UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10 - Q

(Mark One)

For the quarterly period ended September 30, 2005

OR

For the transition period from _______ to _______ .

Commission File Number 1-13610

PMC COMMERCIAL TRUST

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
YES þ NO o

As of November 4, 2005, Registrant had outstanding 10,874,221 Common Shares of Beneficial Interest, par value $.01 per share.

PMC COMMERCIAL TRUST AND SUBSIDIARIES

INDEX

PART I

Financial Information

ITEM 1.

Financial Statements

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

2

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these consolidated financial statements.

3

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

The accompanying notes are an integral part of these consolidated financial statements.

4

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY

The accompanying notes are an integral part of these consolidated financial statements.

5

PMC COMMERCIAL TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.


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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Interim Financial Statements:

The accompanying consolidated balance sheet of PMC Commercial Trust (“PMC Commercial” or together with its wholly-owned subsidiaries, “we,” “us” or “our”) as of September 30, 2005 and the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2005 and 2004 and beneficiaries’ equity and cash flows for the nine months ended September 30, 2005 and 2004, have not been audited by independent accountants. In the opinion of management, the financial statements reflect all adjustments necessary to fairly present our financial position at September 30, 2005 and our results of operations for the three and nine months ended September 30, 2005 and 2004. These adjustments are of a normal recurring nature.

Certain notes and other information have been omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (2) the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Our most sensitive estimates involved the valuation of our net assets acquired in connection with the merger, the valuation of our retained interests in transferred assets, determination of reserves on our receivables and impairment analyses on our long-lived assets.

The results for the three and nine months ended September 30, 2005 are not necessarily indicative of future financial results.

Note 2. Business:

PMC Commercial is a real estate investment trust (“REIT”) that either directly or through its subsidiaries, primarily originates loans to small businesses collateralized by first liens on the real estate of the related business. The majority of these loans are to borrowers in the hospitality industry. We also originate loans on commercial real estate to borrowers in the service, retail, multi-family and manufacturing industries and loans guaranteed by the Small Business Administration (“SBA”) collateralized by business assets. In addition, our investments include the ownership of commercial properties in the hospitality industry. Our common shares are traded on the American Stock Exchange under the symbol “PCC.” On February 29, 2004, PMC Capital, Inc. (“PMC Capital”), a regulated investment company related to us through common management, was merged with and into PMC Commercial.

Note 3. Consolidation:

We consolidate entities that we control by ownership of a majority voting interest as well as variable interest entities for which we are the primary beneficiary. To the extent we do not have a majority voting interest, we use the equity method to account for investments for which we have the ability to exercise significant influence over operating and financial policies. Consolidated net income includes our share of the net earnings of any entity accounted for using the equity method. The difference between consolidation and the equity method impacts certain financial ratios because of the presentation of the detailed line items reported in the financial statements. All material intercompany balances and transactions have been eliminated.

The consolidated financial statements include the accounts of PMC Commercial, First Western SBLC, Inc. (“First Western”), PMC Investment Corporation (“PMCIC”), Western Financial Capital Corporation (“Western Financial”), PMC Commercial Trust, Ltd. 1998-1 (“PMCT Trust”), PMC Funding Corp. (“PMC Funding”), PMC Asset Holding, LLC (“Asset Holding”), PMC Conduit, L.P. (“PMC Conduit”), PMC Properties, Inc. (“PMC Properties”) and four separate subsidiaries created in conjunction with the purchase of four hotel properties in 1999.

First Western is licensed as a small business lending company that originates loans through the SBA 7(a) Guaranteed Loan Program. PMCIC is a licensed specialized small business investment company under the Small Business Investment Act of 1958, as amended (“SBIA”). Western Financial is a licensed small business investment company under the SBIA. PMCT

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Trust was formed in conjunction with our 1998 structured loan financing transaction. PMC Funding, Asset Holding and PMC Conduit hold assets on our behalf. PMC Properties is the operator, through third party managers, of certain limited service hotel properties.

In addition, we own subordinate financial interests in several non-consolidated special purpose entities. These are PMC Capital, L.P. 1998-1 (the “1998 Partnership”), PMC Capital, L.P. 1999-1 (the “1999 Partnership”), PMC Joint Venture, L.P. 2000 (the “2000 Joint Venture”), PMC Joint Venture, L.P. 2001 (the “2001 Joint Venture”), PMC Joint Venture, L.P. 2002-1 (the “2002 Joint Venture”) and PMC Joint Venture, L.P. 2003 (the “2003 Joint Venture,” and together with the 2000 Joint Venture, the 2001 Joint Venture and the 2002 Joint Venture, the “Joint Ventures,” and the Joint Ventures together with the 1998 Partnership and the 1999 Partnership, the “QSPEs”). The QSPEs were created in connection with structured loan sale transactions.

We account for our retained interests in transferred assets (“Retained Interests”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”). Accordingly, the assets, liabilities, partners’ capital and results of operations of the QSPEs are not included in our consolidated financial statements.

Note 4. Variable Interest Entities:

General Information
In December 2003, the Financial Accounting Standards Board issued Interpretation No. 46R (“FIN 46R”). The primary objectives of FIN 46R are to provide guidance on (1) the identification of entities for which control is achieved through means other than voting rights (Variable Interest Entities (“VIEs”)), and (2) how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This model for consolidation applies to an entity which either (1) the equity investors, if any, do not have a controlling financial interest or (2) the equity investment at risk is not considered sufficient (based on both quantitative and qualitative considerations) to finance the entity’s activities without receiving additional subordinated financial support from other parties, including the entity’s own equity investors.

An entity should consolidate a VIE if that entity will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both.

Conduit Warehouse Facility
On February 7, 2005, we entered into a $100.0 million conduit warehouse facility (the “Conduit Facility”). In conjunction with the Conduit Facility, we created a new subsidiary, PMC Conduit, a bankruptcy remote entity, which holds the assets and liabilities of the Conduit Facility. The Conduit Facility operates as a revolving line of credit, collateralized by loans originated by us, which have been or will be sold to PMC Conduit. The transfer of the loans to PMC Conduit did not meet the requirements of SFAS No. 140 for sale treatment. PMC Commercial has not guaranteed the repayment of the obligations of the Conduit Facility.

PMC Conduit was determined to be a VIE and PMC Commercial is the primary beneficiary of PMC Conduit; therefore, PMC Conduit is consolidated in the financial statements of PMC Commercial.

Junior Subordinated Notes
On March 15, 2005, PMC Commercial issued notes payable (the “Junior Subordinated Notes”) of approximately $27.1 million due March 30, 2035 to a special purpose subsidiary, PMC Preferred Capital Trust-A, a Delaware statutory trust (the “Preferred Trust”). The Junior Subordinated Notes are subordinated to PMC Commercial’s existing debt.

The Preferred Trust was determined to be a VIE but PMC Commercial is not considered to be the primary beneficiary of the Preferred Trust; therefore, the Preferred Trust is not consolidated in PMC Commercial’s financial statements. The equity method is used to account for our investment in the Preferred Trust.

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Reclassifications:

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or total beneficiaries’ equity.

Note 6. Share-Based Compensation Plans:

At September 30, 2005, we have options outstanding under share-based compensation plans. The 1993 Employee Share Option Plan and the Trust Manager Share Option Plan expired in December 2003; thus, no additional options will be issued under these two plans.

The 2005 Equity Incentive Plan was approved by our shareholders on June 11, 2005 and permits the grant of options to our employees, executive officers and Board of Trust Managers and restricted shares to our executive officers and Board of Trust Managers for up to 500,000 common shares. We believe that these awards better align the interests of our employees, executive officers and Board of Trust Managers with those of our shareholders.

We use the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to account for all awards granted, modified or settled.

Option awards were granted with an exercise price equal to the market price of our common shares at the date of grant and vest immediately upon grant with five-year contractual terms. The restricted share awards vest based on two years of continuous service with one-third of the shares vesting immediately upon issuance of the shares and one-third vesting at the end of each of the next two years. Restricted share awards provide for accelerated vesting if there is a change in control (as defined in the plan).

We granted 36,700 option awards on June 11, 2005 at an exercise price of $14.54. The fair value of this option award was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The expected term of the options granted represents the period of time that the options are expected to be outstanding and was determined based on our historical data. The risk-free rate was based on the three-year U.S. Treasury rate corresponding to the expected term of the options. We assumed a forfeiture rate of 5% based on our historical forfeiture experience. Historical volatility was used to determine our expected volatility. We recorded compensation expense of approximately $25,000 during the nine months ended September 30, 2005 related to the option grant.

In addition, we issued an aggregate of 9,060 restricted shares to executive officers and our Board of Trust Managers on June 11, 2005 with the current market price of the shares at $14.54. Compensation expense is being recognized over the vesting period. We recorded compensation expense of approximately $17,000 and $66,000 during the three and nine months ended September 30, 2005, respectively, for the vested portion of our restricted share issuance. As of September 30, 2005, there was approximately $66,000 of total unrecognized compensation expense related to the unvested restricted shares which will be recognized over the next twenty months.

We assumed unearned stock compensation in the merger with PMC Capital representing the intrinsic value of unvested options assumed that vest as the employees provide future services. Compensation expense was recognized over the vesting period. We recorded compensation expense of approximately $2,000 and $7,000 during the three and nine months ended September 30, 2004, respectively, related to these unvested options.

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Merger:

PMC Capital merged with and into PMC Commercial on February 29, 2004. Benefits from the merger included a larger equity market capitalization that helps create new business flexibility and earnings stability. As a result of the larger equity base, our ability to meet our liquidity needs has been enhanced through access to larger credit facilities and alternative capital sources such as our Conduit Facility and Junior Subordinated Notes. Each issued and outstanding share of PMC Capital common stock was converted into 0.37 of a common share of PMC Commercial. As a result, we issued 4,385,800 common shares of beneficial interest on February 29, 2004 valued at $13.10 per share, which was the average of the closing prices of our common shares for the nine days preceding the date of the announcement, adjusted by declared but unpaid dividends.

The merger was accounted for using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations” as we were not deemed to be under common control. Accordingly, our consolidated results of operations have incorporated PMC Capital’s activities on a consolidated basis from the merger date. The cost of the merger was allocated to the assets acquired, liabilities assumed and preferred stock of subsidiary based on management’s estimates of their respective fair values at the date of merger. The fair value of the net assets acquired exceeded the cost of the merger, resulting in negative goodwill. The amount of negative goodwill was allocated proportionately to reduce the assigned values of the acquired assets excluding current assets, financial assets and assets held for sale. Substantially all of the assets acquired were considered to be financial assets or assets to be disposed of by sale. Accordingly, we recorded negative goodwill of $11,593,000 during the nine months ended September 30, 2004 representing the excess of the fair value of net assets acquired over the cost of the merger.

The cost of the merger was as follows (dollars in thousands):

The following table summarizes the estimated fair values of assets acquired, liabilities assumed and preferred stock of subsidiary as of February 29, 2004 (in thousands):

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following pro forma results of operations are based on our financial statements and the financial statements of PMC Capital and assumed the merger occurred on January 1, 2004:

These pro forma results have been prepared for comparative purposes only. In the opinion of management, all material adjustments necessary to reflect the effects of the merger transaction have been made.

Note 8. Loans Receivable, net:

Loans receivable, net, consisted of the following:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additional information on our loans receivable, net, was as follows:

Our loans receivable were approximately 95% concentrated in the hospitality industry at September 30, 2005. Any economic factors that negatively impact the hospitality industry could have a material adverse effect on our financial condition or results of operations.

The activity in our loan loss reserves was as follows:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired loans are defined by generally accepted accounting principles as loans for which it is probable that the lender will be unable to collect all amounts due based on the original contractual terms of the loan. Information on those loans considered to be impaired loans was as follows:

Note 9. Real Estate Investments and Rent and Related Receivables:

Our real estate investments consisted of the following:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2005, we owned 14 hotel properties (individually, a “Hotel Property”). One property was sold subsequent to September 30, 2005. These properties were part of a sale and leaseback transaction commencing in 1998 with Arlington Hospitality, Inc. (“AHI”) whereby we purchased the properties from AHI and then leased the properties to a wholly-owned subsidiary of AHI, Arlington Inns, Inc. (“AII” and together with AHI, “Arlington”). We concurrently entered into a Master Lease Agreement with AHI and AII covering all the properties and entered into a guaranty agreement with AHI whereby AHI guaranteed all obligations of AII under the individual property lease agreements. The Master Lease Agreement, as amended, with the individual property lease agreements being known as the “Lease Agreement.”

The May and June 2005 lease payments due from AII were not paid and as a result of their default and in accordance with the provisions of the Lease Agreement we were successful in terminating Arlington’s possession of one of our Hotel Properties. On June 22, 2005, AII filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. On June 28, 2005, the Bankruptcy Court approved the rejection (i.e., termination) of two of the individual property leases under the Lease Agreement. As a result of the lease rejection, we were given possession of the two properties and accordingly we operated the three hotel properties through third party management companies. We sold two of these properties during the third quarter of 2005. On August 31, 2005, AHI filed for voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Arlington Bankruptcy”).

Arlington has stipulated through the Bankruptcy Court that they must decide (on an all or none basis) whether or not to continue with the leases or terminate the leases (a lease rejection) no later than November 30, 2005. It is our intention to sell the properties in an orderly and efficient manner. Pursuant to an agreement with Arlington which was approved by the Bankruptcy Court and finalized in September 2005, we now control the sales process with regards to our Hotel Properties. As a result, we are currently in the process of marketing to sell all of our Hotel Properties. However, due to the Arlington Bankruptcy, there is uncertainty as to the ultimate timing for the sale of the properties. Management believes that is it probable that we will sell nine of the remaining 13 Hotel Properties within the next 12 months.

As a result of the Arlington Bankruptcy, the following lease terms will only be applicable should Arlington choose to continue operating pursuant to the Lease Agreement as part of their bankruptcy plan. At the present time, management believes that it is likely that Arlington will reject the leases. If not rejected, the Lease Agreement expires in June 2008, but can be extended by either Arlington or us for one five-year period, and thereafter by Arlington for a five-year period and a subsequent two-year period. AHI guarantees the lease payment obligation of AII. Minimum future lease payments receivable on the 12 remaining individual property leases operated by AII, as amended (excluding the property sold on October 28, 2005), notwithstanding Arlington’s default, in accordance with generally accepted accounting principles was approximately $2.4 million per year.

Although the May 2005 and June 2005 lease payments remain unpaid, post filing for bankruptcy protection, AII made its July 2005 through November 2005 rent payments (at 8.5% of the stated value established for the Hotel Properties operated by AII) of approximately $224,000 per month for July 2005 through October 2005 and approximately $203,000 for November 2005.

In addition to the lease payments due for May 2005 and June 2005, AII has not paid property taxes that are obligated to be paid pursuant to the Lease Agreement. As of the initial bankruptcy filing in June 2005, property taxes due for 2004 but not yet paid by AII remain unpaid. In order to eliminate any potential penalties from the taxing authorities, we paid property taxes of $420,000. As a result of the Arlington Bankruptcy and the potential for non-performance under the Lease Agreement with respect to payment of current property taxes, we also accrued property tax expense of approximately $402,000 for current property taxes during the nine months ended September 30, 2005, of which approximately $318,000 represents property taxes due on our ten Hotel Properties held for sale and is included in debt and accrued expenses — real estate investments held for sale on our consolidated balance sheet. Since these property taxes are the responsibility of Arlington under the Lease Agreement, we will pursue recovery of these property taxes from Arlington. During the three and nine months ending September 30, 2005, we recorded property tax expense of approximately $574,000 and $828,000, respectively. Estimated annual tax assessments for 2005 on our remaining 13 Hotel Properties (excluding the property sold in October 2005) total approximately $526,000.

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We sold one Hotel Property on October 28, 2005 to a third party for net proceeds of approximately $2.1 million, which approximates its net book value. We financed the sale through origination of a loan of $1.5 million at an interest rate of LIBOR plus 4% and a maturity and amortization period of 20 years. We anticipate that nine additional properties will be sold within the next 12 months. At September 30, 2005, the property sold and the nine properties that we anticipate will be sold within the next year are considered “held for sale” and all operations relating to these properties are now included in discontinued operations on our consolidated statements of income. In addition, we discontinued recording depreciation expense on the held for sale properties. For our ten Hotel Properties to be sold, we performed a recoverability test to determine if the expected net sales proceeds for the Hotel Properties exceeded the carrying value of the Hotel Properties. Based on this analysis, we recorded impairment losses of $1.2 million during the nine months ended September 30, 2005 related to the furniture, fixtures and equipment and buildings and improvements identified as impaired. Management’s estimates of the values for property sales were based on current market conditions. These values may change based on the numerous factors that impact the (1) local and national economy, (2) prospects for the hospitality industry, (3) timing of particular sales, (4) franchise affiliation and (5) particular operating results of the property.

Four of our Hotel Properties have mortgages (which were assumed in the original purchase from AHI) that have significant prepayment penalties. Therefore, we do not anticipate selling those properties until the properties’ market values increase or the prepayment penalties decrease. It is unlikely that this will occur in the next 12 months. Arlington is currently operating three of these properties and we anticipate that Arlington will operate these properties until November 30, 2005 at which time they will likely reject the leases. Until the properties are sold, we would then either operate the properties through third party management companies or lease the properties until the market values of the properties increase or the prepayment penalties decrease. At September 30, 2005, these four properties are considered to be “held and used” and all operations relating to these properties are included in continuing operations on our consolidated statements of income. For our four Hotel Properties to be held and used, we performed a recoverability test to determine if the future undiscounted cash flows over our expected holding period for the Hotel Properties exceeded the carrying value of the Hotel Properties. Based on this analysis, we recorded impairment losses of approximately $0.8 million during the nine months ended September 30, 2005 related to these four Hotel Properties. Future cash flows are based on estimated future rent payments to be received on the Hotel Properties, proceeds from the sale and/or termination fees and property operations, if applicable.

We have claims against Arlington for unpaid rent, property taxes, legal fees incurred, termination damages, notes receivable and other charges (the “Pre-Petition Claims”). At September 30, 2005, our rent and related receivables were approximately $1,731,000 after reserves. As a result of the uncertainty of collection from pre-petition obligations from Arlington, our claim in the Arlington Bankruptcy is well in excess of our recorded investment in the Pre-Petition Claims. Subsequent to the initial bankruptcy filing in June 2005, rent payments received relating to periods subsequent to the bankruptcy filing have been recorded as income when earned. Collection of our Pre-Petition Claims is subject to the ultimate outcome of the bankruptcy proceedings.

We performed an analysis of our anticipated future distribution related to the Arlington Bankruptcy to determine the collectibility of our investment in the rent and related receivables based on best available information provided to us through the bankruptcy proceedings and determined that an allowance of approximately $1,083,000 was necessary on these assets as of September 30, 2005. To the extent there is a reduction of the anticipated future distribution, we would record an additional allowance against these receivables. Conversely, if either (1) we determine that the anticipated future distributions will be greater than our recorded net investment or (2) amounts that we actually receive as part of a distribution are greater than our recorded net investment, any excess would be recorded as lease income.

In addition, we maintain a capital expenditures account for future capital expenditures required to maintain the real estate investments. Funds are released from this account when capital expenditures are incurred. As of September 30, 2005, the balance in our capital expenditure account was approximately $1.1 million and is included in restricted investments on our consolidated balance sheet.

Upon the sale of each of the Hotel Properties, AHI is required to provide us consideration equal to the stated value established for the Hotel Property being sold, through cash proceeds from a third party purchaser and an unsecured note from Arlington if the sale proceeds are less than the stated value established for the Hotel Property (a “Shortfall”). The Shortfall note receivable is unsecured, evidences the aggregate of all Shortfalls, originally matured in 2011 and had a fixed interest

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rate of 8.5%. Subsequent to the AII bankruptcy filing in June 2005, Arlington has not performed under the terms of the Master Lease Agreement with respect to any payments due or acknowledged changes in the Shortfall note receivable. At September 30, 2005, the Shortfall note receivable, with a recorded investment of approximately $644,000 (after discounts and reserves), included in rent and related receivables, net on our consolidated balance sheet, is currently due since Arlington is now in default under the Lease Agreement.

Prior to the Arlington Bankruptcy, when a property was sold with a Shortfall, a Shortfall note receivable from AHI was recorded with a corresponding deferred liability established at the estimated fair value of the note received. The deferred liability was necessary since an uncertainty existed as to whether the note receivable would be ultimately collected from AHI or third party sales proceeds from the sale of the remaining properties. In 2005, prior to the Arlington Bankruptcy, we received principal payments on our Shortfall note receivable of approximately $293,000 and, as a result, recognized approximately $146,000 of the deferred liability as income.

During the nine months ended September 30, 2005 we sold five hotel properties for net proceeds of approximately $10.7 million and recognized net gains of approximately $1,278,000. We financed the sale of two of these properties through origination of loans aggregating approximately $3.2 million with an interest rate of LIBOR plus 4% and a maturity and amortization of 20 years.

Note 10. Retained Interests:

In our structured loan sale transactions, we contributed loans receivable to a QSPE in exchange for cash and beneficial interests in that entity. The QSPE issued notes payable (the “Structured Notes”) (usually through a private placement) to unaffiliated parties (“Structured Noteholders”). The QSPE then distributed a portion of the proceeds from the Structured Notes to us. The Structured Notes are collateralized solely by the assets of the QSPE which means that should the financial assets in the QSPE be insufficient for the trustee to make payments on the Structured Notes, the Structured Noteholders have no recourse against us. Upon the completion of our structured loan sale transactions, we recorded the transfer of loans receivable as a sale in accordance with SFAS No. 140. As a result, the loans receivable contributed to the QSPE, the Structured Notes issued by the QSPE, and the operating results of the QSPE are not included in our consolidated financial statements. The difference between (1) the carrying value of the loans receivable sold and (2) the sum of (a) the cash received and (b) the relative fair value of our Retained Interests, constituted the gain or loss on sale. Retained Interests are carried at estimated fair value, with realized gains and losses recorded in net income and unrealized gains and losses recorded in beneficiaries’ equity.

We completed joint structured loan sale transactions with PMC Capital during 2000, 2001, 2002 and 2003. Our interests related to the loans receivable we contributed to these structured loan sale transactions are the “Originated Structured Loan Sale Transactions.” As a result of the merger, on February 29, 2004, we acquired PMC Capital’s Retained Interests in the Joint Ventures and 100% of the 1998 Partnership and the 1999 Partnership (collectively, the “Acquired Structured Loan Sale Transactions”).

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information pertaining to our Originated Structured Loan Sale Transactions as of September 30, 2005 was as follows:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information pertaining to our Acquired Structured Loan Sale Transactions as of September 30, 2005 was as follows:

None of the loans within our Originated or Acquired Structured Loan Sale Transactions were delinquent over 60 days as to principal and interest as of September 30, 2005.

First Western has Retained Interests related to the sale of loans originated pursuant to the SBA 7(a) Guaranteed Loan Program. The SBA guaranteed portions of First Western’s loans receivable are sold to either dealers in government guaranteed loans receivable or institutional investors (“Secondary Market Loan Sales”) as the loans are fully funded. On Secondary Market Loan Sales, we may retain an excess spread between the interest rate paid to us from our borrowers and the rate we pay to the purchaser of the guaranteed portion of the note and servicing costs. At September 30, 2005, the aggregate principal balance of First Western’s serviced loans receivable on which we had an excess spread was approximately $40.9 million and the weighted average excess spread was approximately 0.7%. In determining the fair value of our Retained Interests related to Secondary Market Loan Sales, our assumptions at September 30, 2005 included a prepayment speed of 20% per annum and a discount rate of 12.1%.

Previously, First Western had Retained Interests related to the sale of the unguaranteed portion of its loans receivable through a private placement in 1997. On April 15, 2005, we acquired, through exercise of our option, the $2.2 million in loans receivable remaining in the securitization for approximately $2.2 million using existing cash and the reserve fund balance of $912,000.

The estimated fair value of our Retained Interests is based upon an estimate of the discounted future cash flows we will receive. In determining the present value of expected future cash flows, estimates are made in determining the amount and

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

timing of those cash flows and the discount rates. The amount and timing of cash flows is generally determined based on estimates of loan losses and anticipated prepayment speeds relating to the loans receivable contributed to the QSPE. Actual loan losses and prepayments may vary significantly from assumptions. The discount rates that we utilize in computing the estimated fair value are based upon estimates of the inherent risks associated with each cash flow stream. Due to the limited number of entities that conduct transactions with similar assets, the relatively small size of our Retained Interests and the limited number of buyers for such assets, no readily ascertainable market exists. Therefore, our estimate of the fair value may or may not vary from what a willing buyer would pay for these assets.

The components of our Retained Interests are as follows:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our Retained Interests consisted of the following:

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following sensitivity analysis of our Retained Interests as of September 30, 2005 highlights the volatility that results when prepayments, losses and discount rates are different than our assumptions:

These sensitivities are hypothetical and should be used with caution. Values based on changes in these assumptions generally cannot be extrapolated since the relationship of the change in an assumption to the change in fair value is not linear. The effect of a variation in a particular assumption on the fair value of our Retained Interests is calculated without changing any other assumption. In reality, changes in one factor are not isolated from changes in another which might magnify or counteract the sensitivities.

SFAS No. 140 provides requirements for an entity to be considered a QSPE, both initially and in subsequent periods. QSPE status can be impacted in subsequent periods by activities of the transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent structured loan transactions meet the requirements of SFAS No. 140 and the special purpose entities created meet the requirements to be considered a QSPE, we record the transactions as sales. To the extent the special purpose entities are determined not to meet the QSPE requirements, we are required to consolidate the assets, liabilities and revenues and expenses of the underlying special purpose entities.

We monitor the governing pooling and servicing agreements for each of our structured loan sale transactions and believe the servicing-related terms set forth therein are industry standard and consistent with QSPE criteria. Accounting standard setters are currently assessing servicing activities involving QSPEs and, consequently, there may now be some uncertainty with respect to the accounting for sale transactions involving QSPEs. As accounting standard setters continue to interpret QSPE criteria under SFAS No. 140, there may be a material resultant impact on our consolidated financial statements.

In accordance with SFAS No. 140, our consolidated financial statements do not include the assets, liabilities, partners’ capital, revenues or expenses of the QSPEs. As a result, at September 30, 2005 and December 31, 2004 our consolidated balance sheets do not include the $284.4 million and $321.4 million of assets, respectively, and $228.6 million and $263.4 million of liabilities, respectively, related to our structured loan sale transactions recorded by our QSPEs. At September 30, 2005, the partners’ capital of our QSPEs was approximately $55.8 million compared to the value of the associated Retained Interests of $62.7 million.

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PMC COMMERCIAL TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following information summarizes the financial position of the QSPEs at September 30, 2005 and December 31, 2004.

Summary of Financial Position: