Loans Receivable, net

9 Months Ended

Sep. 30, 2011

Loans Receivable, net [Abstract]

Loans Receivable, net

Note 4. Loans Receivable, net:

Loans receivable, net, consisted of the following:

	September 30,			December 31,
	2011			2010
	(In thousands)
Commercial mortgage loans (1)	$	123,031		$	124,065
Commercial mortgage loans, subject to structured notes payable (2)		33,221			40,514
SBIC commercial mortgage loans		30,584			31,289
SBA 7(a) loans, subject to secured borrowings		29,632			20,326
SBA 7(a) loans		20,666			18,673
Total loans receivable		237,134			234,867
Adjusted by:
Deferred capitalized costs (commitment fees), net		119			(40	)
Loan loss reserves		(1,827	)		(1,609	)
Loans receivable, net	$	235,426		$	233,218

(1)	At December 31, 2010, these loans were pledged to our revolving credit facility.
(2)	We repaid the 1998 Partnership notes on October 3, 2011 and will repay the 2000 Joint Venture notes on November 15, 2011; thus, loans totaling $17.4 million will no longer be subject to structured notes payable or encumbered as of these dates.

Commercial mortgage loans

Represents all of the loans of PMC Commercial Trust.

Commercial mortgage loans, subject to structured notes payable

Represents loans contributed to special purpose entities in exchange for a subordinated financial interest in that entity. The collateral of the structured notes payable includes these loans.

SBIC commercial mortgage loans

Represents loans of our licensed Small Business Investment Company (“SBIC”) subsidiaries.

SBA 7(a) loans, subject to secured borrowings

Represents the government guaranteed portion of loans which were sold with the proceeds received from the sale reflected as secured borrowings — government guaranteed loans (a liability on our consolidated balance sheet). There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal.

SBA 7(a) loans

Represents (1) the non-government guaranteed retained portion of loans originated under the SBA 7(a) program and (2) the government guaranteed portion of loans that have not yet been fully funded or legally sold. The balance is net of retained loan discounts of $1.4 million and $1.3 million at September 30, 2011 and December 31, 2010, respectively.

Concentration Risks

We have certain concentrations of investments. Substantially all of our revenue is generated from loans collateralized by hospitality properties. At both September 30, 2011 and December 31, 2010, our loans were 94% concentrated in the hospitality industry. Any economic factors that negatively impact the hospitality industry, including recessions, depressed commercial real estate markets, travel restrictions, gasoline prices, bankruptcies or other political or geopolitical events, could have a material adverse effect on our financial condition and results of operations.

At September 30, 2011 and December 31, 2010, approximately 18% and 19%, respectively, of our loans were collateralized by properties in Texas. No other state had a concentration of 10% or greater of our loans receivable at September 30, 2011. A decline in economic conditions in any state in which we have a concentration of investments could have a material adverse effect on our financial condition and results of operations.

We have not loaned more than 10% of our assets to any single borrower; however, we have an affiliated group of obligors representing greater than 5% of our loans receivable (approximately 6%) at both September 30, 2011 and December 31, 2010. Any decline in the financial status of this group could have a material adverse effect on our financial condition and results of operations.

Aging

The following tables represent an aging of our loans receivable. These tables do not include our SBA 7(a) loans receivable, subject to secured borrowings since the SBA has guaranteed payment of the principal.

September 30, 2011
					Commercial
					Mortgage				SBA 7(a)
Category	Totals				Loans				Loans
	(Dollars in thousands)
Current (1)	$	204,701	98.7	%	$	184,556	98.8	%	$	20,145	97.5	%
Between 30 and 59 days delinquent		6	—			—	—			6	—
Between 60 and 89 days delinquent		629	0.3	%		629	0.3	%		—	—
Over 89 days delinquent (2)		2,166	1.0	%		1,651	0.9	%		515	2.5	%
	$	207,502	100.0	%	$	186,836	100.0	%	$	20,666	100.0	%

(1)	Includes $6.5 million of loans classified as troubled debt restructurings which are current based on revised note terms.
(2)	Includes $1.5 million of loans on which the borrowers have filed for Chapter 11 Bankruptcy. We are classified as a secured creditor in the bankruptcy proceedings.

December 31, 2010
					Commercial
					Mortgage				SBA 7(a)
Category	Totals				Loans				Loans
	(Dollars in thousands)
Current (1)	$	196,539	91.6	%	$	178,592	91.2	%	$	17,947	96.1	%
Between 30 and 59 days delinquent		4,877	2.3	%		4,664	2.4	%		213	1.1	%
Between 60 and 89 days delinquent		5,576	2.6	%		5,253	2.7	%		323	1.7	%
Over 89 days delinquent (2)		7,549	3.5	%		7,359	3.8	%		190	1.0	%
	$	214,541	100.0	%	$	195,868	100.0	%	$	18,673	100.0	%

(1)	Includes $9.0 million of loans which are current under agreements which provide for interest only payments during a short period of time in exchange for additional collateral. Of this, $7.2 million relates to an affiliated group of obligors described above.
(2)	Includes $6.3 million of loans on which the borrowers have filed for Chapter 11 Bankruptcy. We are classified as a secured creditor in the bankruptcy proceedings. In addition, the collateral underlying $1.1 million of loans included in the over 89 days delinquent category was in the foreclosure process.

Loan Loss Reserves

We have a quarterly review process to identify and evaluate potential exposure to loan losses. Loans that require specific identification review are identified based on one or more negative characteristics including, but not limited to, non-payment or lack of timely payment of interest and/or principal, non-payment or lack of timely payment of property taxes for an extended period of time, insurance defaults and/or franchise defaults. The specific identification evaluation begins with an evaluation of the estimated fair value of the loan. In determining estimated fair value, management utilizes the present value of the expected future cash flows discounted at the loan’s effective interest rate and/or an estimation of underlying collateral values using appraisals, broker price opinions, tax assessed value and/or revenue analysis. Management uses appraisals as tools in conjunction with other determinants of collateral value to estimate collateral values, not as the sole determinant of value due to the current economic environment. The property valuation takes into consideration current information on property values in general and value changes in commercial real estate and/or hospitality properties. The probability of liquidation is then determined. These probability determinations include macroeconomic factors, the location of the property and economic environment where the property is located, industry specific factors relating primarily to the hospitality industry, our historical experience with similar borrowers and/or individual borrower or collateral characteristics, and in certain circumstances, the strength of the guarantors. The liquidation probability is then applied to the identified loss exposure to establish the reserve for that loan and the ultimate determination as to whether it is considered impaired.

Management closely monitors our loans which require evaluation for loan loss reserves based on specific criteria which classify the loans into three categories: Doubtful, Substandard and Other Assets Especially Mentioned (“OAEM”) (together “Specific Identification Loans”). Loans classified as Doubtful are generally loans which are not complying with their contractual terms, the collection of the balance of the principal is considered impaired and liquidation of the collateral securing the loan is probable. These loans are typically placed on non-accrual status and are generally in the foreclosure process. Loans classified as Substandard are generally those loans that are either not complying or had previously not complied with their contractual terms and have other credit weaknesses which may make payment default or principal exposure likely but not yet certain. Loans classified as OAEM are generally loans for which the credit quality of the borrowers has temporarily deteriorated. Typically these borrowers, whose loans are classified as OAEM, are current on their payments; however, they may be delinquent on their property taxes, insurance, or franchise fees or may be under agreements which provided for interest only payments during a short period of time. In addition, included in OAEM are loans for which the borrowers have filed for Chapter 11 Bankruptcy and we are classified as a secured creditor in the bankruptcy proceedings. Until bankruptcy plans are confirmed, the loans are typically delinquent.

Management has classified our loans receivable (excluding our SBA 7(a) loans receivable, subject to secured borrowings since the SBA has guaranteed payment of the principal) as follows (balances represent our investment in the loans prior to loan loss reserves and deferred capitalized costs (commitment fees)):

	September 30, 2011
						Commercial
						Mortgage					SBA 7(a)
	Totals		%			Loans		%			Loans		%
	(Dollars in thousands)
Satisfactory	$	184,846		89.1	%	$	164,899		88.3	%	$	19,947		96.5	%
OAEM		12,775		6.1	%		12,775		6.8	%		—		—
Substandard		5,108		2.5	%		5,064		2.7	%		44		0.2	%
Doubtful		4,773		2.3	%		4,098		2.2	%		675		3.3	%
	$	207,502		100.0	%	$	186,836		100.0	%	$	20,666		100.0	%

	December 31, 2010
						Commercial
						Mortgage					SBA 7(a)
	Totals		%			Loans		%			Loans		%
	(Dollars in thousands)
Satisfactory	$	187,630		87.5	%	$	169,880		86.7	%	$	17,750		95.1	%
OAEM		16,886		7.9	%		16,872		8.6	%		14		0.1	%
Substandard		9,113		4.2	%		8,469		4.3	%		644		3.4	%
Doubtful		912		0.4	%		647		0.3	%		265		1.4	%
	$	214,541		100.0	%	$	195,868		100.0	%	$	18,673		100.0	%

Our loan loss reserves as a percentage of our outstanding portfolio (excluding SBA 7(a) loans receivable, subject to secured borrowings) were 88 basis points and 72 basis points at September 30, 2011 and September 30, 2010, respectively. Our provision for loan losses (excluding reductions of loan losses) as a percentage of our weighted average outstanding loans receivable (excluding SBA 7(a) loans receivable, subject to secured borrowings) was 0.30% and 0.33% during the nine months ended September 30, 2011 and 2010, respectively. To the extent one or several of our loans experience significant operating difficulties and we are forced to liquidate the loans, future losses may be substantial.

The activity in our loan loss reserves was as follows:

	Nine Months Ended September 30,
	2011
				Commercial
				Mortgage			SBA 7(a)
	Total			Loans			Loans			2010
	(In thousands)
Balance, beginning of year	$	1,609		$	1,303		$	306		$	1,257
Provision for loan losses		628			246			382			769
Reduction of loan losses		(266	)		(241	)		(25	)		(381	)
Consolidation of the 2000 Joint Venture and the 1998 Partnership reserves		—			—			—			184
Principal balances written-off		(144	)		(17	)		(127	)		(171	)
Balance, end of period	$	1,827		$	1,291		$	536		$	1,658

Information on those loans considered to be impaired loans was as follows:

	September 30, 2011						December 31, 2010
			Commercial						Commercial
			Mortgage		SBA 7(a)				Mortgage		SBA 7(a)
	Total		Loans		Loans		Total		Loans		Loans
	(In thousands)
Impaired loans requiring reserves	$	8,376	$	7,861	$	515	$	687	$	419	$	268
Impaired loans expected to be fully recoverable		1,017		857		160		228		228		—
Total impaired loans	$	9,393	$	8,718	$	675	$	915	$	647	$	268
Loan loss reserves	$	561	$	281	$	280	$	219	$	25	$	194

Our impaired loans requiring reserves at September 30, 2011 included $6,488,000 of loans classified as troubled debt restructurings. There are three commercial mortgage loans classified as troubled debt restructurings due to extended interest only periods.

	Three Months Ended September 30,
	2011
			Commercial
			Mortgage		SBA 7(a)
	Total		Loans		Loans		2010
	(In thousands)
Average impaired loans	$	9,420	$	8,744	$	676	$	5,990
Interest income on impaired loans	$	28	$	26	$	2	$	38

	Nine Months Ended September 30,
	2011
			Commercial
			Mortgage		SBA 7(a)
	Total		Loans		Loans		2010
	(In thousands)
Average impaired loans	$	8,504	$	7,952	$	552	$	4,549
Interest income on impaired loans	$	228	$	213	$	15	$	114

Our recorded investment in Non-Accrual Loans at September 30, 2011 of $4,614,000 was comprised of $521,000 of SBA 7(a) loans and $4,093,000 of commercial mortgage loans. Our recorded investment in Non-Accrual Loans at December 31, 2010 of $12,275,000 was comprised of $519,000 of SBA 7(a) loans and $11,756,000 of commercial mortgage loans. We did not have any loans receivable past due 90 days or more which were accruing interest at September 30, 2011 or December 31, 2010. The decrease in our Non-Accrual Loans from December 31, 2010 to September 30, 2011 is primarily due the decrease in loans delinquent 60 days or more at December 31, 2010 including loans for which the borrowers filed for Chapter 11 Bankruptcy whose bankruptcy plans were confirmed and are now paying according to modified terms and a $3.2 million loan classified as a troubled debt restructuring that is now current under agreed upon modified terms.

Additional Credit Quality Indicator

We consider loan origination dates to be a credit quality indicator of our portfolio. Loans originated from 1991 to 1999 are heavily seasoned; thus typically representing a smaller risk in terms of loss upon liquidation due to paydowns of principal. For loans originated during 2005 to 2007, the businesses collateralizing these loans (within a short period of time following closing of the loans) were subject to extreme conditions including a recession and resulting decrease in property values and performance. While we believe that industry performance is improving, it has not yet reached pre-recession levels.

The years of origination for our loans receivable outstanding (excluding our SBA 7(a) loans receivable, subject to secured borrowings since the SBA has guaranteed payment of the principal) were as follows:

September 30, 2011
					Commercial
					Mortgage				SBA 7(a)
Year of Origination	Totals				Loans				Loans
	(Dollars in thousands)
1991 to 1999	$	31,226	15.0	%	$	29,966	16.0	%	$	1,260	6.1	%
2000 to 2004		53,139	25.6	%		50,607	27.1	%		2,532	12.3	%
2005 to 2007		76,230	36.7	%		75,005	40.1	%		1,225	5.9	%
2008 to 2011		46,907	22.6	%		31,258	16.7	%		15,649	75.7	%
	$	207,502	100.0	%	$	186,836	100.0	%	$	20,666	100.0	%

December 31, 2010
					Commercial
					Mortgage				SBA 7(a)
Year of Origination	Totals				Loans				Loans
	(Dollars in thousands)
1991 to 1999	$	36,405	17.0	%	$	35,057	17.9	%	$	1,348	7.2	%
2000 to 2004		56,497	26.3	%		53,739	27.4	%		2,758	14.8	%
2005 to 2007		79,118	36.9	%		77,773	39.7	%		1,345	7.2	%
2008 to 2010		42,521	19.8	%		29,299	15.0	%		13,222	70.8	%
	$	214,541	100.0	%	$	195,868	100.0	%	$	18,673	100.0	%