Loans Receivable, net

9 Months Ended

Sep. 30, 2012

Loans Receivable, net [Abstract]

Loans Receivable, net

Note 3. Loans Receivable, net:

Loans receivable, net, consisted of the following:

	September 30,			December 31,
	2012			2011
	(In thousands)
Commercial mortgage loans	$	134,155		$	134,835
SBIC commercial mortgage loans		42,886			32,416
SBA 7(a) loans, subject to secured borrowings		38,150			30,151
SBA 7(a) loans		28,488			23,238
Commercial mortgage loans, subject to structured notes payable (1)		—			15,474
Total loans receivable		243,679			236,114
Adjusted by:
Deferred capitalized costs, net		302			125
Loan loss reserves		(2,067	)		(1,812	)
Loans receivable, net	$	241,914		$	234,427

(1) The structured notes were repaid on February 15, 2012.

Commercial mortgage loans

Represents the loans held by the parent company, PMC Commercial Trust.

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; therefore, no loan loss reserves are recorded on the $38.2 million and $30.2 million, respectively of government guaranteed portions of these SBA 7(a) loans included in loans receivable at September 30, 2012 and December 31, 2011.

SBA 7(a) loans

Represents the non-government guaranteed retained portion of loans originated under the SBA 7(a) program and the government guaranteed portion of loans that have not yet been fully funded or sold. The balance is net of retained loan discounts of $1.9 million and $1.6 million at September 30, 2012 and December 31, 2011, respectively.

Commercial mortgage loans, subject to structured notes payable

Represented loans contributed to a special purpose entity in exchange for a subordinated financial interest in that entity. The collateral of the structured notes payable included these loans. The structured notes were repaid on February 15, 2012.

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, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, 16% and 18%, 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, 2012 or December 31, 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 approximately 5% of our loans receivable at both September 30, 2012 and December 31, 2011. 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 Subject to Credit Risk (loans receivable less SBA 7(a) loans, subject to secured borrowings as the SBA has guaranteed payment of the principal). Balances are prior to loan loss reserves and deferred capitalized costs, net.

September 30, 2012
Category	Totals				Commercial Mortgage Loans				SBA 7(a) Loans
	(Dollars in thousands)
Current (1)	$	205,503	100.0	%	$	177,041	100.0	%	$	28,462	99.9	%
Between 30 and 59 days delinquent		—	—			—	—			—	—
Between 60 and 89 days delinquent		26	—			—	—			26	0.1	%
Over 89 days delinquent		—	—			—	—			—	—
	$	205,529	100.0	%	$	177,041	100.0	%	$	28,488	100.0	%

(1) Includes $13.1 million of loans classified as troubled debt restructurings which were current at September 30, 2012 based on revised note terms.

December 31, 2011
Category	Totals				Commercial Mortgage Loans				SBA 7(a) Loans
	(Dollars in thousands)
Current (1)	$	202,217	98.2	%	$	179,497	98.2	%	$	22,720	97.7	%
Between 30 and 59 days delinquent		1,224	0.6	%		1,090	0.6	%		134	0.6	%
Between 60 and 89 days delinquent		696	0.3	%		696	0.4	%		—	—
Over 89 days delinquent (2)		1,826	0.9	%		1,442	0.8	%		384	1.7	%
	$	205,963	100.0	%	$	182,725	100.0	%	$	23,238	100.0	%

(1) Includes $6.3 million of loans classified as troubled debt restructurings which were current based on revised note terms. Of these loans, $5.6 million are paying interest only.

(2) Includes a $1.4 million loan on which the borrower filed for Chapter 11 Bankruptcy. We were classified as a secured creditor in the bankruptcy proceeding.

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, including, but not limited to, non-completion of required property improvement plans and non-payment of franchise fees due to insufficient funds. 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. 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, our historical experience with similar borrowers and/or individual borrower or collateral characteristics, and in certain circumstances, the financial strength of the guarantors. The liquidation probability is then applied to the identified loss exposure to determine the general or specific 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.

Management has classified our Loans Receivable Subject to Credit Risk as follows (balances represent our investment in the loans prior to loan loss reserves and deferred capitalized costs):

	September 30, 2012
	Totals		%			Commercial Mortgage Loans		%			SBA 7(a) Loans		%
	(Dollars in thousands)
Satisfactory	$	183,430		89.3	%	$	155,388		87.8	%	$	28,042		98.4	%
OAEM		10,075		4.9	%		9,993		5.6	%		82		0.3	%
Substandard		11,999		5.8	%		11,660		6.6	%		339		1.2	%
Doubtful		25		0.0	%		—		—			25		0.1	%
	$	205,529		100.0	%	$	177,041		100.0	%	$	28,488		100.0	%
	December 31, 2011
	Totals		%			Commercial Mortgage Loans		%			SBA 7(a) Loans		%
	(Dollars in thousands)
Satisfactory	$	189,836		92.2	%	$	167,397		91.6	%	$	22,439		96.5	%
OAEM		3,354		1.6	%		3,317		1.8	%		37		0.2	%
Substandard		10,790		5.2	%		10,569		5.8	%		221		1.0	%
Doubtful		1,983		1.0	%		1,442		0.8	%		541		2.3	%
	$	205,963		100.0	%	$	182,725		100.0	%	$	23,238		100.0	%

Our provision for loan losses (excluding reductions of loan losses and recoveries) as a percentage of our weighted average outstanding Loans Receivable Subject To Credit Risk was 0.60% and 0.30% during the nine months ended September 30, 2012 and 2011, respectively. The increase during the nine months ended September 30, 2012 is primarily due to provisions for loan loss on commercial mortgage loans collateralized by limited service hospitality properties classified as troubled debt restructurings. To the extent one or several of our borrowers experience significant operating difficulties and we are forced to liquidate the collateral underlying the loan, future losses may be substantial.

The activity in our loan loss reserves was as follows:

	Nine Months Ended September 30, 2012
	Total			Commercial Mortgage Loans			SBA 7(a) Loans
	(In thousands)
Balance, beginning of year	$	1,812		$	1,329		$	483
Provision for loan losses		1,203			1,103			100
Reduction of loan losses		(149	)		(115	)		(34	)
Recoveries		(408	)		(408	)		—
Principal balances written-off, net		(391	)		(219	)		(172	)
Balance, end of period	$	2,067		$	1,690		$	377

Recoveries represent cash proceeds from collections on personal loan guarantees to the extent there is a deficiency after foreclosure of the real property collateral and to the extent cash received does not exceed realized losses taken on the property.

	Nine Months Ended September 30, 2011
	Total			Commercial Mortgage Loans			SBA 7(a) Loans
	(In thousands)
Balance, beginning of year	$	1,609		$	1,303		$	306
Provision for loan losses		628			246			382
Reduction of loan losses		(266	)		(241	)		(25	)
Principal balances written-off		(144	)		(17	)		(127	)
Balance, end of period	$	1,827		$	1,291		$	536

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

	September 30, 2012						December 31, 2011
	Total		Commercial Mortgage Loans		SBA 7(a) Loans		Total		Commercial Mortgage Loans		SBA 7(a) Loans
	(In thousands)
Impaired loans requiring reserves (1)	$	10,123	$	10,098	$	25	$	7,411	$	7,027	$	384
Impaired loans expected to be fully recoverable (1)		3,124		2,146		978		846		689		157
Total impaired loans (2)	$	13,247	$	12,244	$	1,003	$	8,257	$	7,716	$	541
Loan loss reserves	$	701	$	676	$	25	$	563	$	372	$	191

(1) Balances represent our recorded investment and include loans classified as troubled debt restructurings.

(2) The unpaid principal balance of our impaired commercial mortgage loans was $12,717,000 and $7,940,000 at September 30, 2012 and December 31, 2011, respectively. The unpaid principal balance of our impaired SBA 7(a) loans (excluding the government guaranteed portion) was $366,000 and $593,000 at September 30, 2012 and December 31, 2011, respectively.

	Three Months Ended September 30, 2012						Three Months Ended September 30, 2011
	Total		Commercial Mortgage Loans		SBA 7(a) Loans		Total		Commercial Mortgage Loans		SBA 7(a) Loans
	(In thousands)
Average impaired loans	$	9,885	$	8,799	$	1,086	$	9,420	$	8,744	$	676
Interest income on impaired loans	$	88	$	84	$	4	$	28	$	26	$	2
	Nine Months Ended September 30, 2012						Nine Months Ended September 30, 2011
	Total		Commercial Mortgage Loans		SBA 7(a) Loans		Total		Commercial Mortgage Loans		SBA 7(a) Loans
	(In thousands)
Average impaired loans	$	8,788	$	8,083	$	705	$	8,504	$	7,952	$	552
Interest income on impaired loans	$	277	$	266	$	11	$	228	$	213	$	15

Our recorded investment in Non-Accrual Loans at September 30, 2012 of $2,284,000 was comprised of an $855,000 SBA

7(a) loan and a $1,429,000 commercial mortgage loan. Included within the non-accrual SBA 7(a) loan at September 30, 2012 is the government guaranteed portion of $634,000 (i.e., the loan has a related secured borrowing as it was sold as a hybrid) on which we have no credit loss exposure. Our recorded investment in Non-Accrual Loans at December 31, 2011 of $1,820,000 was comprised of $384,000 of SBA 7(a) loans and $1,436,000 of commercial mortgage loans. We did not have any loans receivable past due 90 days or more which were accruing interest at September 30, 2012 or December 31, 2011.

Information on our troubled debt restructurings which consisted of eight commercial mortgage loans and one SBA 7(a) loan was as follows at September 30, 2012:

	Commercial Mortgage Loans				SBA 7(a) Loan
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance
	(In thousands)
Troubled debt restructurings requiring reserves	$	10,098	$	10,521	$	854	$	845
Troubled debt restructurings without reserves (1)		2,146		2,197		—		—
Total troubled debt restructurings	$	12,244	$	12,718	$	854	$	845
Loan loss reserves	$	676			$	12

(1) The SBA 7(a) loan recorded investment and unpaid principal balance includes the government guaranteed portion of $634,000 on which we have no credit loss exposure.

Loans with a recorded investment at September 30, 2012 of $4.8 million were modified voluntarily under agreements to allow extended interest only periods instead of the principal and interest payments required by the notes. In addition, loans with a recorded investment at September 30, 2012 of $6.0 million were modified involuntarily through Chapter 11 bankruptcy proceedings. The bankruptcy plans were confirmed with modified terms including extended interest only and amortization periods or modification of timing of payments combined with interest rate adjustments.