PMC Commercial Trust — Q3 2013 Form 10-Q
Entity and period: The filing identifies the registrant as PMC Commercial Trust and covers the quarter ended September 30, 2013, with year-to-date results for the nine months then ended. The supplied company label, Creative Media & Community Trust Corp., does not match the registrant name in this filing. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context and financial results
The company primarily originates commercial real estate-secured loans, including SBA 7(a) and SBIC loans. At September 30, 2013, 94% of loans were concentrated in hospitality properties, and about 84% of the loan portfolio was variable-rate.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $4.588 | $4.864 | $13.587 | $12.615 |
| Interest income | $3.570 | $3.561 | $10.496 | $10.392 |
| Total expenses | $3.834 | $3.947 | $9.805 | $11.758 |
| Income from continuing operations | $0.398 | $0.645 | $2.836 | $0.546 |
| Net income (loss) | $0.323 | $0.473 | $2.513 | $(0.097) |
| Net income (loss) per share | $0.03 | $0.04 | $0.24 | $(0.01) |
Conventional operating margin is not separately reported. The retained loan portfolio’s weighted-average interest rate was 5.8%; weighted-average cost of funds was 3.5% for both nine-month periods.
Financial position, cash flow, and liquidity
- Total assets were $249.9 million at September 30, 2013, versus $247.7 million at December 31, 2012. Net loans receivable were $230.1 million, down from $239.0 million.
- Cash and cash equivalents rose to $12.6 million from $1.2 million. Total debt was $104.5 million, compared with $97.2 million; total equity was $137.8 million versus $139.2 million.
- Nine-month cash from operating activities was $3.1 million, investing activities $3.2 million, and financing activities $5.0 million; cash increased by $11.4 million. Management’s non-GAAP “Modified Cash” was $3.7 million, and dividends exceeded it by $0.2 million. After adjusting for transaction and prior strategic-alternatives costs, Modified Cash was $4.8 million.
- The $40 million unsecured revolving facility had $11.9 million drawn and $28.1 million available; its maturity was extended to June 30, 2015. The company reported compliance with covenants, including a $132 million minimum-equity covenant.
- Loan commitments and approvals totaled $28.6 million, including $18.5 million for SBA 7(a) loans. Management expected to fund $55–$60 million of loans during 2013. Estimated scheduled collections and known prepayments over the next 12 months were $13.1 million.
Changes versus comparable periods
- For Q3, revenue fell 5.7% and net income fell 31.7% year over year. Lower premium income from SBA loan sales was the main revenue driver; transaction costs partly offset savings from the absence of prior-year strategic-alternatives expenses.
- For the first nine months, revenue increased 7.7%, expenses decreased 16.6%, and net income improved from a $0.1 million loss to $2.5 million income. Higher recognized SBA loan-sale premium income and no repeat of the $3.6 million strategic-alternatives expense in 2012 were key contributors. 2013 merger transaction costs were $1.6 million.
- Loan loss reserves declined to $2.9 million from $3.4 million at year-end 2012. Loans rated satisfactory represented 93.5% of loans subject to credit risk, up from 92.0%; impaired loans totaled $8.6 million versus $13.2 million. However, $5.2 million of troubled debt restructurings were no longer complying with modified terms.
Outlook, material events, and risks
- Proposed CIM Urban REIT merger: The July 8, 2013 agreement contemplated approximately 22.0 million newly issued common shares and 65.0 million preferred shares convertible into seven common shares each—about 477.2 million common shares in total after conversion, representing approximately 97.8% of shares. Existing PMC common shares would remain outstanding. Existing shareholders of record before closing would receive a $5.50-per-share special cash dividend. Completion was required by December 31, 2013, subject to shareholder, SBA, third-party and other conditions; the filing cautions that completion is not assured. Up to approximately $3.4 million of transaction fees were contingent on closing. If the deal failed in certain circumstances, a $4.0 million termination fee plus up to $0.7 million of CIM Urban REIT expenses could be payable.
- A shareholder class and derivative lawsuit filed October 9, 2013 sought to enjoin the merger and alleged fiduciary and other breaches. The company denied the allegations and intended to defend itself; outcome and potential costs were uncertain.
- The October 1–17, 2013 federal government shutdown prevented new SBA 7(a) loan approvals. Management warned that a further funding interruption could materially affect originations and loan sales; the then-approved budget expired in January 2014.
- Management cited renewed bank and SBA lender competition, narrower spreads, and increased loan prepayments. These trends may pressure loan yields, premium income, and net interest income. Low rates have also weighed on returns from the predominantly variable-rate portfolio.
- Borrower and collateral risks remain significant: hospitality concentration, delinquencies and restructurings, potential property-value erosion, foreclosure costs, and possible additional loan-loss provisions. Delinquent loans over 89 days were $0.25 million at quarter-end; the filing also notes restructured loans and continuing borrower payment difficulties.
- The company anticipated a taxable loss for 2013, so some or all dividends could be treated as returns of capital. The merger agreement limited quarterly dividends to $0.125 per share until completion or termination; the minimum-equity covenant may constrain returns of capital.
- Interest-rate sensitivity: management estimated each 25-basis-point rate reduction would reduce annual net income by about $0.30 million; a 100-basis-point increase would raise annual interest expense by about $0.77 million, assuming balances remain unchanged. No hedging strategy was in place.
Key investor verification points
- Confirm the registrant identity and whether this PMC Commercial Trust filing is the intended filing for the supplied company label.
- Check merger status, shareholder and regulatory approvals, final consideration and special-dividend terms, and the effect of the proposed share issuance on existing holders.
- Track litigation developments, possible injunctions, termination-fee exposure, and remaining merger costs.
- Review loan delinquencies, restructurings, collateral valuations, charge-offs, and reserve adequacy—particularly given hospitality concentration and noncompliance by restructured borrowers.
- Verify SBA program availability and secondary-market loan-sale capacity, alongside actual loan fundings, prepayments, and dividend coverage.
- Monitor revolver availability, covenant headroom, refinancing requirements, and the company’s sensitivity to interest-rate and funding-market changes.