PMC Commercial Trust — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as PMC Commercial Trust and Subsidiaries. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and financial results
The company is a commercial lender focused largely on loans secured by hospitality properties, including SBA 7(a) and SBIC lending. Its retained loan portfolio was $241.9 million at quarter-end; it also serviced $67.5 million of loans sold and accounted for as sales.
- Q3 revenue: $4.864 million, up 27.7% from $3.809 million. Interest income was $3.561 million; premium income $0.796 million; and other income $0.507 million.
- Q3 earnings: Continuing-operations income was $0.645 million versus $1.232 million a year earlier. Net income was $0.473 million, or $0.04 per share, versus $0.733 million, or $0.07 per share.
- Nine-month results: Revenue was $12.615 million, up 7.7%. Continuing-operations income fell to $0.546 million from $3.591 million. A $0.643 million loss from discontinued operations resulted in a $0.097 million net loss, versus $2.988 million net income in 2011.
- Expenses and credit costs: Nine-month expenses rose 44.1% to $11.758 million, driven chiefly by $3.623 million of strategic-alternatives costs (versus $0.061 million). Net loan-loss provision was $0.646 million, compared with $0.362 million.
- Cash flow: Nine-month operating cash flow was negative $3.379 million; investing cash flow was positive $2.289 million and financing cash flow negative $1.220 million. Cash fell $2.310 million to $4.192 million. Management’s non-GAAP “Modified Cash” was $1.548 million; it was $5.171 million after adjustment for strategic-alternatives expenses.
Balance sheet, debt and liquidity
- Total assets were $254.344 million, including $241.914 million of net loans. Total liabilities were $111.786 million and total equity $142.558 million.
- Total debt was $100.544 million, up from $95.861 million at December 31, 2011. It included $41.287 million of secured borrowings tied to government-guaranteed loans, $27.070 million of junior subordinated notes, $17.187 million of SBIC debentures and $15.000 million outstanding on the revolving facility. Structured notes were repaid in February 2012.
- The unsecured revolving facility was $35 million and matured June 30, 2014; the company reported covenant compliance at September 30. Availability could increase by $5 million in January 2013 if specified conditions are met. Management said short-term liquidity needs should be met by loan sales, loan collections and revolver borrowings.
- Dividends declared were $5.083 million for the nine months, exceeding reported Modified Cash by $3.510 million. The filing says principal collections funded part of the distributions.
Material changes and outlook
- The formal strategic-alternatives process was suspended; the board decided the company should remain independent and pursue an expanded business plan. Management is evaluating complementary activities, including leveraged property acquisitions and other real-estate investments.
- Loan fundings were $40.5 million in the first nine months. Management expected $50–$60 million of fundings in 2012 and $60–$70 million in 2013. Outstanding loan commitments were $10.1 million at quarter-end.
- Management expected most guaranteed SBA loan portions sold in Q4 to be sold for cash premiums rather than as “hybrids,” which defer book gain recognition. Strategic-alternatives expenses were expected to be substantially lower in Q4 than Q3.
- A subsequent-event disclosure reports the CEO’s separation and promotion of Jan F. Salit to CEO. The company expected to record approximately $2.2 million of severance expense in Q4, with substantially all payments expected within a year.
- The board anticipated reducing the next quarterly cash dividend to $0.12 per common share, subject to declaration. It said the intended level should be sustainable for the following year, but gave no assurance.
Risks, contingencies and unusual items
- Hospitality properties represented 94% of loans at quarter-end, exposing results to lodging demand, property values and borrower cash flows. Texas accounted for 16% of loans.
- Credit quality weakened in some categories: satisfactory loans declined to 89.3% of loans subject to credit risk from 92.2% at year-end 2011; OAEM rose to 4.9% from 1.6%. Substandard loans were 5.8%. The filing reports $13.247 million of impaired loans and $2.284 million of non-accrual loans. Only $26,000 was 60–89 days delinquent; no loans were over 89 days delinquent at quarter-end. Current balances include troubled debt restructurings, including $13.1 million current under revised terms.
- Low rates pressure income: 82% of loans were variable-rate. Management estimated each 25-basis-point rate decline would reduce annual net income by $0.288 million, all else equal; the October LIBOR reset was expected to reduce annual interest income by about $0.100 million.
- Management warned that a downturn in hospitality or commercial real estate could increase defaults, foreclosures, loan-loss reserves and REO costs. It also cited constrained access to capital markets and dependence on loan sales and the revolving facility.
- The company reported $10.1 million of outstanding loan commitments and $1.4 million of non-cash loan commitments. It also disclosed ordinary-course collection litigation, which management did not expect to materially affect the financial statements, and potential SBA recourse for technical deficiencies in loan origination, funding or servicing.
Important facts for investors to verify
- Whether the anticipated $0.12 quarterly dividend was declared and how future distributions compare with cash generation and REIT requirements.
- The actual Q4 severance charge and cash payments, and whether strategic-alternatives costs declined as expected.
- Subsequent trends in impaired, restructured and non-accrual loans, reserve adequacy, and hospitality collateral values.
- Revolver availability, covenant headroom, and conditions for the potential $5 million facility increase.
- Loan-funding pace and the cash-premium-versus-hybrid mix of SBA loan sales, including effects on reported earnings and liquidity.