000 during the three months ended June 30, 2009 and 2008, respectively, and $92,000 and $90,000 during the six months ended June 30, 2009 and 2008, respectively, related to restricted shares. As of June 30, 2009, there was approximately $114,000 of total unrecognized compensation expense related to restricted shares which will be recognized over the next two years.

Note 4. Loans Receivable, net:

Loans receivable, net, consisted of the following:

		June 30,				December 31,
		2009				2008
		(In thousands)
Commercial mortgage loans (1)		$	144,912			$	138,858
SBIC commercial mortgage loans (2)			26,789				27,311
SBA 7(a) Program loans			13,783				14,436
Total loans receivable			185,484				180,605
Less:
Deferred commitment fees, net			(397	)			(318	)
Loan loss reserves			(672	)			(480	)
Loans receivable, net		$	184,415			$	179,807

The activity in our loan loss reserves was as follows:

		Six Months Ended
		June 30,
		2009				2008
		(In thousands)
Balance, beginning of year		$	480			$	42
Provision for loan losses			267				31
Reduction of loan losses			(64	)			(19	)
Principal balances written-off, net			(11	)			—
Balance, end of period		$	672			$	54

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,
		2009				2008
		(In thousands)
Impaired loans requiring reserves		$	3,621			$	2,492
Impaired loans expected to be fully recoverable			4,642				2,374
Total impaired loans		$	8,263			$	4,866

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands)
Average impaired loans		$	6,456			$	1,415			$	7,582			$	2,119
Interest income on impaired loans		$	17			$	57			$	9			$	25

Our recorded investment in non-accrual loans at June 30, 2009 and December 31, 2008 was approximately $8.2 million and $5.1 million, respectively. We did not have any loans past due 90 days or more which were accruing interest at June 30, 2009 or December 31, 2008.

Note 5. Retained Interests:

We own subordinated financial interests in several non-consolidated QSPEs (i.e., retained interests in transferred assets (“Retained Interests”)). The QSPEs are PMC Capital, L.P. 1998-1 (the “1998 Partnership”), PMC Joint Venture, L.P. 2000 (the “2000 Joint Venture”) and the 2003 Joint Venture created in connection with structured loan sale transactions. In our structured loan sale transactions, we contributed loans receivable to a QSPE in exchange for cash and beneficial interests in that entity. The QSPE issued notes payable (the “Structured Notes”) to unaffiliated parties (“Structured Noteholders”).

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

Information pertaining to our structured loan sale transactions as of June 30, 2009 was as follows:

						2000				2003
		1998				Joint				Joint
		Partnership				Venture				Venture
		(Dollars in thousands)
Principal outstanding on sold loans		$	6,229			$	24,633			$	20,656
Structured Notes balance outstanding		$	7,451			$	16,463			$	10,374
Cash in the collection account		$	1,688			$	347			$	189
Cash in the reserve account		$	1,329			$	1,675			$	2,414
Weighted average interest rate of loans (1)		P	+1.70	%			9.46	%			L+4.02	%
Interest rate on Structured Notes		P	-1.00	%			7.28	%			L+1.25	%
Discount rate assumptions (2)		5.3% to 14.9%				8.6% to 14.9%				5.4% to 15.0%
Constant prepayment rate assumption (3)			16.00	%			12.00	%			—
Weighted average remaining life of Retained Interests (4)		2.03 years				1.55 years				0.20 years
Aggregate principal losses assumed (5)			1.66	%			1.40	%			—
Aggregate principal losses to date (6)			—				1.65	%			—

First Western SBLC, Inc. (“First Western”) has Retained Interests related to the sale of loans originated pursuant to the Small Business Administration’s (“SBA”) 7(a) Program. We expect the SBA guaranteed portions of First Western’s loans to be sold to either dealers in government guaranteed loans or institutional investors (“Secondary Market Loan Sales”) as the loans are fully funded. On Secondary Market Loan Sales, we may retain an excess spread between the interest rate paid to us from our borrowers and the rate we pay to the purchaser of the guaranteed portion of the note and servicing costs. At June 30, 2009, the aggregate principal balance of First Western’s serviced loans on which we had an excess spread was approximately $32.8 million and the weighted average excess spread was approximately 0.7%. In determining the fair value of our Retained Interests related to Secondary Market Loan Sales, our assumptions at June 30, 2009 included a prepayment speed of 12% per annum and a discount rate of 14.9%.

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

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

Our Retained Interests consisted of the following:

		June 30, 2009
		Estimated Fair Value
		OC Piece				Reserve Fund				IO Receivable				Total				Cost
		(In thousands)
First Western		$	—			$	—			$	647			$	647			$	496
1998 Partnership			429				978				161				1,568				1,494
2000 Joint Venture			8,508				1,383				406				10,297				9,850
2003 Joint Venture			10,376				2,382				129				12,887				12,800
		$	19,313			$	4,743			$	1,343			$	25,399			$	24,640

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

The 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.

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

		Estimated
		Fair				Asset
Changed Assumption		Value				Change (1)
		(In thousands)
Losses increase by 50 basis points per annum (2)		$	25,206			$	(193	)
Losses increase by 100 basis points per annum (2)		$	24,999			$	(400	)
Discount rates increase by 300 basis points		$	24,639			$	(760	)
Discount rates increase by 500 basis points		$	24,159			$	(1,240	)

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

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

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

Our consolidated financial statements do not include the assets, liabilities, partners’ capital, revenues or expenses of the QSPEs. As a result, at June 30, 2009 and December 31, 2008 our consolidated balance sheets do not include $59.4 million and $77.6 million of assets, respectively, and $34.4 million and $44.0 million of liabilities, respectively, related to our structured loan sale transactions recorded by the QSPEs. At June 30, 2009, the partners’ capital of the QSPEs was approximately $25.0 million and the estimated fair value and cost of the associated Retained Interests was approximately $24.8 million and $24.1 million, respectively.

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,
		2009				2008				2009				2008
Annualized yield			11.7	%			14.5	%			12.1	%			15.3	%

Note 6. Debt:

Information on our consolidated debt was as follows:

																						Weighted Average
		June 30, 2009								December 31, 2008												Coupon Rate at
		Face				Carrying				Face				Carrying				Range of				June 30,				December 31,
		Amount				Value				Amount				Value				Maturities				2009				2008
		(Dollars in thousands, except footnotes)
Structured notes and debentures payable:
Debentures		$	8,190			$	8,171			$	8,190			$	8,168				2013 to 2015				5.90	%			5.90	%
Structured notes (1)			5,257				5,257				—				—				(1	)			6.67	%			N/A
			13,447				13,428				8,190				8,168
Junior subordinated notes			27,070				27,070				27,070				27,070				2035				4.48	%			7.01	%
Revolving credit facility			23,800				23,800				22,700				22,700				2009				2.50	%			2.50	%
Redeemable preferred stock of subsidiary (2)			2,000				1,947				4,000				3,876				2010				4.00	%			4.00	%
Debt		$	66,317			$	66,245			$	61,960			$	61,814

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

Note 7. 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 10,548,000 and 10,767,000 for the three months ended June 30, 2009 and 2008, respectively. The weighted average number of common shares outstanding was 10,599,000 and 10,766,000 during the six months ended June 30, 2009 and 2008, respectively. During the three and six months ended June 30, 2009 and 2008, no shares were added to the weighted average shares outstanding for purposes of calculating diluted earnings per share as options were anti-dilutive.

Not included in the computation of diluted earnings per share were outstanding options to purchase approximately 90,000 and 95,000 common shares during the three and six months ended June 30, 2009 and 2008, respectively, because the options’ exercise prices were greater than the average market price of the shares.

Note 8. Dividends Declared:

Dividends declared during 2009 were as follows:

				Amount
Date Paid		Record Date		Per Share
April 13, 2009		March 31, 2009		$	0.225
July 13, 2009		June 30, 2009			0.160
				$	0.385

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

Note 9. Share Repurchase Program:

Our Board of Trust Managers authorized a share repurchase program for up to $10.0 million for the purchase of outstanding common shares which expires September 26, 2010. The common shares may be purchased from time to time in the open market or pursuant to negotiated transactions.

Note 10. Income Taxes:

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

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

Note 11. Restructuring Costs:

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

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

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

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

Note 12. Fair Value Measurements:

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

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

		Six Months Ended
		June 30,
		2009				2008
		(In thousands)
Value, beginning of period		$	33,248			$	48,616
Principal collections			(143	)			(819	)
Realized gains included in net income (1)			(43	)			(102	)
Investments			556				2,845
Permanent impairments			(77	)			(377	)
Repurchases/Consolidation (2)			(8,565	)			(15,856	)
Accretion (3)			241				—
Unrealized appreciation (depreciation)			182				(844	)
Value, end of period		$	25,399			$	33,463
Cost, end of period		$	24,640			$	32,464

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

We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from loan loss reserves on individual loans. For financial and nonfinancial assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2009 and 2008, the following table provides the carrying value of the related individual assets at quarter end.

We use “Level 3” inputs to determine the estimated fair value of our impaired loans.

										Provision for
										Loan Losses
		Carrying value at								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands)
Impaired loans (1)		$	7,961			$	769			$	173			$	29

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

						Estimated
		Carrying				Fair
		Amount				Value
		(In thousands)
Assets:
Loans receivable, net		$	184,415			$	177,038
Retained Interests			25,399				25,399
Restricted investments			2,723				2,723
Cash and cash equivalents			8,945				8,945
Liabilities:
Structured notes and debentures payable			13,428				13,271
Redeemable preferred stock of subsidiary			1,947				2,000
Revolving credit facility			23,800				23,800
Junior subordinated notes			27,070				18,546

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

Loans receivable, net: Our loans receivable are recorded at cost and adjusted by net loan origination fees and discounts. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions including a current discount rate, prepayment tendencies and potential loan losses. Reserves are established based on the creditor’s payment history, collateral value 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: The assets are reflected in our consolidated financial statements at estimated fair value based on valuation techniques as described in Note 5.

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

Restricted investments and cash and cash equivalents: The carrying amounts are considered to be reasonable estimates of fair value due to the short maturity of these funds.

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

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

Note 13. Commitments and Contingencies:

Loan Commitments

Commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Our outstanding loan commitments and approvals to fund loans were approximately $19.3 million at June 30, 2009, the majority of which were for prime-based loans to be originated by First Western, the government guaranteed portion of which may be sold pursuant to Secondary Market Loan Sales. Commitments generally have fixed expiration dates. Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.

Operating Lease

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

Twelve Months
Ending
June 30,		Total
		(In thousands)
2010		$	208
2011			220
2012			75
		$	503

Employment Agreements

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

Structured Loan Sale Transactions

The documents of the structured loan sale transactions contain provisions (the “Credit Enhancement Provisions”) that govern the assets and the inflow and outflow of funds of the entities originally formed as part of the structured loan sale transactions. The Credit Enhancement Provisions include specified limits on the delinquency rates on the loans included in each structured loan sale transaction. If, at any measurement date, the delinquency rate with respect to any structured loan sale transaction were to exceed the specified limits, the Credit Enhancement Provisions would automatically increase the level of credit enhancement requirements for that structured loan sale transaction. During the period in which the specified delinquency rate was exceeded, excess cash flow from the entity, if any, which would otherwise be distributable to us, would be used to fund the increased credit enhancement levels up to the principal amount of such loans and would delay or reduce our distribution. In general, there can be no assurance that amounts deferred under Credit Enhancement Provisions would be received in future periods or that future deferrals or losses will not occur. As a result of delinquent and impaired loans in the 2002 Joint Venture and the 2003 Joint Venture, Credit Enhancement Provisions were triggered during the first quarter of 2009. As a consequence, cash flows related to these transactions otherwise distributable to us were deferred and utilized to fund the increased credit enhancement requirements. Based on current cash flow assumptions, management anticipates that the funds from the 2002 Joint Venture will be received in future periods. For the 2003 Joint Venture, management anticipates that the funds will be received in future periods or used to repay the Structured Notes based on timing of attainment of the “clean-up” call option.

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

Litigation

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

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

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

Other

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

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

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

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

RECENT DEVELOPMENTS AND TRENDS THAT MAY AFFECT OUR BUSINESS

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

Economic Environment

In response to market disruptions, legislators and financial regulators implemented a number of mechanisms designed to add stability and/or liquidity to the financial markets. The overall effects of these and other legislative and regulatory efforts on the financial markets remains uncertain. Should these initiatives fail, our business, financial condition, results of operations and prospects could be materially adversely affected.

Impact on us

In the short-term, we believe the current economic environment is complicated and risky and will continue to present increasing challenges to us, our industry and the general economy. We continue to believe our commercial lending business has strong long-term fundamentals. However, due to the economic conditions, we have experienced, and continue to experience, the following:

	•		Loan origination limitations;
	•		Reduced operating margins due to lack of economies of scale;
	•		Limited access to capital, and if such capital is available, at increased costs that may be significant;
	•		An increase in non-performing and watch list loans;
	•		An increase in loan loss reserves;
	•		An inability to engage in structured loan transactions; and
	•		Reduced cash available for distribution to shareholders, particularly as our portfolio yield is reduced primarily by lower variable interest rates and also by scheduled maturities, prepayments and non-performing loans.

At this time, we are uncertain as to how long the present economic environment will remain and what shape it will take in the future. We are presently focusing on SBA 7(a) loans where we can most efficiently utilize our present capital structure and liquidity.

Liquidity Overview

Our uncollateralized $45 million revolving credit facility (the “Revolver”) matures December 31, 2009. We are currently negotiating to extend the maturity date of the Revolver; however, the credit markets remain extremely illiquid which may make it difficult and possibly cost prohibitive to extend our Revolver. We believe that our Revolver will be extended until at least December 31, 2010. However, the aggregate amount available under our Revolver is expected to decrease and the cost is expected to increase. We believe our current capital needs can be met by the anticipated future availability under our Revolver. To the extent we need additional capital for unanticipated items, there can be no assurance that we would be able to increase the amount available under our Revolver or identify other sources of funds with acceptable terms. We have availability under our Revolver; however, the amount available has caused us to significantly restrict non-SBA 7(a) Program loan origination activity as discussed below. As a result, the majority of our outstanding loan commitments are for SBA 7(a) Program loans.

Strategic Alternatives

The credit and capital market environment remains unstable so we continue to review and analyze potential strategic and liquidity alternatives. While we continue to explore and evaluate future opportunities as they present themselves, our primary focus is presently on maximizing the value of our current investment portfolio and business strategy. Alternatives that we continue to evaluate include the potential benefits that we could achieve through investment in, acquisition of, or conversion to, a bank. There are significant obstacles in becoming a bank including legal, regulatory and shareholder approvals. However, given current market conditions and valuations for commercial mortgage REITs, we will continue to evaluate whether the benefits outweigh the risks.

Current Reliance on the SBA 7(a) Program

We are focusing on origination of SBA 7(a) Program loans which require less capital due to the ability to sell the government guaranteed portion of such loans. We utilize the SBA 7(a) Program to originate small business loans and then sell the government guaranteed portion to investors who then bundle and sell those loans using the asset-backed securities market.

The American Recovery and Reinvestment Act (the “Stimulus Bill”) was passed in February 2009. The Stimulus Bill contains provisions that benefit the SBA which may have a positive impact on our lending operations. The Stimulus Bill provided the SBA with funding to eliminate fees on SBA 7(a) Program loans and provided increased SBA guarantee percentages on SBA 7(a) Program loans of up to 90% for certain loans. These program changes are expected to be in effect for at least the remainder of 2009.

We believe that it is promising that the activity on the secondary market has improved. The market all but froze in the fourth quarter of 2008. In recent months, we have seen the secondary market rebound and premiums paid steadily increase. However, while the premium levels have increased, they are not back to the levels seen prior to the liquidity crisis. We believe our liquidity has been, and will continue to be, benefitted through the increased activity in the secondary market.

Cost Reduction Initiatives

In October 2008, due to economic and market conditions, we announced cost reduction initiatives. These initiatives included streamlining our sales, credit and servicing, as well as outsourcing some functions. Management estimates annual savings for these initiatives to be approximately $1.2 million which will primarily be a reduction of salaries and related benefits on our consolidated income statement.

Loan Portfolio Performance

Our aggregate portfolio continues to have minimal realized loan losses; however, we believe that economic conditions have subjected our borrowers to financial stress. We have seen an increase in payment delinquencies, slow pays, insufficient funds payments, late fees, non-payment of real estate taxes and borrower requests for deferments of payment of principal and interest. Our recorded investment in non-accrual loans increased from $5,062,000 (2.8% of our retained loans) at December 31, 2008 to $8,236,000 (4.5% of our retained loans) at June 30, 2009. Additional changes to the facts and circumstances of the individual borrowers, the limited service hospitality industry and the economy may require the establishment of significant additional loan loss reserves and the effect on our results of operations and financial condition may be material.

We are in the process of foreclosure proceedings on several properties, primarily limited service hospitality properties, collateralizing our serviced loans. Historically, many borrowers have brought their loans current; thus, we stopped the foreclosure process. It is difficult to determine what impact the current market disruptions will have on our borrowers whose collateral is in the process of foreclosure and the borrowers’ ability to become current on their loans. We estimate that these foreclosure processes will be completed within the next eighteen months; however, foreclosure is a complex and generally time consuming process that is subject to numerous state laws and regulations.

Loan Activity

During the first six months of 2009 we funded approximately $7.8 million of loans. At June 30, 2009, December 31, 2008 and June 30, 2008, our outstanding commitments to fund loans were approximately $19.3 million, $10.0 million and $13.2 million, respectively. Our pipeline has been increasing and we anticipate that our fundings during 2009 will be between $20 million and $30 million. We have been concentrating on longer-term loan originations with real estate for collateral and loan amounts between $500,000 and $2,000,000.

We had a significant amount of prepayments of our serviced loans from 2006 to 2008. The result has been a reduction in our total serviced portfolio outstanding from its peak of approximately $498 million during 2004 to approximately $270 million at June 30, 2009. Our prepayment activity slowed during the last half of 2008 and the first half of 2009 and we expect that the amount of prepayments will continue at these lower levels during the last half of 2009.

In addition to our retained portfolio of $185 million, at June 30, 2009, we service approximately $85 million of aggregate principal balance remaining on loans that were sold in structured loan sale transactions and Secondary Market Loan Sales. Since we retain a residual interest in the cash flows from these sold loans, the performance of these loans impacts our profitability and our cash available for dividend distributions. Therefore, we provide information on both our loans retained (the “Retained Portfolio”) and combined with sold loans that we service (the “Serviced Portfolio”).

Information on our Serviced Portfolio, including prepayment trends, was as follows:

		June 30,				December 31,
		2009				2008				2007				2006				2005				2004
		(Dollars in thousands)
Serviced Portfolio (1)		$	270,317			$	275,530			$	326,368			$	397,567			$	447,220			$	468,158
Loans funded		$	7,802			$	34,587			$	33,756			$	51,686			$	49,942			$	49,733
Prepayments (2)		$	6,411			$	68,556			$	84,137			$	91,710			$	41,049			$	15,931
% Prepayments (3) (4)			4.7	%			21.0	%			21.2	%			20.5	%			8.8	%			3.2	%