Business context and reporting period
PMC Commercial Trust and subsidiaries filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The filing describes a commercial lender focused on commercial real estate and SBA 7(a) loans, with 93% of its loans concentrated in hospitality properties. The filing identifies the registrant as PMC Commercial Trust.
Financial results and position
Unless otherwise noted, amounts are in millions of dollars. Revenue declined 6.6% year over year to $3.787 million, mainly because less SBA loan-sale premium income was recognized. Interest income was $3.398 million, versus $3.367 million; premium income fell to $0.113 million from $0.431 million.
- Total expenses rose 31.1% to $3.812 million, including $0.850 million of strategic-alternatives costs and a $0.475 million net loan-loss provision.
- Continuing operations reported a $0.006 million loss, compared with $1.124 million income in Q1 2011. Net loss was $0.155 million, or $0.01 per share, versus net income of $0.916 million, or $0.09 per share. Management stated that, before strategic-alternatives costs, continuing income and net income would have been $0.844 million and $0.695 million, respectively; these are management-presented figures, not reported GAAP results.
- Cash used in operations was $3.097 million; investing activities provided $4.049 million and financing activities used $4.200 million. Cash declined to $3.254 million from $6.502 million at year-end.
- Management’s non-GAAP “Modified Cash” was $0.642 million, below the $1.694 million of dividends declared for the quarter. Dividends were $0.16 per share.
- At March 31, loans receivable, net were $235.744 million; total assets were $247.298 million; debt was $93.799 million; and total equity was $145.882 million. Debt declined from $95.861 million, including repayment of the $5.264 million structured notes balance.
- The $35 million revolving facility had $15.7 million drawn and matures June 30, 2014. The minimum-equity covenant is $142 million; management reported beneficiaries’ equity of approximately $145 million and compliance at quarter-end.
- The portfolio’s weighted-average loan rate was 5.7%; weighted-average cost of funds was 3.5%. The filing does not present a conventional operating-margin measure. Estimated fair value of net loans was $223.372 million versus carrying value of $235.744 million.
Material changes versus the prior comparable period
- Net income of $0.916 million in Q1 2011 turned to a $0.155 million net loss in Q1 2012. Strategic-alternatives costs were the primary stated driver; higher loan-loss provision and lower recognized premium income also affected results.
- Loan-loss provision increased from $0.313 million to $0.475 million. Non-accrual loans rose to $3.685 million from $1.820 million at December 31, 2011.
- Loans receivable, net increased to $235.744 million from $234.427 million at year-end. Loans funded during the quarter totaled $10.731 million, versus $8.072 million in Q1 2011.
- Operating cash use increased from $1.314 million to $3.097 million. Dividends exceeded Modified Cash by $1.028 million in Q1 2012, compared with $0.136 million in Q1 2011.
Outlook, commentary, risks and contingencies
- Management expected 2012 loan fundings of $50 million to $60 million. Outstanding loan commitments were $23.2 million at quarter-end. Management also reported $10 million of SBA commitments for SBIC debentures, subject to SBA approval, and said it had requested an additional $10 million.
- A board special committee was evaluating strategic alternatives following preliminary transaction inquiries. No transaction, timing, or outcome was assured. Strategic-alternatives costs totaled $1.628 million cumulatively through March 31; an additional $0.400 million was incurred in April.
- Management said continued strategic-review costs and the choice to sell most fully funded SBA loans as “hybrids” could contribute to future losses. Hybrid sales defer book gain recognition; deferred cash premiums were $2.860 million at quarter-end. Continued losses could reduce covenant headroom and require a dividend reduction.
- Credit risks include hospitality-sector weakness, foreclosures, borrower cash-flow stress, declining collateral values, and loan modifications. At March 31, 96.4% of loans subject to credit risk were current; 2.7% were 30–59 days delinquent and 0.9% were over 89 days delinquent. Current balances included $6.3 million of troubled debt restructurings; one $1.4 million loan involved a borrower in Chapter 11.
- Management cited funding and liquidity risks: secondary-market loan sales and principal collections are key funding sources, while securitization and other capital markets were described as unavailable or unattractive. The revolver’s availability increase to $40 million in 2013 depends on specified conditions, including covenant and non-performing-loan tests.
- Other exposures include $23.2 million of loan commitments (some may expire undrawn), executive employment-agreement provisions, and potential SBA recovery claims for technical deficiencies in guaranteed loans. Management did not expect the latter or ordinary-course litigation to have a material effect. The filing reported no material change in previously disclosed risk factors.
Investor facts to verify
- Progress and costs of the strategic-alternatives review, including any subsequent transaction developments.
- Whether loan quality, non-accrual balances, reserves, and hospitality collateral values improve or deteriorate.
- Liquidity, revolver availability and covenant headroom, especially the $142 million minimum-equity requirement.
- Whether Modified Cash covers dividends, and the effects of loan-sale mix and deferred premiums on reported earnings and cash.
- Approval and timing of the expected SBIC debentures and the company’s ability to meet its $50–$60 million funding outlook.