PMC CAPITAL INC, 10-K405, 1997-03-21

PMC CAPITAL INC
10-K405, 1997-03-21

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______.

Commission File Number: 811-3780

PMC CAPITAL, INC.
(Exact name of registrant as specified in its charter)

FLORIDA 59-2338539
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

17290 PRESTON ROAD, 3RD FLOOR, DALLAS, TX 75252 (972) 380-0044
(Address of principal executive offices) (Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE

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 [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
28, 1997 as reported on the American Stock Exchange, was approximately $118
million. Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded because
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

As of February 28, 1997, the Registrant had 11,249,343 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the year covered by this Form
10-K with respect to the Annual Meeting of Shareholders to be held on May 14,
1997 are incorporated by reference into Part III.

<PAGE> 2

PMC CAPITAL, INC
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996

--------------------------------------------------------

TABLE OF CONTENTS

Form
10-K
Report
Item Page
---- ----
<S> <C> <C>
PART I

1. Business..................................................... 1
2. Properties................................................... 8
3. Legal Proceedings............................................ 8
4. Submission of Matters to a Vote of Security Holders.......... 8

PART II

5. Market for the Registrant's Common Stock and Related
Shareholder Matters..................................... 9
6. Selected Consolidated Financial Data......................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 11
8. Consolidated Financial Statements and Supplementary Data..... 18
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 18

PART III

10. Directors and Executive Officers of the Registrant........... 19
11. Executive Compensation....................................... 19
12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 19
13. Certain Relationships and Related Transactions............... 19

PART IV

14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................. 20
Signatures.......................................................... 21
Financial Statements................................................ F-1
Exhibits............................................................ E-1
</TABLE>

<PAGE> 3
PART I

ITEM 1. BUSINESS

GENERAL

PMC Capital, Inc. ("PMC Capital" or "PMC" and, together with its
subsidiaries, the "Company") is a diversified closed-end management investment
company that operates as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The common stock
of the Company (the "Common Stock") is traded on the American Stock Exchange
under the symbol "PMC." The Company engages in the business of originating
loans to small businesses either directly or through its three principal
subsidiaries: First Western SBLC, Inc. ("First Western"), PMC Investment
Corporation ("PMIC") and Western Financial Capital Corporation ("Western
Financial"). First Western, PMIC and Western Financial are registered under the
1940 Act as diversified closed-end management investment companies. In
addition, PMC Capital is either directly or indirectly the sole shareholder or
partner of PMC Advisers, LTD ("PMC Advisers"), PMC Funding Corp. ("PMC
Funding"), PMC Capital Corp. 1996-A ("PMC Capital Corp."), PMC Trust 1996-A,
and PMC Capital Limited Partnership (the "Partnership"). PMC Advisers is an
investment advisor who evaluates and services loans pursuant to a fee
arrangement. PMC Capital has elected to be taxed as a regulated investment
company and distributes substantially all its taxable income as dividends to
its shareholders, thereby incurring no Federal income tax liability on such
income.

The Company primarily originates loans to individuals and small
business concerns in the lodging industry. The Company also targets the medical,
food service, service, retail and commercial real estate industries. The Company
primarily lends to businesses in the Southwest and Southeast regions of the
United States. A majority of the Company's loans in the lodging industry are to
owner-operated facilities generally operating under national franchises. The
Company believes that franchise operations offer attractive lending
opportunities because such businesses employ proven business concepts, have
consistent product quality, are screened and monitored by franchisors and
generally have a higher rate of success as compared to other independently
operated businesses. In addition, management believes that the franchise lodging
industry and the other industry segments upon which it focuses are underserved
by traditional lending sources.

PMC Capital, incorporated in Florida under the name of Pro-Med
Capital, Inc. in June 1983, became the successor by merger to Western Capital
Corporation (founded in 1979) in December 1983 and changed its name to "PMC
Capital, Inc." in March 1991. The principal executive offices of the Company
are located at 17290 Preston Road, Third Floor, Dallas, Texas 75252.

Earnings per share on a quarterly basis since 1988 were as follows:

<TABLE>
<CAPTION>
Per Share Earnings
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter ...... $0.27 $0.23 $0.19 $0.18 $0.18 $0.15 $0.13 $0.09 $0.09
Second Quarter ..... 0.30 0.25 0.23 0.23 0.23 0.15 0.12 0.11 0.09
Third Quarter ...... 0.30 0.27 0.26 0.25 0.19 0.18 0.13 0.10 0.10
Fourth Quarter ..... 0.31 0.28 0.44* 0.21 0.19 0.16 0.14 0.11 0.09
----- ----- ----- ----- ----- ----- ----- ----- -----
$1.18 $1.03 $1.12 $0.87 $0.79 $0.64 $0.52 $0.41 $0.37
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

* Includes $0.24 from a structured sale of a portion of the loan portfolio.

LENDING PROGRAMS

FIRST WESTERN

<PAGE> 4

respect to certain industries where eligibility is determined based on a number
of employees), (ii) liquid assets or real estate equity of the borrower (and
certain affiliates) cannot exceed certain limits and (iii) the maximum
aggregate SBA loan guarantees to a borrower cannot exceed $750,000.

The interest rate environment and legislative changes have affected
the secondary market for the 7(a) Program guaranteed portion of loans
originated by First Western. 7(a) Program lenders are required to pay a fee of
between 40 basis points and 50 basis points ("SBA Servicing Fees") per annum on
the outstanding principal balance of any loans sold in the secondary market
depending upon when the loan was sold. At present, a 50 basis point fee is in
effect for loans originated after October, 1995. The value of the guaranteed
portion of loans decreased as a result of this fee. Additionally, as interest
rates fluctuated during 1994, the secondary market demand for the guaranteed
portion of the 7(a) Program loans decreased and the premiums declined. The
secondary market demand increased in late 1994, continued the increase during
1995 and stabilized during 1996, partially offsetting the negative effect of
the SBA Servicing Fees established in 1993.

Effective October 1995, the fees charged to the borrower by the SBA
for the SBA's guaranty of a loan to the lender increased, are now based on the
size of the originated loan, and range from 2% to 3.875% of the guaranteed
portion of the loan. The fees had been 2% of the guaranteed portion of the
loan. First Western had a decrease in loan origination volume during 1996
partially as a result of these increased fees and an increase in competition.
Due to the decrease in loan origination volume, the premiums recognized from
the sale of the government guaranteed portion of SBA 7(a) loans sold in the
secondary market decreased from $2.8 million in 1995 to $1.9 million during
1996.

Effective March 1, 1996, certain eligibility requirements of the 7(a)
Program were amended. As a result of these amendments and the other factors
described above, First Western has experienced a reduction in loan origination
opportunities within the 7(a) Program. The following are the modifications to
the program:

Eligibility requirement modifications. When the total amount of the proposed
financing:

(a) Is $250,000 or less, each 20 percent owner of the applicant
must contribute to the business personal liquid assets per the
SBA rules and regulations ("Personal Liquid Assets") in excess
of two times the total financing or $100,000, whichever is
greater;

(b) Is between $250,001 and $500,000, each 20 percent owner of the
applicant must contribute Personal Liquid Assets to the
business in excess of one and one-half times the total
financing or $500,000, whichever is greater; and

(c) Exceeds $500,000, each 20 percent owner of the applicant must
contribute to the business Personal Liquid Assets in excess of
one times the total financing or $750,000, whichever is
greater.

Continued program and market changes may have an adverse effect on
future periods of operations. The future profitability of the Company's 7(a)
Program lending activities will be impacted by a number of factors including:
(i) the more efficient capital structure achieved by First Western's 1994
securitization and future potential securitizations, (ii) volume of lending,
(iii) length of loans, (iv) structure of sales to the secondary market, (v)
interest rates charged and related terms, (vi) quality of portfolio, (vii)
prepayment experience and (viii) legislative and/or regulatory changes.

Any other aspect of SBA programs under which the Company participates
could be modified by legislation or agency policy changes. PMC Capital
continues to evaluate alternative lending strategies and would pursue such
strategies should the SBA programs under which any of its subsidiaries operates
were to be eliminated or significantly curtailed.

At December 31, 1996 and 1995, First Western had outstanding loans
receivable, net, in an aggregate amount of $26.3 million and $20.8 million,
respectively. During the years ended December 31, 1996 and 1995, First Western
originated $29.2 million and $40.6 million, respectively, in loans and sold
$20.0 million and $30.3 million, respectively, of the guaranteed portion of its
loans into the secondary market (without recourse to the Company). At December
31, 1996 and 1995, First Western had loans receivable with aggregate balances
of approximately $412,000 and $659,000 (1.6% and 3.2%, respectively, of First
Western's outstanding loans receivable, net) greater than 60 days past due.
Realized and unrealized losses on First Western's investments were $56,000 and
$238,000 during the years ended December 31, 1996 and 1995, respectively.

<PAGE> 5

PMIC

PMIC is a licensed specialized small business investment company
("SSBIC") under the Small Business Investment Act of 1958, as amended ("SBIA").
PMIC uses long-term funds provided by the SBA, together with its own capital,
to provide long-term, fixed-rate collateralized loans to eligible small
businesses owned by "disadvantaged" persons, as defined under the regulations
of the SBA. As an SBIC, PMIC is eligible to obtain long-term, fixed-rate
funding from the SBA through the issuance of Debentures which are guaranteed by
the SBA. For any Debentures issued by PMIC prior to 1996, the interest rate has
been reduced through an SBA subsidy by 3% during the first five years. As an
SSBIC, prior to 1996 PMIC was eligible to issue preferred stock to the SBA with
either a 3% or 4% per annum cumulative dividend rate. Issuance of Debentures is
subject to SBA approval and availability. See "Overview of SBA Regulations."

At December 31, 1996 and 1995, PMIC had loans receivable, net, in an
aggregate amount of $ 28.6 million and $36.7 million, respectively. During the
years ended December 31, 1996 and 1995, PMIC originated $19.3 million and $21.2
million, respectively, in loans and during the year ended December 31, 1996
transferred $24.8 million in loans to PMC Capital in conjunction with a
structured financing (the "Structured Financing"). At December 31, 1996 and
1995, PMIC had loans receivable with aggregate balances of approximately
$160,000 and $707,000 (0.8% and 2.0%, respectively, of PMIC's loans receivable,
net) greater than 60 days past due. Realized and unrealized losses on PMIC's
investments were $27,000 during each of the years ended December 31, 1996 and
1995.

WESTERN FINANCIAL

Western Financial is a licensed small business investment company
("SBIC") under the SBIA that provides fixed-rate loans to small business
concerns and persons whether or not they qualify as "disadvantaged." As an
SBIC, Western Financial is eligible to obtain long-term, fixed-rate funding
from the SBA through the issuance of Debentures. Issuance of Debentures is
subject to SBA approval and availability. See "Overview of SBA Regulations."

At December 31, 1996 and 1995, Western Financial had loans receivable,
net, in an aggregate amount of $14.4 million and $25.1 million, respectively.
During the years ended December 31, 1996 and 1995, Western Financial originated
$7.5 million and $8.0 million, respectively, in loans and during the year ended
December 31, 1996 transferred $10.0 million in loans to PMC Capital in
conjunction with the Structured Financing. At December 31, 1996 and 1995,
Western Financial had loans receivable with aggregate principal balances of
approximately $215,000 and $436,000 (1.5% and 1.7%, respectively, of Western
Financial's loans receivable, net) greater than 60 days past due. Realized and
unrealized losses on Western Financial's investments were $64,000 and $94,000,
respectively, during the years ended December 31, 1996 and 1995.

PMC CAPITAL

PMC Capital has originated loans to borrowers on a non-SBA supported
basis using criteria similar to that utilized by its three principal investment
company subsidiaries whose loans are funded under the SBA programs. These loans
are: (i) to borrowers who exceed the eligibility requirements of the 7(a)
Program or SBIC programs, (ii) payable in monthly installments of principal and
interest based upon four to 25 year amortization tables, with the balance due
at maturity (typically four to 20 years), (iii) primarily collateralized by
real estate and (iv) generally guaranteed by the principals of the borrowers.
The funding for this lending program is limited to the extent of leverage
available to PMC Capital. However, PMC Capital expects that most non-SBA
supported loans will be funded by PMC Commercial Trust ("PMC Commercial") in
the future and that such loans will be made by the Company only to the extent
that PMC Commercial does not have available funds. PMC Commercial is a Texas
real estate investment trust and an affiliate of PMC Capital.

At December 31, 1996 and 1995, PMC Capital had loans receivable, net,
in an aggregate amount of $24.1 million and $27.9 million, respectively. During
the years ended December 31, 1996 and 1995, PMC Capital originated $14.2
million and $7.7 million in loans, respectively and during the year ended
December 31, 1996 contributed $45.6 million in loans to the Partnership
(including the $34.8 million in loans transferred from PMIC and Western
Financial to PMC Capital in conjunction with the Structured Financing). At
December 31, 1996 and 1995, PMC Capital had no loans receivable greater than 60
days past due. PMC Capital had no realized or unrealized losses during the
years ended December 31, 1996 and 1995.

<PAGE> 6

NON INVESTMENT COMPANY SUBSIDIARIES

The accompanying consolidated financial statements include the
accounts of PMC and its wholly owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with the requirements of the Federal securities laws.

PMC ADVISERS

PMC Advisers, organized in July 1993, is a registered investment
advisor under the Investment Advisers Act of 1940 which acts as the investment
advisor for PMC Commercial. PMC Advisers provides investment advisory services
to PMC Commercial pursuant to an investment management agreement (the
"Investment Management Agreement") entered into between PMC Capital, PMC
Advisers and PMC Commercial. As the investment advisor for PMC Commercial, PMC
Advisers has earned $1,562,000, $1,189,000 and $429,000 in advisory fees during
the years ended December 31, 1996, 1995 and 1994, respectively.

PMC CAPITAL CORP., PMC TRUST 1996-A AND THE PARTNERSHIP

The Partnership was formed as a special purpose affiliate of the
Company. On November 13, 1996, the Partnership, a Delaware limited partnership,
completed the Structured Financing through a private placement (the "Private
Placement") of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a stated
maturity in 2011 and bear interest at the rate of 6.725% per annum, were
originally collateralized by approximately $45.7 million of loans (the "Initial
Loan Contribution") contributed by PMC Capital to the Partnership. The net book
value of the Initial Loan Contribution after deferred commitment fees,
discounts and accrued interest receivable on the date of transfer was
approximately $45.5 million. In connection with the Private Placement, the
Notes were given a rating of "Aa2" by Moody's Investors Service. The
Partnership has the exclusive obligation for repayment of the Notes, and the
holders of the Notes have no recourse to PMC Capital or its other subsidiaries
or their assets in the event of nonpayment of the underlying loans receivable.
The net proceeds from the issuance of the Notes (approximately $37.5 million
before giving effect to payment of issuance costs of approximately $396,000 and
after giving effect to the funding of a $2.04 million reserve fund held by the
trustee as collateral) were distributed to PMC Capital. PMC Capital Corp. was
formed in November 1996 to act as the independent trustee of PMC Trust 1996-A
which is the general partner of the Partnership and owns a 1% general
partnership interest in the Partnership. PMC Capital owns a 99% limited
partnership interest in the Partnership. PMC is the servicer for all loans held
by the Partnership.

PMC FUNDING

PMC Funding is a Florida corporation that holds assets on behalf of
the Company. PMC Capital is the sole shareholder of PMC Funding. Operations
from PMC Funding consist of income generated from the operation of properties
held and charter revenue derived from use by third parties of PMC Funding's
airplane.

ELECTION TO BE A BUSINESS DEVELOPMENT COMPANY

In 1980, the 1940 Act was amended to permit closed-end investment
companies which make certain types of investments ("Qualifying Assets") to
elect to become business development companies ("BDCs") rather than registered
investment companies. Under this amendment (the "1980 Amendment"), BDCs must
register their shares under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and become subject to the Exchange Act's periodic
reporting requirements rather than the 1940 Act's reporting requirements.
During 1994, PMC Capital elected to operate as a BDC. Companies having
securities registered under the Exchange Act, such as PMC Capital, must file
quarterly rather than semi-annual financial reports. The 1980 Amendment
provides BDCs with greater operating flexibility relating to capital structure,
portfolio diversification, transactions with downstream affiliates, executive
stock options and the frequency of which they may make distributions from
capital gains, that may be greater than that available to registered investment
companies.

Under the 1980 Amendment, a BDC such as PMC Capital may only acquire
Qualifying Assets unless, at the time of their acquisition, Qualifying Assets
represent at least 70% of the value of the BDC's total assets. The principal
categories of Qualifying Assets relevant to the business of PMC Capital are the
following:

<PAGE> 7

(1) Securities purchased in transactions not involving any public offering from
the issuer of such securities, which issuer is an eligible portfolio company.
An eligible portfolio company is defined in the 1980 Amendment as any issuer
which:

(a) is organized under the laws of, and has its principal place of
business in, the United States;

(b) is not an investment company other than an SBIC wholly-owned
by the BDC (PMC Capital's investments in and advances to PMIC,
Western Financial and First Western are Qualifying Assets ); and

(2) Securities received in exchange for or distributed on or with respect to
securities described in (1) above, or pursuant to the exercise of options,
warrants or rights relating to such securities.

(3) Cash, cash items, Government securities or high quality debt securities
maturing in one year or less from the time of investment.

In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments
in the type of securities described in (1) above and, in order to classify the
securities as Qualifying Assets for purposes of the 70% test, the BDC must make
available to the issuer of the securities significant managerial assistance
which means, among other things:

(1) Any arrangement whereby the BDC, through its directors,
officers or employees, offers to provide, and, if accepted,
does so provide, significant guidance and council concerning
the management, operations or business objectives and
policies of a portfolio company; or

(2) In the case of an SBIC, making loans to a portfolio company.

Under the 1980 Amendment, now that PMC Capital has elected to be
regulated as a BDC, it may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by the vote of a
majority of the shares of Common Stock.

FUNDAMENTAL AND OTHER POLICIES OF THE COMPANY AND ITS SUBSIDIARIES

PMC Capital and each of its investment company subsidiaries have
designated certain investment policies as "fundamental policies," which may
only be changed with the approval of the holders of PMC Capital's outstanding
shares of Common Stock as described below.

The following investment policies of PMC Capital and its investment
company subsidiaries are fundamental policies and may not be changed without
the approval of the lesser of (i) more than 50% of PMC Capital's outstanding
voting securities or (ii) 67% or more of PMC Capital's voting securities
present at a meeting of security holders at which a quorum is present. All
other investment policies of PMC Capital may be changed by its Board of
Directors at any time.

1. The Company will not purchase or sell commodities or commodity
contracts.

2. The Company will not engage in short sales, purchase securities on
margin or trade in contracts commonly called puts or calls or in combinations
thereof, except that it may acquire warrants, options or other rights to
subscribe to or sell securities in furtherance of its investment objectives.

3. The Company will not underwrite securities of other issuers, except
that it may acquire portfolio securities under circumstances where, if sold,
the Company might be deemed an underwriter for purposes of the Securities Act
of 1933. The Company may purchase "restricted securities" as to which there are
substantial restrictions on resale under the Securities Act of 1933.

<PAGE> 8

4. The Company will not purchase any securities of a company if any of
the directors or officers of the Company owns more than 0.5% of such company
and such persons owning more than 0.5% together own 5% or more of the shares of
such company.

5. The Company may issue senior securities in the form of Debentures,
reverse repurchase agreements and preferred stock and may borrow monies from
banks and other lenders, all on an unsecured basis. The 1940 Act limits the
Company to the issuance of one class of senior debt securities and one class of
senior equity securities (as such terms are defined in the 1940 Act).

6. The Company will not invest more than 25% of its total assets in
any one industry except in the lodging industry which may constitute 100% of
the Company's portfolio. The Company will invest at least 25% of its total
assets in the lodging industry.

7. The Company may invest in real estate development companies, may
make real estate acquisition loans and real estate improvement loans and may
further make other loans secured by real estate.

8. The Company may make loans and purchase debt securities in
furtherance of its investment objectives. The Company will not make loans to
its officers, directors or other affiliated persons.

9. PMIC will perform the functions and conduct the activities
contemplated under the SBIA, and will provide assistance solely to small
business concerns which will contribute to a well-balanced national economy by
facilitating ownership of such concerns by persons whose participation in the
free enterprise system is hampered because of social or economic disadvantages.
These fundamental policies of PMIC may not be changed without the prior written
consent of the SBA.

As stated above, the Company has a fundamental policy regarding
investment in the lodging industry. At December 31, 1996 and 1995, loans to
businesses in the lodging industry comprised 44% and 55% of its total assets,
respectively.

There can be no assurance that the Company will continue to experience
the positive results it has historically achieved from lending to the lodging
industry or that market conditions will enable the Company to maintain or
increase its level of loan concentration in this industry. Any economic factors
that negatively impact this industry could have a material adverse effect on
the business of the Company. Additionally, at December 31, 1996, loans to
businesses located in Texas, Florida and Georgia comprised approximately 38%,
13% and 11% of the Company's outstanding loan portfolio, respectively. A
decline in economic conditions in any of these states may adversely affect the
Company.

COMPETITION

PMC Capital's primary competition comes from banks, financial
institutions, franchise loan programs and other companies operating under SBA
sponsored programs. Some of these competitors have greater financial and larger
managerial resources than the Company. Competition has increased as the
financial strength of the banking and thrift industries improved. PMC Capital
believes that it competes effectively with such entities on the basis of the
interest rates, maturities and payment schedules, the quality of its service,
its reputation as a lender, the timely credit analysis and decision making
processes, and the renewal options available to borrowers. In addition, to the
extent that the investment opportunities reviewed by PMC Advisers conform to
the investment criteria of PMC Commercial, and PMC Commercial has funds
available to make these investments, such investments will be made by PMC
Commercial.

During December 1995, in addition to being a "Certified SBA lender" in
Miami, Florida and "Preferred SBA lender" in Dallas, Texas, First Western was
granted the designation of a "preferred lender" in over 50 additional districts
of the SBA. Under the 7(a) Program, in order to have an SBA guarantee, the
lender must have some level of SBA approval. Within the 7(a) Program, the
different status levels for SBA approvals are (i) guaranteed lender, (ii)
certified lender and (iii) preferred lender. Approval of loans under the
guaranteed lender program requires the greatest amount of review time by the
SBA while loans under the preferred lender program require the least. The
granting of preferred lender status to First Western assists the Company in
competing for loan origination opportunities due to the reduction in approval
time.

<PAGE> 9

LEVERAGE

The Company has borrowed funds and issued shares of preferred stock,
and intends to borrow additional funds through advances on its revolving credit
facility and through the issuance of notes payable or SBA Debentures, if
available, see "Overview of SBA Regulations." As a result, the Company is
leveraged. The SBA and private lenders have fixed dollar claims on the
Company's assets superior to the claims of the holders of Common Stock. Any
increase in the interest rate earned by the Company on investments in excess of
the interest rate or dividend payable on the funds obtained from either
borrowings or the issuance of preferred stock would cause its net income and
earnings per share to increase more than it would without the leverage, while
any decrease in the interest rate earned by the Company on investments would
cause net income and earnings per share to decline by a greater amount than it
would without the leverage. Leverage is thus generally considered a speculative
investment technique. In order for the Company to repay indebtedness or meet
its obligations in respect of any outstanding preferred stock on a timely
basis, the Company may be required to dispose of assets at a time which it
would not otherwise do so and at prices which may be below the net book value
of such assets. Dispositions of assets may adversely impact the Company's
results of operations.

INTEREST RATE AND PREPAYMENT RISK

Net income of the Company is effected by the spread between the rate
at which it borrows funds and the rate at which it loans these funds. The
portfolio of PMC Capital, Western Financial and PMIC have typically been
long-term and at fixed rates and the borrowed funds of these companies are
typically long-term and at fixed rates. First Western originates variable rate
loans and has utilized equity capital of PMC Capital and a structured sale in
1994 to obtain funds necessary to originate loans. If the yield on loans
originated by the Company with funds obtained from borrowings or the issuance
of preferred stock fails to cover the cost of such funds, the Company's cash
flow will be reduced. During periods of changing interest rates, interest rate
mismatches could negatively impact the Company's net income, dividend yield and
the market price of the Common Stock. Most of the fixed rate loans that the
Company originates have prepayment penalties. If interest rates decline, the
Company may experience significant prepayments. Such prepayments, as well as
scheduled repayments, are likely to be reloaned or invested at lower rates,
which may have an adverse effect on the Company's ability to maintain
distributions at existing levels.

EMPLOYEES

At December 31, 1996, the Company had 56 employees. Management of the
Company believes its relationship with its employees is good.

OVERVIEW OF SBA REGULATIONS

The lending operations of First Western, PMIC and Western Financial
are regulated by the SBA establishing, among other things, maximum interest
rates that borrowers may be charged (which currently may not exceed the greater
of 19% per annum or 11% above the Company's cost of funds from the SBA) and
minimum and maximum maturities for the Company's loans (which generally range
from four to 25 years). Borrowers must satisfy certain criteria established by
the SBA to qualify for loans originated by the Company under SBA sponsored
programs, including limitations on the net worth and net income of potential
borrowers or alternative criteria that focus upon the number of employees of
the borrower and its gross revenues. In addition, the SBA generally limits the
aggregate amount of guaranties that can be provided to any single borrower and
restricts the use to which the loan proceeds can be employed by the borrower.

As part of the omnibus funding bill signed into legislation by
Congress in October 1996, the SBIC program was authorized to issue a minimum of
$256 million in SBA Debentures in the SBA's fiscal year ending September 30,
1997. This is significantly above amounts available in 1996; however, there are
increased costs for new SBA Debentures. A flat 3% "draw-down" fee will replace
the 2% commitment fee and there will be an increase of 100 basis points in the
interest rates to be charged. The interest rates previously charged on SBA
Debentures were approximately 70 basis points over the 10 year Treasury Note.
As adjusted, the new rates would be approximately 170 basis points over the 10
year Treasury Note. As part of this legislation, the availability of 3%
subsidized Debentures and the right of the SBA to purchase preferred stock of
an SSBIC was repealed. This will have no effect on previously issued Debentures
or preferred stock of SSBICs including PMIC.

<PAGE> 10

Appropriations for the 7(a) Program under the omnibus funding bill for
the fiscal year ending September 30, 1997 were approved. The 7(a) Program will
receive an aggregate of $158 million in direct appropriation with an additional
$40.5 million carry over of unused funds from 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."

ITEM 2. PROPERTIES

The Company's headquarters are located at 17290 Preston Road, Dallas,
Texas 75252 where its facilities comprise approximately 12,400 square feet of
space pursuant to leases with a corporation, a majority of whose shareholders
are officers and/or directors of the Company. In addition, at December 31,
1996, the Company also leased office space in Hollywood, Florida and Atlanta,
Georgia. The aggregate annual lease payments for the year ended December 31,
1996 were approximately $213,000.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved from time to time in routine litigation
incidental to its business. The Company does not believe that the current
proceedings will have a material adverse effect on the results of operations or
financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the last
quarter of the year ended December 31, 1996.

<PAGE> 11

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "PMC." The following table sets forth for the periods
indicated the high and low sales prices as reported on the AMEX and the
dividends per share declared by the Company for each such period.

<TABLE>
<CAPTION>
Regular Special
Dividends Dividends
Per Per
Quarter Ended High Low Share Share
- ------------- ---- --- ---------- ---------
<S> <C> <C> <C> <C>
March 31, 1994............................... $16.25 $14.00 $0.225 --
June 30, 1994................................ $17.38 $14.50 $0.230 --
September 30, 1994........................... $17.13 $14.13 $0.235 --
December 31, 1994............................ $14.88 $11.88 $0.240 $0.125

March 31, 1995............................... $13.50 $11.13 $0.245 --
June 30, 1995................................ $12.13 $10.75 $0.250 --
September 30, 1995........................... $12.00 $10.88 $0.255 --
December 31, 1995............................ $13.25 $11.38 $0.260 $0.065

March 31, 1996............................... $13.63 $11.88 $0.270 --
June 30, 1996................................ $13.38 $12.38 $0.280 --
September 30, 1996........................... $14.25 $11.75 $0.295 --
December 31, 1996............................ $14.75 $12.88 $0.300 $0.020
</TABLE>

On February 28, 1997, there were approximately 1,700 shareholders of
record of Common Stock and the last reported sales price of the Common Stock
was $14.25 per share.

<PAGE> 12

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following summary of Selected Consolidated Financial Data of the
Company should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto and "Management's Discussion
and Analysis of the Financial Condition and Results of Operations" appearing
elsewhere in this Form 10-K. The selected financial data below provides
information about the Company's financial history and is derived from the
audited financial statements.

<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C>
Operating:
Operating income .................. $ 23,821 $ 21,262 $ 16,450 $ 15,670 $ 11,780
Operating expenses ................ $ (10,454) $ (9,541) $ (7,578) $ (5,933) $ (4,705)
Realized and unrealized gain (loss)
on investments .................. $ (147) $ (359) $ 3,151 $ (404) $ (263)
Net operating income and realized
and unrealized gain (loss) on
investments .................... $ 13,220 $ 11,362 $ 12,023 $ 9,333 $ 6,812
Dividends declared, common ........ $ 12,853 $ 11,600 $ 11,244 $ 9,367 $ 6,349
Earnings per common share ......... $ 1.18 $ 1.03 $ 1.12 $ 0.87 $ 0.79
Dividends per common share ........ $ 1.16 $ 1.08 $ 1.06 $ 0.89 $ 0.69
Weighted average common
shares outstanding .............. 11,002 10,768 10,650 10,579 8,557
Loans funded ...................... $ 70,154 $ 77,567 $ 75,349 $ 74,091 $ 55,975
At end of period:
Loans receivable, net ............. $ 93,354 $ 110,499 $ 75,264 $ 71,528 $ 54,059
Total assets ...................... $ 164,964 $ 159,002 $ 125,416 $ 112,515 $ 85,933
SBA debentures payable ............ $ 44,570 $ 43,540 $ 26,280 $ 20,280 $ 22,280
Notes payable ..................... $ 35,000 $ 35,001 $ 25,001 $ 25,001 $ 1
Preferred stock of consolidated
subsidiary ..................... $ 7,000 $ 7,000 $ 5,000 $ 3,000 $ 3,000
Common shareholders' equity ....... $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
Number of common shares
outstanding ..................... 11,162 10,871 10,684 10,603 10,542

Ratios:
Return on average assets .......... 8.3% 8.0% 10.3% 9.4% 9.6%
Return on average common
shareholders' equity ............ 21.3% 19.2% 21.2% 16.8% 17.1%
</TABLE>

<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

GENERAL
The Company's operations include originating and servicing commercial loans for
its own account as well as operating as an investment advisor who evaluates and
services loans under a fee arrangement for PMC Commercial. In addition, the
Company sells the guaranteed portion its loans originated under the 7(a)
Program and in November 1996 securitized a portion of its fixed-rate portfolio
as part of the Structured Financing as an additional source of working capital.
Historically, the Company has retained servicing and residual interests in all
loans sold.

The Company's revenue sources include the following:

o Interest earned on loans originated and retained including the
effect of commitment fees collected at the inception of the loan
(generally 3% on fixed rate loans).
o Advisory fee income from the management of PMC Commercial.
o Equity in the income of non-investment company subsidiaries.
o Premiums recognized from the sale of the government guaranteed
portion of 7(a) Program loans sold into the secondary market.
o Interest earned on temporary (short-term) investments.
o Other fees, including: late fees, prepayment fees, construction
monitoring and site visit fees.

In order to generate revenues, PMC originates commercial loans. The
following table sets forth information concerning the aggregate gross loans
funded for the Company and the respective changes from previous years:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- ----------------------
(In millions)
Increase Increase Increase
Company Funded (Decrease) Funded (Decrease) Funded (Decrease)
- ------- ------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PMIC ............... $ 19.3 (9%) $ 21.2 108% $ 10.2 209%
Western
Financial ........ 7.5 (6%) 8.0 11% 7.2 500%
First Western ...... 29.2 (28%) 40.6 (2%) 41.6 (22%)
PMC Capital ........ 14.2 84% 7.7 (53%) 16.4 1%
------- ------- -------
Total .............. $ 70.2 (9%) $ 77.5 3% $ 75.4 2%
======= ======= =======
</TABLE>

In 1993, the Company organized a registered investment advisor which
pursuant to the terms of an investment management agreement acts as the
investment advisor for PMC Commercial. The Company's subsidiary, PMC Advisers,
has been the investment advisor for PMC Commercial since the completion of PMC
Commercial's public offering in December 1993 (see footnote 14 to the
accompanying consolidated financial statements). During 1996 PMC Advisers
earned management fees of $1.6 million from PMC Commercial.

The Company also earns income through its equity ownership in its
non-investment company subsidiaries, primarily the Partnership. In November
1996 the Partnership completed the Private Placement of approximately $40.7
million of Notes which were issued at par and have an interest rate of 6.725%.
The Notes were originally collateralized by approximately $45.7 million of
loans contributed to the Partnership by PMC Capital. The net proceeds of the
issuance of the Notes, approximately $37.5 million were distributed to PMC
Capital and are being utilized to originate additional loans. The differential
between the interest received on the collateralized loans (originally $45.7
million at an average yield of 11.5%) and the interest paid on the Notes
(originally $40.7 million at 6.725%), less any loan losses and amortization of
transaction fees, will contribute to the profit of PMC Capital.

<PAGE> 14

Due to the reduction of loan origination opportunities experienced by
First Western over the past several years, the Company has actively sought to
increase other sources of revenues and thereby reduce its reliance on the
income generated by First Western. During this period the Company's other
lending activities have increased and the Company has established other revenue
sources such as the investment advisory income.

The Company has initiated a new marketing program and positioned
itself to add an additional lending program. Late in the fourth quarter of 1996
the Company began marketing a variable rate lending program (the "Prime Lending
Program") which is separate from the 7(a) Program of First Western, the
Company's other variable rate lending program. The Prime Lending Program is
designed to refinance existing real estate secured commercial loans with
borrowers who have proven timely payment histories and loan-to-value and debt
coverage ratios within the Company's underwriting criteria. It is anticipated
that many of the loans refinanced under this program will originally have been
7(a) Program loans and that some of these loan originations may refinance loans
currently in First Western's portfolio. These loans will have variable interest
rates based on the Prime Rate (as defined below).

Additionally, the Company has been approved as a licensee under the
Rural Economic Development Business and Industry Loan Program sponsored by the
U.S. Department of Agriculture (the "B & I Loan Program"). Under the B & I Loan
Program, loans are to be originated in rural areas (generally city areas with a
population of less than 50,000) and are partially guaranteed by the U.S.
Government. The U.S. Government guarantees repayment of up to 80% of the
principal amount of loans originated under the B & I Loan Program.

Substantially all of the First Western loans are variable rate which
reset quarterly based on a spread above the prime rate of interest as stated in
The Wall Street Journal on the first day of the applicable period ("Prime
Rate"). The spread over the Prime Rate charged by First Western ranges from
1.0% to 2.75%

Prime rates utilized by First Western were as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
First Quarter 8.50% 8.50% 6.00%
Second Quarter 8.25% 9.00% 6.25%
Third Quarter 8.25% 9.00% 7.25%
Fourth Quarter 8.25% 8.75% 7.75%
</TABLE>

Due to the decline in interest rates since 1995 and the increased
availability of either fixed rate loans or variable rate loans with interest
rates less than that on the outstanding portfolio of First Western, prepayments
have increased.

The Company experienced a 9% decrease in loans originated from $77.6
million during the year ended December 31, 1995 to $70.2 million during the
year ended December 31, 1996. This origination reduction is due in significant
part to increased competition. In management's opinion, there has been an
increasing amount of competitor lending activity at advance rates and interest
rates which are considerably more aggressive than those offered by the Company.
In order to maintain a quality portfolio, the Company will continue to adhere
to its historical underwriting criteria, and as a result, certain loan
origination opportunities will not be funded by the Company. The Company has
instituted the Prime Lending Program to attract those established seasoned
small business lending opportunities which merit lower interest rates. The
yield on these loans (assuming no change in the Prime Rate) will be lower than
the Company has historically experienced.

As a result of its working capital requirements for loan originations
as well as holding borrowers advances and cash reserves for its completed
securitizations or structured financings, the Company has temporary short-term
investments. In order to minimize its short-term investment positions, the
Company may enter into a bank warehouse facility and anticipates greater
utilization of its revolving credit facility.

The Company receives other investment income from various sources
including late fees, prepayment fees, construction monitoring and site visit
fees. The net amount of other investment income earned during 1996 was $608,000.
The amount earned will vary based on volume funded, the mix of loans
(construction versus non-construction), the rate on loans originated (whether
fixed or floating) as well as the general level of interest rates.

Expenses primarily consist of interest expense and company overhead.
Expenses were 44% of total income during the year ended December 31, 1996
compared to 45% during the year ended December 31, 1995.

<PAGE> 15

Interest expense was $5.7 million during 1996. Interest expense is
primarily derived from (i) $35 million of unsecured notes with a weighted
average interest rate of 7.3% and weighted average remaining maturity of 4.8
years as of December 31, 1996, and (ii) $44,570,000 of Debentures due to the
SBA as a result of borrowings made by the Company's SBIC subsidiaries, with a
weighted average interest rate of 6.9% and weighted average remaining maturity
of 5.7 years as of December 31, 1996. At December 31, 1996, the Company had no
borrowings outstanding pursuant to its revolving credit facility, and had
availability of $15 million. Any borrowings thereunder would bear interest at a
rate based on either the prime rate or Libor.

Company overhead was $4.7 million in 1996 and is comprised of salaries
and related benefits, general and administrative expense, profit sharing plan,
rent, legal and accounting, SBA fees and directors and shareholders expense. The
Company's operations are centralized from its headquarters in Dallas, Texas. The
Company presently has other marketing offices located in Hollywood, Florida,
Atlanta, Georgia and Phoenix, Arizona. The largest overhead expense is the
salaries and related benefits which consist of salaries for the Company's
officers and employees who provide for all of the Company's management and
portfolio functions including marketing, closing, servicing, accounting and
portfolio analysis. Salaries and related benefits were 13% of total income
during each of the years ended December 31, 1996 and 1995. It is anticipated
that overhead will continue to increase as the Company's portfolio under
management increases.

General and administrative expenditures consist primarily of the Texas
franchise and other taxes, advertising and promotional expense, telephone
services, corporate printing costs and general office expenses. General and
administrative expenses were 4% of total income during the year ended December
31, 1996 compared to 5% during the year ended December 31, 1995. These costs
are anticipated to increase in proportion to the growth of the Company's
portfolio under management. The largest component of expense, the Texas
franchise tax, is currently being reviewed by the Texas legislature with
significant modifications being considered. During the year ended December 31,
1996, the Company expensed $197,000 relating to the Texas franchise tax.

Profit sharing plan, rent, legal and accounting, SBA fees and
directors and shareholders expense (collectively the "Other Administrative
Costs") aggregated $723,000 for the year ended December 31, 1996. The Other
Administrative Costs were 3% of total income for each of the years ended
December 31, 1996 and 1995. These costs are anticipated to increase in
proportion to the increase in salaries and general administrative expense as a
result of the anticipated growth of the Company's portfolio under management.

In 1994, PMIC filed a registration statement with the Securities and
Exchange Commission to register shares of its common stock. The Company
incurred approximately $136,000 in costs in connection with the filing of this
registration statement. PMIC, a licensed specialized small business investment
company, uses long-term funds provided by the SBA through the issuance of
Debentures (which are guaranteed by the SBA and on which the interest rate is
reduced through an SBA subsidy by 3% during the first five years). Based on the
lack of availability of SBA subsidized Debentures or preferred stock , the
registration was suspended. Accordingly, during the year ended December 31,
1995, the Company has expensed the costs of registration.

CERTAIN ACCOUNTING CONSIDERATIONS

In accordance with its business and financing strategy, the Company
sells the guaranteed portions of its SBA loans while retaining servicing
rights. A portion of the Company's revenue is recognized from the premium on
the sale of loans, which principally represents either cash received or an
excess servicing spread. The excess servicing spread is calculated as the
present value of the difference between the interest rate charged by the
Company to a borrower and the interest rate paid to the investors who purchased
the loan (adjusted for prepayment assumptions) to the extent that this
difference exceeds the normal loan servicing fees (the "Excess Servicing
Spread"). At the time of sale, the value of the Excess Servicing Spread is
reported as income and concurrently recorded as a corresponding asset on the
Company's consolidated balance sheet (the "Excess Servicing Asset").

During the first quarter of 1995, the Company completed a reassessment
of the method used to amortize the Excess Servicing Asset. Historically, the
Company had amortized the Excess Servicing Asset based upon the estimated life
for each loan at the time of sale, expectation of prepayments and other
considerations. When a loan was paid in full, the remaining unamortized Excess
Servicing Asset, if any, was charged against income. Considering the above
factors and the Company's historical portfolio performance, the Company
extended to the expected remaining life of the related loans, on a pooled
basis, the period over which the remaining Excess Servicing Asset would be
amortized for loans originated and sold prior to January 1, 1995. The Excess
Servicing Asset is amortized on an accelerated method over the estimated
remaining lives of the related assets. There can be no assurance of the
accuracy of management's prepayment estimates. If prepayments occur at a faster
rate than expected, the amortization of the Excess Servicing Asset will be
accelerated as

<PAGE> 16

a charge to earnings. If actual prepayments occur at a slower rate than
estimated, cash flows from the Excess Servicing Spread would exceed previously
expected amounts and total income in future periods would be enhanced.
Management will evaluate on an ongoing basis the future benefit anticipated
from the Excess Servicing Asset. If it is determined that the future benefit is
impaired, the Company will reflect the impairment as a charge to earnings
during the period evaluated. To the extent future Excess Servicing Spread
exceeds the estimated amortization of the Excess Servicing Asset pertaining to
these loans, additional revenues will be recognized.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

Interest income increased by $2,241,000 (14%) from $16,330,000 for the
year ended December 31, 1995, to $18,571,000 for the year ended December 31,
1996. This increase was primarily attributable to the growth in the Company's
portfolio. The average loan portfolio outstanding during the year ended
December 31, 1996 was $124.9 million, a 33% increase from $94.1 million in the
comparable period of 1995. Accordingly, interest income on loans increased by
$3,076,000 (21%) from $14,428,000 during the year ended December 31, 1995, to
$17,504,000 during the year ended December 31, 1996. Average temporary
investments outstanding during the year ended December 31, 1996 were $21.3
million, a 34% decrease from $32.4 million for the year ended December 31,
1995. Accordingly, interest income on temporary investments decreased by
$835,000 (44%) from $1,902,000 during the year ended December 31, 1995 to
$1,067,000 during the year ended December 31, 1996.

Premium income decreased by $905,000 (32%) from $2,847,000 for the
year ended December 31, 1995, to $1,942,000 for the year ended December 31,
1996. This decrease was primarily attributable to a 33% decrease in the
guaranteed portion of loans held for sale or sold (under the 7(a) Program)
during the year ended December 31, 1996 ($20.0 million) as compared to the year
ended December 31, 1995 ($29.9 million).

Other investment income, net, increased by $240,000 (65%) from
$368,000 for the year ended December 31, 1995, to $608,000 for the year ended
December 31, 1996. This increase was primarily attributable to an increase of
$200,000 in fees received on loans which prepaid during the year ended December
31, 1996 as compared to the year ended December 31, 1995. The Company
experienced a greater number of loan prepayments in 1996 as compared to 1995
because of the general decline in interest rates and the increased competition
for financing in the lodging industry.

Equity in income (loss) of non-consolidated subsidiaries increased by
$447,000, from a loss of $78,000 during the year ended December 31, 1995 to
income of $369,000 during the year ended December 31, 1996. The increase is
primarily due to the formation of the Partnership in November 1996 which had
net profits of $328,000. The Partnership profits include all yield generated
from the loans contributed by PMC Capital less the cost of the Notes issued by
the Partnership. The net income from the Partnership included $80,000 in fees
received on prepaid loans. In addition, PMC Funding realized an increase in
revenues from charter services of its airplane which resulted in a change in
profits from a loss of $78,000 during the year ended December 31, 1995 to a
profit of $41,000 during the year ended December 31, 1996.

Other income, net, increased by $536,000 (30%) from $1,795,000 during
the year ended December 31, 1995, to $2,331,000 during the year ended December
31, 1996. This increase was primarily a result of investment management fees
generated by PMC Advisers which increased by approximately $400,000 (33%) from
$1.2 million during the year ended December 31, 1995 to $1.6 million during the
year ended December 31, 1996.

Operating expenses, excluding interest, increased by $255,000 (6%)
from $4,492,000 during the year ended December 31, 1995, to $4,747,000 during
the year ended December 31, 1996. This increase was a result of an increase in
salaries and related benefits of $402,000 (15%) from $2,778,000 during the year
ended December 31, 1995, to $3,180,000 during the year ended December 31, 1996.
The increase in salaries and related benefits was a result of increased number
of employees (due to the increase in portfolio under management and the
complexity of the financing transactions undertaken by the Company), and a
general increase in the level of salaries for employees during 1996. This
increase was offset partially by a $210,000 decrease in administrative and
general costs. During the third quarter of 1995, the Company expensed
approximately $106,000 of costs pertaining to its decision not to pursue an
offering of common stock of PMIC. Also, the Company had reductions in
advertising, telephone and travel expenses when comparing the year ended
December 31, 1996 to the year ended December 31, 1995. Advertising reductions
were due to fewer newspaper ad placements, telephone reductions were due to a
change in long distance carriers and travel reductions were due to increased
use of PMC Funding's airplane.

Interest expense increased by $659,000 (13%) from $5,049,000 during
the year ended December 31, 1995, to $5,708,000 during the year ended December
31, 1996. The increase was primarily attributable to: (i) the interest expense
on approximately $17.3 million of SBA Debentures which were issued or assumed
during the year ended December 31,

<PAGE> 17

1995 by PMIC and Western Financial, (ii) the assumption of $1,030,000 of SBA
Debentures in June 1996, (iii) the scheduled increase in the interest rate on
$2.0 million of PMIC's SBA Debentures during June 1995 and (iv) the issuance of
$10.0 million of unsecured notes by PMC Capital in April 1995.

Realized and unrealized gain (loss) on investments changed from a loss
of $359,000 during the year ended December 31, 1995 to a loss of $147,000
during the year ended December 31, 1996. The decrease in the aggregate losses
on a dollar amount and a percentage basis was due to continued steady
performance of the lodging portion of the portfolio. In addition, to the extent
loans were deemed non-performing or were liquidated or foreclosed upon, the
percentage recovery has generally been substantial due to the high
concentration of real estate collateral on such loans. Realized and unrealized
gain (loss) on investments as a percentage of average loans receivable for the
year ended December 31, 1996 and 1995 were 0.12% and 0.38%, respectively.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994

Interest income increased by $4,378,000 (37%) from $11,952,000 for the
year ended December 31, 1994, to $16,330,000 for the year ended December 31,
1995. This increase was primarily attributable to: (i) the growth in the
Company's portfolio from $75.3 million at December 31, 1994 to $110.5 million
at December 31, 1995, (ii) the increased yield on First Western's loan
portfolio as a result of an increase in the Prime Rate and (iii) the increased
interest earned on temporary investments from funds received on the
securitization and structured sale of assets during December 1994 which were
placed in short-term investments until loans were funded.

Premium income increased by $119,000 ( 4%) from $2,728,000, million
for the year ended December 31, 1994, to $2,847,000 for the year ended December
31, 1995. The premium income increased even though the volume of loans sold
decreased by $2.7 million, or 8%, from $33.0 million during the year ended
December 31, 1994 to $30.3 million during the year ended December 31, 1995.
This increase in premium income was primarily attributable to the increased
demand for these SBA loan products by the secondary market. The increased
demand was a result of stabilized interest rates and the decrease in the prime
rate in July 1995. Accordingly, the premium on individual loans sold increased.
The premium derived from the secondary market is directly related to the term
of the loan.

Other investment income, net, increased by $65,000 ( 21%) from
$303,000 for the year ended December 31, 1994, to $368,000 for the year ended
December 31, 1995. This increase was primarily attributable to forfeited
deposits and prepayment fees.

Other income, net, increased by $328,000 (22%) from $1,467,000 during
the year ended December 31, 1994, to $1,795,000 during the year ended December
31, 1995. This increase was primarily attributable to the investment management
fees generated by PMC Advisers.

Operating expenses, excluding interest, increased by $529,000 (13%)
from $3,963,000 during the year ended December 31, 1994, to $4,492,000 during
the year ended December 31, 1995. Included in operating expenses for the year
ended December 31, 1995, are $136,000 pertaining to the aggregate of costs of
the PMIC registration statement. This increase was also primarily attributable
to: (i) increased staff and general overhead necessary to manage the increased
portfolio of the Company, (ii) the operations of PMC Advisers and (iii)
increases in state franchise tax expense.

Interest expense increased by $1,434,000 (40%) from $3,615,000 during
the year ended December 31, 1994, to $5,049,000 during the year ended December
31, 1995. This increase was primarily attributable to: (i) the interest expense
on $23,260,000 in SBA Debentures issued or assumed between September 1994 and
September 1995 by PMIC and Western Financial, (ii) the scheduled increase in
interest rate on $5,000,000 of PMIC's SBA Debentures during the first half of
1995 and (iii) the issuance of $10,000,000 of senior notes by PMC Capital on
April 19, 1995.

Due to First Western's securitization and structured sale of assets,
during the year ended December 31, 1994, the Company recognized a $3,346,000
gain. This gain represented the difference between the proceeds from the sale
of these assets plus the present value of the difference between the interest
charged to the borrowers and the interest paid to the purchasers less the
carrying value of the assets (including discounts from the application of
Financial Accounting Standards Board ("FASB") Emerging Issues Task Force 88-11)
and an allowance for credit losses. During the year ended December 31, 1995,
the Company did not complete any securitization or structured sale, and did not
have any comparable gain recognized. Not including the aforementioned gain,
realized and unrealized loss on investments has increased by $163,000 (83%)
from a loss of $196,000 for the year ended December 31, 1994, to a loss of
$359,000 during the year ended December 31, 1995. This increase in loss is
attributable primarily to a greater number of loans in the process of
liquidation during 1995. Based on updated area demographics, appraisals and the
condition of the collateral properties, valuation

<PAGE> 18

reserves were increased. However, loan losses for the year ended December 31,
1995 continued at an annualized rate of approximately 0.39% of average
outstanding loans receivable, primarily attributable to: (i) minimal losses
incurred in the Company's largest industry concentration (the lodging
industry), (ii) continued monitoring efforts, (iii) the strong economy and (iv)
the low interest rates over the previous several years.

CASH FLOW ANALYSIS

The Company generated $14.1 million and $12.9 million from operating
activities during the years ended December 31, 1996 and 1995, respectively. The
increase of $1.2 million (9%) was primarily attributable to the increase in net
income from $11.4 million to $13.2 million. Included in cash flows from
operating activities is the lending activity of First Western relating to the
government guaranteed portion of loans originated which are sold into the
secondary market ("Government Guaranteed Lending"). During the years ended
December 31, 1996 and 1995, the Company used net cash of $1,927,000 and
$169,000, respectively, from Government Guaranteed Lending activities.

The Company used $25.9 million and $31.9 million from investing
activities during the years ended December 31, 1996 and 1995, respectively. The
Company increased its use of funds for loans originated by $800,000 from $47.1
million during the year ended December 31, 1995 to $48.2 million during the
year ended December 31, 1996. During the year ended December 31, 1996 principal
collected was $22.6 million as compared to $10.7 million during the year ended
December 31, 1995. This increase of $11.8 million (110%) was primarily due to
an increase in prepayments on larger principal balance fixed rate loans during
1996 primarily in the portfolios of PMC Capital and PMIC and increased
prepayment activity on the variable rate portfolio of First Western (which
loans have no prepayment fees). Also included as proceeds from investing
activity are the proceeds from maturities of government securities ($8.9
million) net of purchases of $3.9 million during the year ended December 31,
1995 for which there were no comparable transactions during the year ended
December 31, 1996.

The Company generated $30.4 million from financing activities during
the year ended December 31, 1996 as compared to $16.9 million during the year
ended December 31, 1995. The source of funds in 1995 were primarily from the
issuance of $25 million in debt, $2 million in preferred stock of PMIC and $1.4
million from the issuance of Common Stock pursuant to the Company's Dividend
Reinvestment plan ("DRP Stock Issuance"). The source of funds in 1996 were
primarily the net proceeds from the issuance of Notes by the Partnership ($37.5
million) which were distributed to PMC Capital and $2.8 million from DRP Stock
Issuances. Dividends paid during the year ended December 31, 1996 were $11.9
million as compared to $11.2 million during the year ended December 31, 1995,
an increase of $700,000 (6.0%).

LIQUIDITY AND CAPITAL RESOURCES

The primary use of the Company's funds is to originate loans, and from
time to time, the Company may use funds to acquire loans from governmental
agencies and/or their agents. The Company also uses funds for the payment of
financing costs, dividends to shareholders, general and administrative
expenses, capital expenditures, advances on loan liquidations and payments of
principal due on borrowing facilities. Approximately $2.5 million of the
Company's SBA Debentures became payable in February 1997 and were paid in full.
As a regulated investment company, pursuant to the Internal Revenue Code of
1986, the Company is required to pay out substantially all of its net
investment company taxable income to the common shareholders. To sustain growth
in the size of its investment portfolio, the Company continually reviews the
need for obtaining additional funds from either: (i) debt offerings and
additional credit facilities, (ii) securitization and sale of a portion of the
loan portfolio and/or (iii) equity offerings. Historically, the Company's
primary sources of capital and liquidity have been Debentures issued through
programs of the SBA, private and public issuances of common stock, the issuance
of senior unsecured notes, the securitization and sale of its loan portfolio
and the utilization of its short-term, uncollateralized revolving credit
facility.

Loan commitments outstanding at December 31, 1996 to various
prospective small business companies, including the unfunded portion of
projects in the construction phase, amounted to approximately $45.9 million. Of
these commitments, $6.6 million were for loans partially guaranteed by the SBA
of which approximately $5.0 million will be sold into the secondary market.
Such commitments are made in the ordinary course of the Company's business.
Commitments to extend credit are agreements to lend to a customer provided that
the terms established in the contract are met. Commitments generally have fixed
expiration dates and require payment of a fee. Since some commitments expire
without the proposed loan closing, the total commitment amounts do not
necessarily represent future cash requirements.

<PAGE> 19

In order to meet its working capital requirements and increase the
size of its investment portfolio, during the years ended December 31, 1995 and
1996, the Company has completed the following leverage transactions:

<TABLE>
<CAPTION>
STATED
MATURITY
DATE AMOUNT RATE DATE DESCRIPTION
- --------------- ------------ ------------- -------------------- ---------------
<S> <C> <C> <C> <C>
April, 1995 $ 5,000,000 8.600% April, 2003 Unsecured note
April, 1995 $ 5,000,000 Libor + 1.300% April, 2004 Unsecured note
May, 1995 $ 2,000,000 4.000% May, 2010 Preferred Stock - PMIC
May, 1995 (1) $ 2,260,000 7.500% to 10.400% Up to December, 2002 SBA Debentures
March, 1995 $ 3,000,000 4.840% (2) March, 2005 SBA Debentures
June, 1995 $ 5,000,000 3.690% (2) June, 2005 SBA Debentures
September, 1995 $ 7,000,000 3.875% (2) September, 2005 SBA Debentures
May, 1996 (1) $ 1,030,000 9.300% June, 2000 SBA Debentures
November, 1996 $ 40,746,000 6.725% November, 2005 Structured Financing (3)
</TABLE>

(1) Assumed Debentures from a non-affiliated SBIC (see footnote 6 to the
accompanying consolidated financial statements)

(2) Rate increases 3%, five years from the date of issuance until maturity.

(3) Fixed rate loan-backed notes issued by the Partnership (see footnote 15
to the accompanying consolidated financial statements)

PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear interest at the
Company's option at the bank's prime rate less 50 basis points or the London
Interbank Offering Rate (LIBOR) plus 175 basis points. The credit facility
requires the Company to meet certain covenants, the most restrictive of which
includes that the ratio of net charge-offs to net loans receivable will not
exceed 2%, and the ratio of assets to senior debt (as defined in the note
agreement) will not fall below 150%. At December 31, 1996, the Company had no
balance outstanding on this credit facility. At December 31, 1996, the Company
was in compliance with all covenants of this facility.

Due to changes in the SBIC program to the cost and availability of SBA
Debentures and preferred stock (see "Business - Overview of SBA Regulations"),
the Company has utilized other sources of funds to expand its loan portfolio.
The cost and terms of these other sources of funds will not be as favorable as
those historically achieved on SBA Debentures; however, the Company has been
able to issue debt through private placement of notes and receive working
capital through securitization and sale of a portion of its portfolio. If
additional funds are required, the Company would attempt to either issue
additional unsecured notes, privately or publicly raise equity and/or
securitize and structure a sale of a portion of either the unguaranteed portion
of SBA loans or the portfolio of PMC, Western Financial and/or PMIC. Management
believes that through utilization of one or more of these sources of debt or
equity capital, the Company should meet its liquidity needs for the foreseeable
future.

PMC Capital is in compliance with the requirement to maintain a
minimum of 200% asset coverage of debt as defined in sections 18 and 61 of the
1940 Act as modified by exemptive orders obtained by the Company from the
Securities and Exchange Commission.

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K

This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives relating to
future growth of the loan portfolio and availability of funds. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.

<PAGE> 20

RECENT ACCOUNTING PRONOUNCEMENTS

In 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 122 "Accounting for Mortgage Servicing Rights," an amendment of
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," to require
that an entity recognize as separate assets rights to service mortgage loans
for others, regardless of how such servicing is acquired. SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995. The effects on
operations and financial condition of implementing SFAS No. 122, in
management's opinion, is not considered significant.

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities." Those
standards have been established to provide a consistent application of
accounting based on a financial-components approach which distinguishes the
transfer of financial assets that are sales from those that are secured
borrowings. This approach is based upon control of the related assets, whereby
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes financial assets when control has been surrendered and liabilities
are extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and may only be applied prospectively.

In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation, and disclosure requirements
for earnings per share. SFAS No. 128 is designed to improve the earnings per
share information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of earnings per share data. SFAS No. 128 is effective for
financial statements for periods ending after December 15, 1997. In the opinion
of management, the effect of this pronouncement on earnings per share is not
considered significant.

In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain disclosure
about an entity's capital structure. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. In the opinion of
management, the effect of this pronouncement on the Company's financial position
or results of operation is not considered significant.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data are included in this
report beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None

<PAGE> 21

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year end covered by this Form 10-K with respect to the Annual
Meeting of Shareholders to be held on May 14, 1997.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

<PAGE> 22

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report:

(1) Financial Statements
See index to Financial Statements set forth on
page F-1 of this Form 10-K.

(2) Financial Statement Schedules
All schedules are omitted because they are not
required under the related instructions or not
applicable, or because the required information
is included in the consolidated financial
statements or notes thereto.

(3) Exhibits
See Exhibit Index beginning on page E-1 of this
Form 10-K.

(b) Reports on Form 8-K:

None

<PAGE> 23

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) or the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

PMC Capital, Inc.

By: /s/ Lance B. Rosemore
------------------------------
Lance B. Rosemore, President

Dated March 21, 1997

Pursuant to the requirements of the Securities Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.

Name Title Date
---- ----- ----
<S> <C> <C>
/S/ DR. FREDRIC M. ROSEMORE Chairman of the Board March 21, 1997
- ---------------------------- and Treasurer
DR. FREDRIC M. ROSEMORE

/S/ LANCE B. ROSEMORE President, Chief Executive March 21, 1997
- ---------------------------- Officer, Secretary and Director
LANCE B. ROSEMORE (Principal Executive Officer)

/S/ DR. ANDREW S. ROSEMORE Executive Vice President, March 21, 1997
- ---------------------------- Chief Operating Officer
DR. ANDREW S. ROSEMORE and Director

/S/ BARRY N. BERLIN Chief Financial Officer March 21, 1997
- ---------------------------- (Principal Financial and
BARRY N. BERLIN Accounting Officer)

/S/ LEE RUWITCH Director March 21, 1997
- ----------------------------
LEE RUWITCH

/S/ DR. MARTHA GREENBERG Director March 21, 1997
- ----------------------------
DR. MARTHA GREENBERG

/S/ DR. IRVIN BORISH Director March 21, 1997
- ----------------------------
DR. IRVIN BORISH

/S/ THOMAS HAMILL Director March 21, 1997
- ----------------------------
THOMAS HAMILL

/S/ ROBERT DIAMOND Director March 21, 1997
- ----------------------------
ROBERT DIAMOND

/S/ BARRY IMBER Director March 21, 1997
- ----------------------------
BARRY IMBER
</TABLE>

<PAGE> 24
PMC CAPITAL, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
PMC CAPITAL, INC. AND SUBSIDIARIES
- ----------------------------------

Summary of Selected Financial Information ........................... F-2

Quarterly Statistics ................................................ F-3

Report of Independent Accountants ................................... F-4

Consolidated Financial Statements:

Financial Highlights ............................................. F-5

Consolidated Balance Sheets as of December 31, 1996 and 1995 ..... F-6

Consolidated Schedule of Investments as of December 31, 1996 ..... F-7

Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 ............................... F-9

Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 ................... F-10

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 ............................... F-11

Notes to Consolidated Financial Statements ....................... F-12

Consolidating Financial Statements:

Consolidating Balance Sheet as of December 31, 1996 .............. F-31

Consolidating Statement of Income for the
Year Ended December 31, 1996 ................................... F-32

Consolidating Statement of Shareholders' Equity for
the Year Ended December 31, 1996 ............................... F-33

Consolidating Statement of Cash Flows for the Year
Ended December 31, 1996 ........................................ F-34

PMC CAPITAL LIMITED PARTNERSHIP
- -------------------------------

Report of Independent Accountants ................................... F-35

Statement of Assets, Liabilities and Partners' Capital
as of December 31, 1996 ........................................... F-36

Statement of Income for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-37

Statement of Partners' Capital for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-38

Statement of Cash Flows for the Period From
November 8, 1996 (Inception) to December 31, 1996 ................ F-39

Notes to Financial Statements ....................................... F-40
</TABLE>

F-1
<PAGE> 25
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL INFORMATION

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING:

Operating income ............................. $ 23,821 $ 21,262 $ 16,450 $ 15,670 $ 11,780

Operating expenses ........................... (10,454) (9,541) (7,578) (5,933) (4,705)

Realized and unrealized gain (loss)
on investments ............................. (147) (359) 3,151 (404) (263)
---------- ---------- ---------- ---------- ----------

Net operating income and realized
and unrealized gain (loss) on
investments ................................ $ 13,220 $ 11,362 $ 12,023 $ 9,333 $ 6,812
========== ========== ========== ========== ==========

Dividends declared, common ................... $ 12,853 $ 11,600 $ 11,244 $ 9,367 $ 6,349
========== ========== ========== ========== ==========

Earnings per common share .................... $ 1.18 $ 1.03 $ 1.12 $ 0.87 $ 0.79
========== ========== ========== ========== ==========

Dividends per common share ................... $ 1.16 $ 1.08 $ 1.06 $ 0.89 $ 0.69
========== ========== ========== ========== ==========

Weighted average common shares
outstanding ................................ 11,002 10,768 10,650 10,579 8,557
========== ========== ========== ========== ==========

Loans funded ................................. $ 70,154 $ 77,567 $ 75,349 $ 74,091 $ 55,975
========== ========== ========== ========== ==========

AT END OF PERIOD:

Loans receivable, net ........................ $ 93,354 $ 110,499 $ 75,264 $ 71,528 $ 54,059
========== ========== ========== ========== ==========

Total assets ................................. $ 164,964 $ 159,002 $ 125,416 $ 112,515 $ 85,933
========== ========== ========== ========== ==========

SBA debentures payable ....................... $ 44,570 $ 43,540 $ 26,280 $ 20,280 $ 22,280
========== ========== ========== ========== ==========

Notes payable ................................ $ 35,000 $ 35,001 $ 25,001 $ 25,001 $ 1
========== ========== ========== ========== ==========

Preferred stock of consolidated subsidiary ... $ 7,000 $ 7,000 $ 5,000 $ 3,000 $ 3,000
========== ========== ========== ========== ==========

Common shareholders' equity .................. $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
========== ========== ========== ========== ==========

Number of common shares outstanding .......... 11,162 10,871 10,684 10,603 10,542
========== ========== ========== ========== ==========

RATIOS:

Return on average assets ..................... 8.3% 8.0% 10.3% 9.4% 9.6%
========== ========== ========== ========== ==========

Return on average common shareholders'
equity ..................................... 21.3% 19.2% 21.2% 16.8% 17.1%
========== ========== ========== ========== ==========
</TABLE>

F-2
<PAGE> 26
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
QUARTERLY STATISTICS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
(UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 5,480 $ 5,904 $ 6,051 $ 6,386 $23,821

NET OPERATING INCOME ............. $ 3,012 $ 3,346 $ 3,421 $ 3,588 $13,367

NET GAIN (LOSS) ON INVESTMENTS ... $ (17) $ (1) $ (23) $ (106) $ (147)

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 2,995 $ 3,345 $ 3,398 $ 3,482 $13,220

<CAPTION>
- ----------------------------------------------------------------------------------------
PER SHARE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 0.502 $ 0.539 $ 0.550 $ 0.574 $ 2.165

NET OPERATING INCOME ............. $ 0.276 $ 0.305 $ 0.311 $ 0.323 $ 1.215

NET GAIN (LOSS) ON INVESTMENTS ... $(0.002) -- $(0.002) $(0.010) $(0.014)

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 0.274 $ 0.305 $ 0.309 $ 0.313 $ 1.201
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
(UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME ................. $ 4,694 $ 5,327 $ 5,634 $ 5,607 $21,262

NET OPERATING INCOME ............. $ 2,520 $ 2,883 $ 3,154 $ 3,164 $11,721

NET GAIN (LOSS) ON INVESTMENTS ... $ (11) $ (77) $ (188) $ (83) $ (359)

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 2,509 $ 2,806 $ 2,966 $ 3,081 $11,362

NET OPERATING INCOME ............. $ 0.235 $ 0.268 $ 0.293 $ 0.292 $ 1.088

NET GAIN (LOSS) ON INVESTMENTS ... $(0.001) $(0.007) $(0.017) $(0.008) $(0.033)

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ... $ 0.234 $ 0.261 $ 0.276 $ 0.284 $ 1.055
</TABLE>

F-3
<PAGE> 27

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
PMC Capital, Inc.:

We have audited the accompanying consolidated balance sheets of PMC
Capital, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996 and the
financial highlights for each of the five years in the period ended December
31, 1996. We have also audited the accompanying consolidated schedule of
investments as of December 31, 1996. These financial statements and the
financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included the examination or
confirmation of securities owned as of December 31, 1996 and 1995. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements and financial
highlights referred to above present fairly, in all material respects, the
consolidated financial position of PMC Capital, Inc. and subsidiaries as of
December 31, 1996 and 1995, the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, and the financial highlights for each of the five years in the period
ended December 31, 1996, and the consolidated schedule of investments as of
December 31, 1996, in conformity with generally accepted accounting
principles.

Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and the related consolidating statements of
income, cash flows, and shareholders' equity are presented for purposes of
additional analysis rather than to present the financial position, results of
operations, and cash flows of the individual companies, and are not a
required part of the consolidated financial statements. The supplementary
consolidating information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and, in our
opinion, is fairly stated, in all material respects, in relation to the
consolidated financial statements taken as a whole.

COOPERS & LYBRAND L.L.P.

Dallas, Texas
March 5, 1997

F-4

<PAGE> 28
- --------------------------------------------------------------------------------
PMC CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------

The following financial highlights of the Company should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere on this Form 10-K. The financial highlights below provide
information about the Company's financial history. It uses the Company's fiscal
year (which ends December 31) and expresses the per share operating performance
in terms of a single share outstanding throughout each fiscal period. The
information is derived from the audited consolidated financial statements. The
financial highlights have been audited by Coopers & Lybrand L.L.P., independent
accountants.

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE (1):

Net asset value, beginning of period ................. $ 5.44 $ 5.37 $ 5.24 $ 5.20 $ 3.38
-------- -------- -------- -------- --------

Net operating income ................................. 1.21 1.09 0.83 0.92 0.83
Net gains or losses on securities
realized and unrealized (2) ........................ 0.17 0.08 0.37 0.02 1.69
-------- -------- -------- -------- --------
Total from investment operations ................. 1.38 1.17 1.20 0.94 2.52
-------- -------- -------- -------- --------

Less distributions:
Preferred shareholder of consolidated subsidiary ... 0.02 0.02 0.01 0.01 0.01
Common shareholders ................................ 1.16 1.08 1.06 0.89 0.69
-------- -------- -------- -------- --------

Total distributions .............................. 1.18 1.10 1.07 0.90 0.70
-------- -------- -------- -------- --------

Net asset value, end of period ....................... $ 5.64 $ 5.44 $ 5.37 $ 5.24 $ 5.20
======== ======== ======== ======== ========

Per share market value, end of period ................ $ 14.00 $ 12.63 $ 13.50 $ 14.50 $ 13.25
======== ======== ======== ======== ========

Total investment return .............................. 20% 2% 0% 16% 43%
======== ======== ======== ======== ========

RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ............. $ 62,903 $ 59,088 $ 57,371 $ 55,524 $ 54,839
======== ======== ======== ======== ========
Ratio of expenses to average net assets .............. 17% 16% 13% 11% 12%
======== ======== ======== ======== ========
Ratio of operating income to average net assets ...... 22% 20% 16% 18% 18%
======== ======== ======== ======== ========
Ratio of net operating income and realized and
unrealized gain (loss) on investments to
average net assets ................................. 22% 20% 21% 17% 17%
======== ======== ======== ======== ========
Portfolio turnover (3) ............................... 16% 30% 65% 54% 77%
======== ======== ======== ======== ========
</TABLE>

FOOTNOTES:

(1) The per share changes during the year are based on the weighted average
number of shares outstanding of the Company during the year presented.

(2) The per share net gains or losses on securities (realized and unrealized)
includes the effect of stock issuances and other changes in per share
amounts during the year presented.

(3) Included in the computation of the portfolio turnover rate are the sales
of loans through the secondary market or private placement.

F-5
<PAGE> 29
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ............................ $ 93,354 $110,499
Cash equivalents ................................. 49,677 31,135
Investment in subsidiaries ....................... 8,585 27
Excess servicing asset, net ...................... 6,429 7,514
Restricted investments ........................... 1,229 1,785
Real property owned .............................. 303 5
-------- --------

TOTAL INVESTMENTS .................................. 159,577 150,965
-------- --------

OTHER ASSETS:
Receivable for loans sold ........................ 2,508 4,371
Due from unconsolidated subsidiaries ............. 1,097 1,135
Deferred charges, deposits and other assets ...... 885 1,170
Accrued interest receivable ...................... 376 723
Cash ............................................. 340 439
Property and equipment, net ...................... 181 199
-------- --------

TOTAL OTHER ASSETS ................................. 5,387 8,037
-------- --------

TOTAL ASSETS ....................................... $164,964 $159,002
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable ........................... $ 44,570 $ 43,540
Notes payable .................................... 35,000 35,001
Accounts payable ................................. 4,145 2,500
Dividends payable ................................ 3,635 3,596
Allowance for credit losses on loans sold ........ 1,533 2,523
Borrower advances ................................ 1,795 2,260
Accrued interest payable ......................... 1,442 1,434
Due to unconsolidated subsidiaries ............... 1,076 --
Deferred fee revenue ............................. 419 779
Other liabilities ................................ 1,446 1,281
-------- --------

TOTAL LIABILITIES .................................. 95,061 92,914
-------- --------

COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 8)

CUMULATIVE PREFERRED STOCK OF SUBSIDIARY ........... 7,000 7,000
-------- --------

SHAREHOLDERS' EQUITY:
Common stock, authorized 30,000,000 shares
of $.01 par value, 11,162,000 and 10,871,000
shares issued and outstanding at
December 31, 1996 and 1995, respectively ....... 112 109
Additional paid-in capital ....................... 62,125 58,429
Undistributed net operating income ............... 1,101 1,017
Net unrealized depreciation on investments ....... (435) (467)
-------- --------

62,903 59,088
-------- --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $164,964 $159,002
======== ========

NET ASSET VALUE PER COMMON SHARE ................... $ 5.64 $ 5.44
======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE> 30
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED LOANS SERVICED LOANS (2)
------------------------------------------- -------------------------
NUMBER NUMBER
OF OF
CATEGORY/ISSUER (1) LOANS VALUE % COST % LOANS COST %
------------------- ------ ------- ----- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS TO SMALL BUSINESS CONCERNS (3):
SMALL BUSINESS LENDING COMPANY LOANS:
FIRST WESTERN SBLC, INC. AND SUBSIDIARY
Hotels and motels ............. 159 $20,280 21.7% $ 21,652 22.4% 159 $109,943 39.7%
Gasoline / service stations ... 20 576 0.6% 635 0.7% 20 5,776 2.1%
Restaurants ................... 83 2,166 2.3% 2,358 2.4% 83 15,387 5.6%
Laundromats ................... 14 126 0.1% 135 0.1% 14 1,320 0.5%
Retail, other ................. 72 754 0.8% 818 0.9% 72 7,268 2.6%
Health care ................... 10 37 -- 40 -- 10 679 0.2%
Food and grocery stores ....... 16 244 0.3% 263 0.3% 16 4,326 1.6%
Services ...................... 80 1,069 1.2% 1,206 1.2% 80 11,175 4.0%
Manufacturing ................. 17 789 0.9% 795 0.8% 17 4,204 1.5%
Wholesale ..................... 24 237 0.3% 293 0.3% 24 4,577 1.7%
Car washes .................... 4 27 -- 28 -- 4 1,231 0.4%
----- ------- ----- -------- ----- ----- -------- -----

Total ........................... 499 26,305 28.2% 28,223 29.1% 499 165,886 59.9%
----- ------- ----- -------- ----- ----- -------- -----

SMALL BUSINESS INVESTMENT COMPANY LOANS:
WESTERN FINANCIAL CAPITAL CORPORATION
Hotels and motels ............. 17 8,326 8.9% 8,550 8.8% 26 16,069 5.8%
Gasoline / service stations ... 1 345 0.4% 345 0.4% 4 1,459 0.5%
Restaurants ................... -- -- -- -- -- 1 196 0.1%
Retail, other ................. 4 2,431 2.6% 2,504 2.6% 6 2,651 1.0%
Services ...................... 11 1,538 1.6% 1,570 1.6% 16 2,458 0.9%
Health care ................... 35 923 1.0% 1,006 1.0% 36 1,059 0.4%
Food and grocery stores ....... 2 307 0.3% 307 0.3% 2 307 0.1%
Laundromats ................... 1 85 0.1% 85 0.1% 1 85 --
Manufacturing ................. 2 344 0.4% 344 0.4% 2 344 0.1%
Other notes receivable ........ 2 114 0.1% 147 0.2% 5 325 0.1%
----- ------- ----- -------- ----- ----- -------- -----

Total ........................... 75 14,413 15.4% 14,858 15.4% 99 24,953 9.0%
----- ------- ----- -------- ----- ----- -------- -----

SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY LOANS:
PMC INVESTMENT CORPORATION
Hotels and motels ............. 37 23,464 25.1% 24,011 24.8% 64 43,648 15.8%
Gasoline / service stations ... 5 2,041 2.2% 2,097 2.1% 7 3,223 1.2%
Restaurants ................... 1 296 0.3% 299 0.3% 2 960 0.3%
Retail, other ................. 1 60 0.1% 61 0.1% 1 61 --
Services ...................... 2 173 0.2% 173 0.2% 2 173 0.1%
Health care ................... 20 670 0.7% 779 0.8% 20 779 0.3%
Food and grocery stores ....... 5 1,124 1.2% 1,147 1.2% 7 1,940 0.6%
Other notes receivable ........ 2 734 0.8% 768 0.8% 2 869 0.3%
----- ------- ----- -------- ----- ----- -------- -----

Total ........................... 73 28,562 30.6% 29,335 30.3% 105 51,653 18.6%
----- ------- ----- -------- ----- ----- -------- -----

COMMERCIAL LOANS:
PMC CAPITAL, INC.
Hotels and motels ............. 30 19,720 21.1% 19,717 20.4% 43 28,727 10.4%
Gasoline / service stations ... 1 320 0.3% 323 0.3% 1 323 0.1%
Restaurants ................... 1 168 0.2% 169 0.2% 1 169 0.1%
Retail centers and other ...... 4 3,066 3.3% 3,408 3.5% 5 4,474 1.6%
Apartment complex ............. 1 800 0.9% 811 0.8% 1 811 0.3%
----- ------- ----- -------- ----- ----- -------- -----

Total ........................... 37 24,074 25.8% 24,428 25.2% 51 34,504 12.5%
----- ------- ----- -------- ----- ----- -------- -----

TOTAL LOANS RECEIVABLE (4) ...... 684 $93,354 100.0% $ 96,844 100.0% 754 $276,996 100.0%
===== ======= ===== ======== ===== ===== ======== =====
</TABLE>

(Continued on next page)

F-7
<PAGE> 31
PMC CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
(CONTINUED)

<TABLE>
<CAPTION>
CATEGORY/ISSUER VALUE % COST %
--------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
TOTAL LOANS RECEIVABLE (FROM PRIOR PAGE) ........................... $ 93,354 58.5% $ 96,844 59.4%
-------- ----- -------- -----

MONEY MARKET AND FUND DEPOSIT ACCOUNTS (5):
Certificates of deposit (6) ................................... 1,287 0.8% 1,287 0.8%
Bank money market saving accounts ............................. 24,263 15.2% 24,263 14.9%
SunTrust, overnight repo account .............................. 1,745 1.1% 1,745 1.1%
Short-term government agency securities ....................... 9,527 5.9% 9,527 5.8%
Dreyfus, Cash Management Plus money market fund ............... 3,021 1.9% 3,021 1.9%
Goldman Sachs, Prime Obligation money market fund ............ 5,398 3.4% 5,398 3.3%
Goldman Sachs, Money Market Portfolio money market fund ...... 4,436 2.8% 4,436 2.7%
-------- ----- -------- -----

Total money market and fund deposit accounts .................... 49,677 31.1% 49,677 30.5%
-------- ----- -------- -----

INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES:
Investment in PMC Limited Partnership ......................... 8,205 5.1% 8,205 5.0%
Investment in PMC Advisers, LTD ............................... 26 -- 26 --
Investment in PMC Capital Corp. 1996-A and PMC Trust 1996-A ... 262 0.2% 262 0.2%
Investment in PMC Funding Corp ................................ 92 0.1% 92 0.1%
-------- ----- -------- -----

Total investment in unconsolidated subsidiaries ................. 8,585 5.4% 8,585 5.3%
-------- ----- -------- -----

OTHER INVESTMENTS:
Excess servicing asset ........................................ 6,429 4.0% 6,429 3.9%
SunBank Miami, restricted investments ......................... 1,229 0.8% 1,229 0.7%
Real property owned ........................................... 303 0.2% 303 0.2%
-------- ----- -------- -----

Total other investments ......................................... 7,961 5.0% 7,961 4.8%
-------- ----- -------- -----

TOTAL INVESTMENTS (7) .............................................. $159,577 100.0% $163,067 100.0%
======== ===== ======== =====
</TABLE>

(1) Names have been omitted as disclosure to the public may be detrimental to
the small business.

(2) Balances include retained loans, loans sold into the secondary market
($122,061,000), the loans contributed to the Partnership ($42,384,000),
loan participations ($105,000) and the unguaranteed portion of First
Western loans sold in 1994 ($15,602,000). The balance does not include
approximately $93 million of loan portfolio serviced on behalf of PMC
Commercial Trust.

(3) Interest rates on loans receivable range from 8.0% to 14.9%.

(4) Balances are at face value of loans, less discounts aggregating $2,452,000
in accordance with Emerging Issues Task Force 88-11, discounts on
purchased loans of $413,000, deferred fee revenue of $960,000 and reserves
of $435,000.

(5) Interest or dividend rates on money market and fund deposit accounts range
from 4.8% to 6.1%.

(6) Interest rates on certificates of deposit range from 5.2% to 5.6%. All
certificates held by either PMC or any of its subsidiaries are less than
$100,000 in any one institution, generally have original maturities of 90
days and are considered to be cash equivalents.

(7) The aggregate cost of investments for Federal income tax purposes is
$160,972,000.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-8
<PAGE> 32
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest ................................................. $ 18,571 $ 16,330 $ 11,952
Premium income ........................................... 1,942 2,847 2,728
Other investment income, net ............................. 608 368 303
-------- -------- --------

Total investment income .................................... 21,121 19,545 14,983

Other income, net .......................................... 2,331 1,795 1,467
Equity in income (loss) of unconsolidated entities ......... 369 (78) --
-------- -------- --------

Total income ............................................... 23,821 21,262 16,450
-------- -------- --------

EXPENSES:
Interest ................................................. 5,708 5,049 3,615
Salaries and related benefits ............................ 3,180 2,778 2,552
General and administrative ............................... 843 1,053 900
Profit sharing plan ...................................... 217 190 168
Rent ..................................................... 213 203 176
Legal and accounting ..................................... 149 152 76
Small Business Administration fees ....................... 99 77 48
Directors and shareholders expense ....................... 45 39 43
-------- -------- --------

Total expenses ............................................. 10,454 9,541 7,578
-------- -------- --------

Net operating income ...................................... 13,367 11,721 8,872
-------- -------- --------

REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Loans written-off ...................................... (214) (309) (406)
Recoveries on loans written-off ........................ 35 40 68
Sale of assets ......................................... -- -- 3,346
Change in unrealized appreciation
(depreciation) on investments ........................ 32 (90) 143
-------- -------- --------

Total realized and unrealized gain (loss) on investments ... (147) (359) 3,151
-------- -------- --------

NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................... $ 13,220 $ 11,362 $ 12,023
======== ======== ========

PREFERRED DIVIDENDS ........................................ $ 251 $ 222 $ 112
======== ======== ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 11,002 10,768 10,650
======== ======== ========

EARNINGS PER COMMON SHARE .................................. $ 1.18 $ 1.03 $ 1.12
======== ======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-9
<PAGE> 33
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
NET
UNDISTRIBUTED UNREALIZED
ADDITIONAL NET DEPRECIATION
COMMON PAID-IN OPERATING ON
STOCK CAPITAL INCOME INVESTMENTS TOTAL
------ ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 ............ $ 106 $ 55,074 $ 863 $ (520) $ 55,523

Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 81,345 shares ...... 1 1,180 -- -- 1,181

Net income .......................... -- -- 11,880 143 12,023

Dividends:

Preferred ......................... -- -- (112) -- (112)

Common ($1.06 per common share) ... -- -- (11,244) -- (11,244)
------ ---------- ------------- ------------ ---------

BALANCE, DECEMBER 31, 1994 .......... 107 56,254 1,387 (377) 57,371

Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 187,005 shares ..... 2 2,175 -- -- 2,177

Net income .......................... -- -- 11,452 (90) 11,362

Dividends:

Preferred ......................... -- -- (222) -- (222)

Common ($1.08 per common share) ... -- -- (11,600) -- (11,600)
------ ---------- ------------- ------------ ---------

BALANCE, DECEMBER 31, 1995 .......... 109 58,429 1,017 (467) 59,088

Issuance of common stock pursuant
to dividend reinvestment and cash
purchase plan, 291,042 shares ..... 3 3,696 -- -- 3,699

Net income .......................... -- -- 13,188 32 13,220

Dividends:

Preferred ......................... -- -- (251) -- (251)

Common ($1.16 per common share) ... -- -- (12,853) -- (12,853)
------ ---------- ------------- ------------ ---------

BALANCE, DECEMBER 31, 1996 .......... $ 112 $ 62,125 $ 1,101 $ (435) $ 62,903
====== ========== ============= ============ =========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS

F-10
<PAGE> 34
PMC CAPITAL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and unrealized
gain (loss) on investments ..................................... $ 13,220 $ 11,362 $ 12,023
Adjustments to reconcile net operating income and realized
and unrealized gain (loss) on investments to net cash
provided by operating activities:
Loans funded, held for sale ................................... (21,915) (30,468) (32,249)
Proceeds from sale of guaranteed loans ........................ 19,988 30,299 32,989
Change in unrealized depreciation on investments
and loans written-off ....................................... 182 359 196
Unrealized premium income, net ................................ (5) 80 5
Depreciation and amortization ................................. 1,084 1,142 1,642
Accretion of loan discount and deferred fees .................. (957) (799) (803)
Deferred fees collected ....................................... 785 1,050 1,004
(Gain) loss on sale of assets ................................. -- 26 (43)
Gain on structured sale of loans .............................. -- -- (3,346)
Equity in (income) loss of unconsolidated subsidiaries ........ (369) 78 --
Net change in operating assets and liabilities:
Accrued interest receivable ............................... 347 (298) (45)
Other assets .............................................. 357 (166) 460
Accrued interest payable .................................. 8 401 202
Borrower advances ......................................... (465) (694) 371
Other liabilities ......................................... 1,812 503 1,485
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 14,072 12,875 13,891
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ..................................................... (48,239) (47,098) (43,100)
Principal collected and other adjustments ........................ 22,647 10,651 17,756
Proceeds from structured sale of loans ........................... -- -- 24,844
Purchase of furniture and fixtures and other assets .............. (127) (53) (828)
Purchase of government securities ................................ -- (3,942) (4,856)
Proceeds from maturities of government securities ................ -- 8,947 3,000
Proceeds from sale of assets ..................................... -- 233 1,010
Release of (investment in) restricted cash ....................... 556 (251) (1,533)
Investment in unconsolidated subsidiaries ........................ (893) (400) --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES .............................. (26,056) (31,913) (3,707)
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption of SBA debentures .......... 941 15,000 6,000
Proceeds from issuance of notes payable ......................... -- 10,000 --
Proceeds from issuance of common stock .......................... 2,834 1,399 535
Proceeds from issuance of preferred stock ....................... -- 2,000 2,000
Proceeds from unconsolidated subsidiary ......................... 37,803 -- --
Payment of dividends on common stock ............................ (11,935) (11,189) (9,774)
Payment of dividends on preferred stock ......................... (250) (204) (67)
Advances from (to) unconsolidated affiliates, net ............... 1,114 357 (370)
Payment of issuance costs on notes and debentures ............... (80) (447) (158)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 30,427 16,916 (1,834)
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 18,443 (2,122) 8,350

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 31,574 33,696 25,346
-------- -------- --------

CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 50,017 $ 31,574 $ 33,696
======== ======== ========

SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................... $ 5,433 $ 4,648 $ 3,413
======== ======== ========

Dividends reinvested ............................................ $ 880 $ 777 $ 646
======== ======== ========

Loans receivable acquired in exchange for SBA debentures ........ $ 158 $ 2,109 $ --
======== ======== ========

Reclassification from loans receivable to real property owned ... $ 453 $ 65 $ 649
======== ======== ========

Loans to facilitate sale of real property owned ................. $ -- $ 85 $ 1,345
======== ======== ========

Loans contributed to unconsolidated subsidiary, net ............. $ 45,145 $ -- $ --
======== ======== ========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-11
<PAGE> 35
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

PMC Capital, Inc. ("PMC" or "PMC Capital") is a diversified, closed-end
management investment company that has elected to operate as a business
development company under the Investment Company Act of 1940 (the "1940 Act").
PMC engages in the business of originating loans to small businesses either
directly or through its three principal subsidiaries: First Western SBLC, Inc.
("First Western"), PMC Investment Corporation ("PMIC") and Western Financial
Capital Corporation ("Western Financial"). First Western, PMIC and Western
Financial are registered under the 1940 Act as diversified, closed-end
management investment companies. In addition, PMC is either directly or
indirectly the sole shareholder or partner of PMC Advisers, LTD ("PMC
Advisers"), PMC Funding Corp. ("PMC Funding"), PMC Capital Corp. 1996-A ("PMC
Capital Corp."), PMC Trust 1996-A and PMC Capital Limited Partnership ( the
"Partnership"). PMC has elected to be taxed as a regulated investment company
and distributes substantially all of its taxable income as dividends to
shareholders.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of PMC and its
wholly owned regulated investment company subsidiaries (collectively, the
"Company"). Intercompany transactions have been eliminated in consolidation.

The accounts of PMC Advisers, PMC Funding, PMC Capital Corp., PMC Trust 1996-A
and the Partnership are accounted for by the equity method of accounting in
conformity with Federal securities laws.

CONSOLIDATED SUBSIDIARIES

First Western is a small business lending company ("SBLC") that originates
variable-rate loans which are partially guaranteed by the Small Business
Administration ("SBA") pursuant to its Section 7(a) Program (the "7(a)
Program"). While the eligibility requirements of the 7(a) Program vary by the
industry of the borrower and other factors, the general eligibility
requirements are that: (i) gross sales of the borrower cannot exceed $5.0
million (other than with respect to certain industries where eligibility is
determined based on the number of employees), (ii) liquid assets or real estate
equity of the borrower (and certain affiliates) cannot exceed the greater of
25% of the loan amount or $50,000 and (iii) the maximum aggregate SBA loan
guarantees to a borrower cannot exceed $750,000.

PMIC is a licensed specialized small business investment company ("SSBIC")
under the Small Business Investment Act of 1958, as amended ("SBIA"). PMIC uses
long-term funds provided by the SBA, together with its own capital, to provide
long-term, fixed-rate collateralized loans to eligible small businesses owned
by "disadvantaged" persons, as defined under the regulations of the SBA. As an
SSBIC, PMIC was eligible to obtain long-term, fixed-rate funding, generally at
below-market rates, from the SBA through the issuance of debentures (which are
guaranteed by the SBA and on which the interest rate is reduced through an SBA
subsidy by 3% during the first five years) and preferred stock.

Western Financial is a licensed small business investment company ("SBIC")
under the SBIA that provides fixed-rate loans to borrowers whether or not they
qualify as "disadvantaged". As an SBIC, Western Financial is eligible to obtain
long-term, fixed-rate funding, generally at below-market rates, from the SBA
through the issuance of debentures.

PMC originates loans to borrowers on a non-SBA supported basis using similar
criteria as that used for other loans that are funded under the SBA programs
utilized by the subsidiaries. These loans are made to borrowers who exceed the
eligibility requirements of the 7(a) Program or SBIC programs.

UNCONSOLIDATED ENTITIES

PMC Advisers, organized in July 1993, is a registered investment advisor under
the Investment Advisers Act of 1940 which acts as the investment advisor for
PMC Commercial Trust ("PMC Commercial" or the "Trust"), a Texas real estate
investment trust and an affiliate of PMC Capital.

F-12

<PAGE> 36

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

PMC Funding is a Florida corporation that holds assets on behalf of the
Company. PMC Capital is the sole shareholder of PMC Funding.

The Partnership was formed as a Delaware limited partnership in November 1996
to act as a special purpose affiliate of the Company. The Partnership was
established to acquire loans from the Company and to issue fixed-rate debt
through a private placement.

PMC Capital Corp. is a Delaware corporation formed in November 1996 to be the
independent trustee of the general partner of the Partnership. PMC Trust 1996-A
is a Delaware business trust formed in November 1996 to be the general partner
of the Partnership.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

VALUATION OF INVESTMENTS

Loans receivable are carried at the Board of Directors' estimate of fair value.
The Board of Directors has estimated the fair value of loans receivable to be
the loan principal balance less deferred fees and discounts, unless there is
doubt as to the realization of the loan (a "Problem Loan"). A valuation reserve
is established for a Problem Loan based on the creditor's payment history,
collateral value, guarantor support and other factors. Changes in market
interest rates are not considered in determining the estimate of fair value.

Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 60 days. If a loan or a portion of a loan is classified as doubtful
or is partially reserved or charged-off, the loan is classified as nonaccrual.
Loans that are on a current payment status or past due less than 60 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.

When selling the SBA-guaranteed portion of loans, the basis of the retained
portion of the loans has been reduced by the differential between the face
amount of the unguaranteed portion of the loans and the value as determined in
accordance with the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF") 88-11. This difference being the Retained Loan
Discount. At the time of sale, premium income has been reduced by the Retained
Loan Discount. Unless the underlying loans are paid in full or sold, the
Retained Loan Discount is amortized over the life of the underlying loan based
on an effective yield method. When a loan is prepaid, the remaining Retained
Loan Discount is recognized as an increase to interest income. When a loan is
sold, the remaining Retained Loan Discount is included as a reduction to the
basis of the retained portion of the underlying loan as a reduction of cost.

Excess servicing related to the sale of the guaranteed portion of SBA loans is
carried at the Board of Directors' estimate of fair value at the time of the
related loan sale and amortized on a pool basis over the estimated life of the
underlying pool of loans.

For those sales of the unguaranteed portion of SBA loans, an allowance has been
established which represents the Board of Directors' estimate of probable
credit losses to be incurred over the lives of the loans sold.

Deferred fees consist of non-refundable fees less direct loan origination
costs. These fees are being recognized over the expected life of the related
loan as an adjustment of yield.

Real property owned is carried at the Board of Directors' estimate of fair
value, based upon appraisals and other factors.

F-13

<PAGE> 37

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

Cash equivalents are carried at value, which approximates cost.

VALUATION OF DEBT

Debt incurred by the Company is valued at cost. Changes in market interest
rates are not considered in determining fair value as determined by the Board
of Directors.

PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are carried at their value,
which is cost less accumulated depreciation and amortization. Depreciation and
amortization is computed using accelerated and straight-line methods, with
estimated useful lives ranging from five to 15 years.

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

Realized gains or losses are measured by the difference between the proceeds
from the sale and the cost basis of the investment, without regard to
unrealized gains and losses previously recognized. The gain or loss calculated
also includes loans written-off or charged-down during the year and recoveries
of loans written-off or charged-down in prior years.

Other changes in the value of investments are included as changes in the
unrealized appreciation (depreciation) on investments in the statements of
income.

Realized gains on the sale of the unguaranteed portion of SBA loans are
recognized based upon the difference between the sales price as adjusted for
any excess servicing (less any allowance for credit losses) and the carrying
value of the assets (including the Retained Loan Discount).

INTEREST INCOME

Interest income on loans is accrued as earned. The accrual of interest is
generally suspended when the related loan becomes 60 days past due
("Non-accrual Loan"). Interest income on a Non-accrual Loan is recognized on
the cash basis.

Interest income includes the interest rate spread on loans sold to the
secondary market or through the securitization and sale of the unguaranteed
portion of SBA loans less the amortization of any excess servicing asset.

PREMIUM INCOME

For loans originated by the SBLC, gain on the sale of the SBA guaranteed
portion of such loans to the secondary market has been adjusted to reflect a
normal service fee for the future servicing rights retained by the Company.
Premium income represents the differential between the value attributable to
the sale of a loan to the secondary market and the principal balance (cost) of
the loan in accordance with EITF 88-11. The sale price includes the value
attributable to any excess servicing spread retained by the Company plus any
cash received.

DEFERRED CHARGES

Costs incurred in connection with the issuance of SBA debentures and notes
payable are included in deferred charges, deposits and other assets. These
costs are amortized over the life of the related obligation.

FEDERAL INCOME TAXES

The Company has elected to be treated as a regulated investment company by
meeting certain requirements of the Internal Revenue Code relating to the
distribution of its net investment income to shareholders. Thereby the Company
incurs no Federal income tax liability on such income. Based on its status as a
regulated investment company, the Company may elect to retain, deem to
distribute or distribute, in whole or in part, net long-term capital gains
realized on the disposition of its investments.

Any dividends declared by the Company in October, November or December of any
calendar year, payable to shareholders of record on a specified date in such
month and actually paid during January of the following year, may be treated as
if it were received by the shareholders on December 31 of the year declared.

F-14

<PAGE> 38

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

DISTRIBUTIONS TO SHAREHOLDERS

Distributions to shareholders are recorded on the ex-dividend date.

STATEMENT OF CASH FLOWS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the consolidated statement of cash flows.

EXCESS SERVICING ASSET

During 1995, the EITF reached a consensus on Issue No. 94-9,
"Determining a Normal Servicing Fee Rate for the Sale of an SBA Loan."
This consensus provides that for purposes of allocating the recorded
investment in a loan between the portion of the loan sold and the
portion retained, including any excess servicing asset, a normal
servicing fee of 40 basis points should be used. The Company had
historically used 50 basis points as a normal servicing fee. The
effect of this change in estimate was not material to the consolidated
financial statements during the year ended December 31, 1995.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 122

During May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights," an amendment to SFAS No. 65. The Company
elected to adopt this standard for its financial statement reporting
beginning in 1996. SFAS No. 122 prohibits retroactive application.
Accordingly, the Company's financial statement reporting for years
prior to 1996 was accounted for under SFAS No. 65, the predecessor
Statement to SFAS No. 122. The impact of SFAS No. 122 to the
consolidated financial statements was not significant to operations
during the year ended December 31, 1996.

SFAS NO. 125

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities."
Those standards have been established to provide a consistent
application of accounting based on a financial-components approach
which distinguishes the transfer of financial assets that are sales
from those that are secured borrowings. This approach is based upon
control of the related assets, whereby after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, and derecognizes
financial assets when control has been surrendered and liabilities are
extinguished. SFAS No. 125 is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and may only be applied prospectively.

SFAS NO. 128

In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. SFAS No. 128 is designed to
improve the earnings per share information provided in financial
statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability
of earnings per share data. SFAS No. 128 is effective for financial
statements for periods ending after December 15, 1997. In the opinion
of management, the effect of this pronouncement on earnings per share
is not considered significant.

SFAS NO. 129

In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure." SFAS No. 129 requires certain
disclosure about an entity's capital structure. SFAS No. 129 is
effective for financial statements for periods ending after December
15, 1997. In the opinion of management, the effect of this
pronouncement on the Company's financial position or results of
operations is not considered significant.

RECLASSIFICATION

Certain prior period amounts have been reclassified to conform to
current year presentation.

F-15

<PAGE> 39

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. LOANS RECEIVABLE:

Loans receivable consist primarily of loans made under SBIC, SSBIC and
SBLC programs established by the SBA and financings to businesses
outside of the SBA loan programs.

As an SBLC, First Western originates loans which are partially
guaranteed by the SBA and which are collateralized generally, with
first liens on real and/or personal property of the borrower. The SBA
guarantees repayment of up to 90% of the principal amount of the loans
originated by First Western. First Western sells, without recourse,
the guaranteed portion of its loans into the secondary market ("SBA
Guaranteed Sales") while retaining the rights to service the loans.
Funding for the 7(a) Program depends on the annual appropriations by
the U.S. Congress. At December 31, 1996, included in loans receivable
are approximately $3.8 million which represents the guaranteed portion
of First Western loans available for sale.

The principal balance of the loans serviced on behalf of third parties
by First Western was approximately $137.7 million and $150.1 million
at December 31, 1996 and 1995, respectively.

First Western's loans: (i) range in original principal amount from
$30,000 to $1,400,000, (ii) provide for a variable rate of interest
based on 1.0% to 2.75% above the then prevailing prime rate, (iii)
have a term of seven to 25 years, (iv) may be prepaid without penalty
and (v) require monthly payments covering accrued interest and
amortization of principal based in part on the remaining useful life
of the assets collateralizing the loans and on the borrowers' use of
loan proceeds.

PMIC and Western Financial originate loans that are payable in monthly
installments of principal and interest based upon four to 20 year
amortization periods, with the balance due at maturity. These loans
are collateralized with first liens on real and/or personal property
and are generally guaranteed by the principals of the borrower.

PMC originates loans to borrowers on a non-SBA supported basis, using
similar criteria for loans that are funded under the SBA programs
utilized by its three principal subsidiaries. These loans are: (i) to
borrowers who exceed the eligibility requirements of the 7(a) Program
or SBIC programs, (ii) payable in monthly installments of principal
and interest based upon four to 25 year amortization periods, with the
balance due at maturity, (iii) generally collateralized by real estate
and/or equipment and (iv) are generally guaranteed by the principals
of the borrower.

The Company's portfolio of investments consists of loans to borrowers
located principally in the southern portion of the United States. The
most significant concentration of loans were to borrowers in Texas,
Florida and Georgia, as noted below:

<TABLE>
<CAPTION>
Percentage of Loan Portfolio
State December 31,
----- ----------------------------
1996 1995
------ -----
<S> <C> <C>
Texas 38% 41%
Florida 13% 13%
Georgia 11% 10%
Other 38% 36%
--- ---
100% 100%
=== ===
</TABLE>

The activity in net unrealized depreciation on investments is as
follows:

<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Balance, beginning of period .......... $ 467,000 $ 377,000
Provision for losses .................. 182,000 399,000
Loans written-off ..................... (214,000) (309,000)
--------- ---------
Balance, end of period ................ $ 435,000 $ 467,000
========= =========
</TABLE>

F-16
<PAGE> 40

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. LOANS RECEIVABLE: (CONTINUED)

Loans receivable with an aggregate retained balance of $1.0 million
and $1.8 million were greater than 60 days past due, litigation
against the borrowers has commenced, or the loans are in the process
of liquidation at December 31, 1996 and 1995, respectively.

At December 31, 1996 and 1995, the recorded investment in loans
identified as impaired in accordance with SFAS No. 114 totaled $1.0
million and $1.5 million, respectively. Of this total, at December 31,
1996 and 1995, approximately $80,000 and $20,000, respectively,
related to loans with no valuation reserve, since the estimated fair
value of the collateral for each loan exceeds the respective loan
balance. Approximately $900,000 and $1.5 million of these loans at
December 31, 1996 and 1995, have a corresponding valuation allowance
of $412,000 and $446,000, respectively. At December 31, 1996 and 1995,
the Company has recognized $22,000 and $21,000 in valuation allowances
on identified problem loans of $317,000 and $300,000, respectively,
which were not deemed impaired. The Company did not recognize any
material amount of interest on impaired loans during the portion of
the period that they were impaired. Had these impaired loans performed
in accordance with their original terms, interest income of
approximately $113,000 and $168,000, respectively, would have been
recognized during the years ended December 31, 1996 and 1995.

In addition to the SBA Guaranteed Sales, First Western sells through
separate transactions, the unguaranteed portion of certain of its
originated loans through private placements ("SBA Unguaranteed
Sales"). First Western retains the right to service all such loans.
The guaranteed portions are sold to either dealers in government
guaranteed loans or institutional investors and certain of the
unguaranteed portions have been sold in privately negotiated
transactions between First Western and the purchaser.

PMC Capital contributed approximately $45.7 million (aggregate
principal balance due, including $34.4 million in loans transferred
from PMIC and Western Financial to PMC Capital) of loans to the
Partnership without recourse. (See Note 15.)

NOTE 3. EXCESS SERVICING ASSET:

By retaining the right to service the loan, First Western earns an
interest rate spread equal to the difference between the interest rate
on the loan and the interest rate paid to the purchaser on the sold
portion (this difference being the "Servicing Spread"). On SBA
Guaranteed Sales, First Western or PMC recognizes premium income by
receiving either a cash premium, an excess servicing right on the sale
or a combination of these elements. On SBA Guaranteed Sales that
involve receiving the maximum premium, First Western retains the
minimum Servicing Spread of 1% required by SBA regulations ("SBA
Minimum Servicing"). When receiving the maximum premium, PMC or First
Western would recognize as premium income the difference between the
amount received from the purchaser and the aggregate of the
outstanding principal amount of the guaranteed portion plus any value
of the Servicing Spread in excess of normal servicing (the "Excess
Servicing Spread").

On SBA Guaranteed Sales, First Western recognizes premium income equal
to the value of the Excess Servicing Spread, plus the difference, if
any, between the amount received from the purchaser and the
outstanding principal amount of the guaranteed portion sold as valued
in accordance with EITF 88-11.

The Board of Directors estimates the value of the Excess Servicing
Spread based upon various factors including premiums realized on
comparable transactions in the secondary market with a 1% servicing
fee being retained, comparable market bids with normal servicing rates
on SBA loans and the likelihood of prepayment. The value of the Excess
Servicing Spread is recognized as premium income at the time of the
sale and is concurrently capitalized as an asset on the Company's
balance sheet (the "Excess Servicing Asset"), which is then amortized
over the estimated life of the loan. In using this valuation method,
the Company incorporated assumptions that market participants would
use in estimating future net servicing income which included estimates
of the cost of servicing per loan, the discount rate, prepayment
speeds and default rates. During 1995, the Company completed a
reassessment of the method used to amortize the Excess Servicing
Asset. Historically, the Company had amortized the Excess Servicing

F-17

<PAGE> 41
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. EXCESS SERVICING ASSET: (CONTINUED)

Asset based upon the estimated life for each loan at the time of sale,
expectation of prepayments and other considerations. When a loan was
paid in full, the remaining unamortized Excess Servicing Asset, if
any, was charged against income. Considering the above factors and the
Company's historical portfolio performance, the Company extended to
the expected remaining life of the related loans, on a pooled basis,
the period over which the remaining Excess Servicing Asset would be
amortized for loans originated and sold prior to January 1, 1995. The
Excess Servicing Asset is amortized on an accelerated method over the
estimated remaining lives of the related pool assets. There can be no
assurance of the accuracy of management's prepayment estimates. If
prepayments occur at a faster rate than expected, the amortization of
the Excess Servicing Asset will be accelerated as a charge to
earnings. If actual prepayments occur at a slower rate than estimated,
cash flows from the Excess Servicing Spread would exceed previously
expected amounts and total income in future periods would be enhanced.

The sale of the unguaranteed portion of SBA loans has also generated
an Excess Servicing Asset to the extent that the Servicing Spread
exceeds the normal servicing fee. (See Note 8.)

Pursuant to SFAS No. 122, impairment of the Excess Servicing Asset is
measured based on its fair value. In measuring impairment at December
31, 1996, the servicing portfolio was evaluated based upon the
predominant risk characteristics which the Company has determined to
be prepayment and payment default risks. The Company evaluated the
serviced portfolio for both the Excess Servicing Asset related to SBA
Guaranteed Sales and related to the sale of the unguaranteed portion
of SBA loans in 1994 (the "SBA Unguaranteed Sale"). Based upon current
prepayment assumptions, estimates of default rates and a discount
factor considering the current interest rate environment, it has been
determined that there was no impairment reserve required as of
December 31, 1996. As a result of an increase in the rate of
prepayment of loans during 1996, the Company accelerated the
amortization of its Excess Servicing Asset related to the SBA
Unguaranteed Sale by $780,000. The related allowance for credit losses
on loans sold was also adjusted by a similar amount as a result of
these prepayments. The acceleration of the Excess Servicing Asset
amortization is included in the schedule below.

The activity in the excess servicing asset is summarized as follows:

Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year ...... $ 7,514,000 $ 7,694,000 $ 5,108,000
Additions, net of allowances .... 707,000 791,000 4,078,000
Less: amortization, net ........ (1,792,000) (971,000) (1,492,000)
----------- ----------- -----------
Balance, end of year ............ $ 6,429,000 $ 7,514,000 $ 7,694,000
=========== =========== ===========
</TABLE>

Additions in 1994 include $3,047,000 relating to the Excess Servicing
Spread from the SBA Unguaranteed Sale.

NOTE 4. PROPERTY AND EQUIPMENT:

At December 31, 1996 and 1995, property and equipment consisted of the
following:

1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment ..................... $319,000 $288,000
Leasehold improvements ...................... 150,000 150,000
Automobiles ................................. 13,000 13,000
-------- --------
482,000 451,000
Less:accumulated depreciation ...... 301,000 252,000
-------- --------
$181,000 $199,000
======== ========
</TABLE>

Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 was approximately $49,000, $57,000 and $75,000,
respectively.

F-18
<PAGE> 42
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. NOTES PAYABLE:

PMC has a $15 million uncollateralized revolving credit facility which
expires May 1998. Advances pursuant to the credit facility bear
interest at the Company's option at the bank's prime rate less 50 basis
points or the London Interbank Offering Rate (LIBOR) plus 175 basis
points. The credit facility requires the Company to meet certain
covenants, the most restrictive of which includes that the ratio of net
charge-offs to net loans receivable will not exceed 2%, and the ratio
of assets to senior debt (as defined in the note agreement) will not
fall below 150%. At December 31, 1996, the Company had no amounts
outstanding pursuant to this credit facility and the Company was in
compliance with all covenants of this facility. At December 31, 1995,
PMC had a $10 million revolving credit facility which expired in 1996.

PMC has consummated $35 million in private placements of
uncollateralized notes. These borrowings have been utilized to fund
commitments of the non-SBA lending program. The notes require the
Company to meet certain covenants (terms are as defined in the
applicable note agreement), the most restrictive of which require; (i)
that net loans receivable exceed 150% of senior funded debt, (ii) the
increase in the Company's loan valuation reserve for any 12 month
period must not exceed 3% of net loans receivable and (iii) the
Company's consolidated earnings plus interest expense must exceed 150%
of interest expense. At December 31, 1996, the Company was in
compliance with all of the covenants of these notes. At December 31,
1996 outstanding uncollateralized notes were as follows:

Interest Final
Date Rate Amount Maturity
- ----------------- ---------------- -------------- -----------------
<S> <C> <C> <C>
July 19, 1993 7.20% $20,000,000(2) July 19, 2001
December 15, 1993 6.97% 5,000,000 December 15, 2002
April 19, 1995 8.60% 5,000,000 April 19, 2003
April 19, 1995 LIBOR +1.3% (1) 5,000,000 April 19, 2004
-----------
$35,000,000
===========
</TABLE>

(1) Reset quarterly, 6.83% at December 31, 1996.
(2) Payable in three equal annual installments commencing July
19, 1999.

Principal payments required on the notes at December 31, 1996, are as
follows:

Year Ending
December 31, Amount
------------ -----------
<S> <C>
1999 $6,666,667
2000 6,666,667
2001 6,666,666
2002 5,000,000
2003 5,000,000
2004 5,000,000
-----------
$35,000,000
===========
</TABLE>

F-19
<PAGE> 43
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. SBA DEBENTURES PAYABLE:

Debentures payable represent amounts due to the SBA as a result of
borrowing made pursuant to the SBIA.

At December 31, 1996, the maturities, interest rates and principal
payments on the SBA debentures were as follows:

Maturity Date Interest Rate Amount
-------------------- ---------------- -----------
<S> <C> <C>
February 1, 1997 (1) 7.950% $ 2,480,000
September 1, 1997 (2) 10.350% 800,000
February 1, 1998 8.850% 1,500,000
August 18, 1999 (3) 8.125% 1,000,000
September 1, 1999 8.800% 2,500,000
December 1, 1999 (2) 8.600% 650,000
January 2, 2000 (4) 7.875% 3,000,000
March 1, 2000 9.350% 1,000,000
June 1, 2000 (2) 9.300% 300,000
June 1, 2000 (5) 9.300% 2,000,000
June 1, 2000 (6) 9.300% 1,030,000
September 1, 2000 9.600% 4,310,000
December 1, 2002 (2) 7.510% 510,000
September 1, 2004 (7) 5.200% 3,000,000
September 1, 2004 8.200% 3,000,000
March 1, 2005 (8) 4.840% 3,000,000
June 1, 2005 (9) 3.690% 5,000,000
September 1, 2005 (10) 3.875% 7,000,000
September 1, 2006 7.590% 2,490,000
-----------
$44,570,000
===========
</TABLE>

(1) Paid off in February 1997.

(2) During April 1995, the Company assumed $2,260,000 in SBA
debentures from a non-affiliated small business investment
corporation in exchange for loans receivable of $2,109,062
and cash of $150,938. The loans acquired were initially
originated by the Company and a portion sold to the
non-affiliated small business investment corporation. All of
these loans were purchased at par and were performing
according to their terms at the time of reacquisition.

(3) The interest rate on this debenture was 5.125% through August
18, 1994, as a result of the subsidy program provided by the
SBA.

(4) The interest rate on this debenture was 4.875% through
January 2, 1995, as a result of the subsidy program provided
by the SBA.

(5) The interest rate on this debenture was 6.300% through June
1, 1995, as a result of the subsidy program provided by the
SBA.

(6) During May 1996, the Company assumed $1,030,000 in SBA
debentures from a non-affiliated SBIC in exchange for loans
receivable of approximately $200,000 and cash of
approximately $900,000. The loans acquired were initially
originated by the Company and a portion sold to the
non-affiliated SBIC. All of these loans were purchased at par
and were performing according to their terms at the time of
reacquisition.

F-20

<PAGE> 44

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. SBA DEBENTURES PAYABLE: (CONTINUED)

(7) The interest rate will increase to 8.200% in September 1999
until maturity.

(8) The interest rate will increase to 7.840% in March 2000 until
maturity.

(9) The interest rate will increase to 6.690% in June 2000 until
maturity.

(10) The interest rate will increase to 6.875% in September 2000
until maturity.

NOTE 7. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

During 1991, the Company entered into an agreement to lease its
corporate office space for a 15 year period from a corporation, a
majority of whose principals are officers and directors of the
Company. Leasehold improvements of $150,000 have been paid to the
corporation for costs incurred during the build-out of the leased
premises. The lease has been amended to allow the Company to terminate
such lease without penalty upon 60 days written notice to the
corporation. The Company has also entered into agreements to lease
additional space in the same building for one year periods.

The independent members of the Board of Directors decide on an annual
basis whether PMC will continue the leases and the annual lease
payment.

At December 31, 1996, the Company has additional agreements to lease
office space in Florida and Georgia.

Rental expense amounted to approximately $213,000 , $203,000 and
$176,000 during the years ended December 31, 1996, 1995 and 1994,
respectively.

Future minimum lease payments at December 31, 1996 are as follows:

Year Ending
December 31, Amount
------------ -----------
<S> <C>
1997 $ 227,000
1998 225,000
1999 226,000
2000 223,000
2001 235,000
Thereafter 1,364,000
----------
$2,500,000
==========
</TABLE>

LOAN COMMITMENTS

Loan commitments outstanding at December 31, 1996, to various
prospective small business companies, including the unfunded portion
of projects in the construction phase, amounted to approximately $45.9
million. Of these commitments, $5.0 million are for loans to be
originated by First Western, a portion of which will be sold pursuant
to SBA Guaranteed Sales. These commitments are made in the ordinary
course of the Company's business and in management's opinion, are
generally on the same terms as those to existing borrowers.
Commitments to extend credit are agreements to lend to a customer
provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and require payment
of a fee. Since some commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.

F-21

<PAGE> 45

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

EMPLOYMENT AGREEMENTS
The Company has employment contracts with certain of its officers for
terms expiring June 1999. Annual remuneration during the term of the
contracts range from $125,000 to $300,000. Future minimum payments
under these contracts are as follows:

Year Ending
December 31, Amount
------------ ----------
<S> <C>
1997 $1,148,000
1998 1,075,000
1999 538,000
----------
$2,761,000
==========

</TABLE>

During the years ended December 31, 1996, 1995 and 1994 compensation
to officers was approximately $1,382,000, $1,229,000 and $1,243,000,
respectively.

LITIGATION
In the normal course of business, the Company is subject to various
proceedings and claims, the resolution of which will not, in
management's opinion, have a material adverse effect on the Company's
consolidated financial position or results of operations.

NOTE 8. CREDIT AND INTEREST RATE RISK:

In connection with First Western's structured sale of a 94% portion of
certain unguaranteed SBA loans during December 1994, the Company is
subject to credit risk. Total proceeds from the sale amounted to $24.8
million. Pursuant to the structured sale, the investors' protection
from losses is provided by: (i) the subordination of the Company's
right to receive payment on loans receivable totaling approximately
$1.6 million at the time of sale ($1.0 million at December 31, 1996),
(ii) the subordination of the Company's right to receive the Servicing
Spread on those loans sold in the securitization ($1,335,000 at
December 31, 1996, included in Excess Servicing Asset on the
accompanying balance sheet) and (iii) cash deposits provided by the
Company. At December 31, 1996, approximately $1,229,000 of cash
deposits held in interest bearing accounts were restricted. In
connection with this structured sale, a valuation reserve of $2.6
million was established at the time of sale. At December 31, 1996 the
valuation reserve was $1,533,000.

In connection with the Company's investment in the Partnership, all
payments of principal and interest on the loans contributed to the
Partnership are to be deposited with the trustee and are used to pay
the noteholders the required monthly principal and interest then due
on the notes pursuant to the Trust Indenture (as defined below) prior
to releasing any excess funds to the Partnership free and clear of the
Trust Indenture. The Partnership's obligations to the noteholders are
also collateralized by: (i) the differential between the outstanding
principal balance remaining due on the underlying loans held by the
Partnership and the balance due the noteholders, (ii) the reserve
account established to provide liquidity to the noteholders ( the
"Reserve Account") and (iii) money held in the operating accounts of
the Partnership to the extent they are restricted pursuant to the
terms of the trust indenture established by the noteholders, the
Company and the Partnership (the "Trust Indenture"). The Trust
Indenture provides for several covenants which would require, under
certain circumstances, that the excess cash , after payment of the
required principal and interest to the Partnership Noteholders (the
"Excess Cash"), be retained in the Reserve Account until the covenants
are in compliance. Of the assets of the Partnership at December 31,
1996, approximately $280,000 was Excess Cash which was distributed to
the Partners in January 1997.

The Company has a fundamental policy that requires investment of at
least 25% of its total assets in the lodging industry, and allows
investment of up to 100% of total assets in this industry. At December
31, 1996 and 1995, loans to businesses in the lodging industry
comprised 44% and 55% of its total assets, respectively, and 77% and
78% of

F-22

<PAGE> 46

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. CREDIT AND INTEREST RATE RISK: (CONTINUED)

its loans receivable, net, respectively. There can be no assurance
that the Company will continue to experience the positive results it
has historically acheived from these lending activities or that market
conditions will enable the Company to maintain or increase this level
of loan concentration. Any economic factors that negatively impact the
lodging industry could have a material adverse effect on the business
of the Company. Additionally, loans to businesses located in Texas,
Florida and Georgia currently comprise approximately 38%, 13% and 11%
of the Company's outstanding loan portfolio, respectively. A decline
in economic conditions in any of these states may adversely affect the
Company.

Net income of the Company is effected by the spread between the rate
at which it borrows funds and the rate at which it loans these funds.
The portfolios of PMC Capital, Western Financial and PMIC have
typically been long-term and at fixed rates and the borrowed funds of
these companies are typically long-term and at fixed rates. First
Western originates variable rate loans and has utilized equity capital
of PMC Capital and a structured sale in 1994 to obtain funds necessary
to originate loans. If the yield on loans originated by the Company
with funds obtained from borrowings or the issuance of preferred stock
fails to cover the cost of such funds, the Company's cash flow will be
reduced. During periods of changing interest rates, interest rate
mismatches could negatively impact the Company's net income, dividend
yield and the market price of the Common Stock. Most of the fixed rate
loans that the Company originates have prepayment penalties. If
interest rates decline, the Company may experience significant
prepayments. Such prepayments, as well as scheduled repayments, are
likely to be reloaned or invested at lower rates, which may have an
adverse effect on the Company's ability to maintain distributions at
existing levels.

NOTE 9. CUMULATIVE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY:

PMIC has outstanding 30,000 shares of $100 par value, 3% cumulative
preferred stock (the "3% Preferred Stock") and 40,000 shares of $100
par value, 4% cumulative preferred stock (the "4% Preferred Stock").
The 3% Preferred Stock and the 4% Preferred Stock (collectively the
"Preferred Stock") are held by the SBA pursuant to the SBIA.

PMIC is entitled to redeem, in whole or in part, the 3% Preferred
Stock by paying 35% of the par value of these securities plus
dividends accumulated and unpaid on the date of redemption. While the
3% Preferred Stock may be redeemed, redemption is not mandatory.
Dividends of approximately $90,000 on the 3% Preferred Stock were
recognized during each of the years ended December 31, 1996, 1995 and
1994.

The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from
the date of issuance. Dividends of approximately $160,000, $132,000
and $22,000 were recognized on the 4% Preferred Stock during the years
ended December 31, 1996, 1995 and 1994, respectively.

Neither series of Preferred Stock has any preemptive or conversion
rights. The Preferred Stock provides for a liquidation preference in
the amount of $100 per share plus accrued and unpaid dividends.

NOTE 10. SHAREHOLDERS' EQUITY:

The Company has a dividend reinvestment and cash purchase plan (the
"Plan") for up to 1,000,000 shares of common stock. As amended,
participants in the Plan have the option to reinvest all or a portion
of dividends received plus an optional cash purchase of up to $10,000
per month. The purchase price of the shares is 98% of the average of
the high and low price of the common stock as published for the five
trading days immediately prior to the dividend record date or prior to
the optional cash payment purchase date, whichever is applicable.
During the years ended December 31, 1996, 1995 and 1994, the Company
issued 291,042, 187,005 and 81,345 shares of common stock pursuant to
the Plan for proceeds (through cash and the reinvestment of dividends)
of approximately $3.7 million, $2.2 million and $1.2 million,
respectively.

F-23

<PAGE> 47

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. EARNINGS PER COMMON SHARE COMPUTATIONS:

The computations of earnings per common share are based on the
weighted average number of shares outstanding of the Company. Earnings
are defined as the net operating income and realized and unrealized
gain (loss) on investments and are reduced by the preferred stock
dividend requirements of PMIC. Preferred stock dividend requirements
were approximately $250,000, $222,000 and $112,000 during the years
ended December 31, 1996, 1995 and 1994, respectively. The weighted
average number of shares used in the computations of earnings per
common share were 11.0 million, 10.8 million and 10.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively.

NOTE 12. BORROWER ADVANCES:

The Company finances several projects during the construction phase.
At December 31, 1996, the Company was in the process of funding
approximately $15.1 million in construction projects, of which $5.9
million in funding remained. As part of the monitoring process to
verify that the borrowers' cash equity is utilized for its intended
purpose, the Company deposits amounts received from the borrowers and
releases the funds upon presentation of appropriate supporting
documentation. The Company had approximately $1.8 million and $2.3
million in funds held on behalf of borrowers at December 31, 1996 and
1995, respectively.

NOTE 13. PROFIT SHARING PLAN:

The Company has a profit sharing plan available to its full-time
employees after one year of employment. Vesting increases ratably to
100% after the sixth year of employment. Pursuant to the profit
sharing plan, the Company has expensed approximately $217,000,
$188,000 and $168,000 during the years ended December 31, 1996, 1995
and 1994, respectively. Contributions to the profit sharing plan are
at the discretion of the Board of Directors.

NOTE 14. RELATED PARTY TRANSACTIONS:

Pursuant to agreements between PMC Capital and its wholly owned
subsidiaries, during the three years in the period ended December 31,
1996, PMC provided certain services to the subsidiaries at no cost.
These services and costs include salaries, rent and other general
corporate expenses. However, PMC retains all cash premiums on First
Western's SBA Guaranteed Sales ($1,937,000, $2,927,000 and $2,734,000
during the years ended December 31, 1996, 1995 and 1994, respectively)
as compensation for these services and for the working capital
provided by PMC Capital to First Western.

During December 1993, PMC Advisers entered into an investment
management agreement with the Trust. The officers and certain trust
managers of the Trust are officers and directors of PMC. Pursuant to
its agreement with PMC Advisers, through June 30, 1996 the Trust paid
PMC Advisers a base annual servicing fee of 0.50% of the average
assets (as defined in the agreement) of the Trust under management
plus an advisory fee of 1% of the average invested assets (as defined
in the agreement ) of the Trust. In addition, PMC Advisers earned an
advisory fee up to 1% of the average invested assets upon meeting
certain criteria in regards to investment returns to the Trust
shareholders. All such advisory fees were reduced by 50% with respect
to the value of average invested assets that exceed the beneficiaries'
equity of the Trust as a result of leverage or the issuance of
preferred shares.

Effective July 1, 1996, the Investment Management Agreement was
amended to include compensation to PMC Advisers for its assistance in
any issuance of debt or equity securities for PMC Commercial. Such
compensation includes a consulting fee based on (i) 12.5% of any
offering fees incurred by PMC Commercial pursuant to the public
offering or private placement of its common shares, and (ii) 50% of
any issuance or placement fees incurred by PMC Commercial pursuant to
the public offering or private placement of its debt securities or
preferred shares of beneficial interest. Of the amount of servicing
and advisory fees paid or payable to PMC Advisers as of December 31,
1996, approximately $251,000 was earned pursuant to a public offering
of common shares by PMC Commercial in July 1996.

F-24

<PAGE> 48

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. RELATED PARTY TRANSACTIONS: (CONTINUED)

Pursuant to the amended Investment Management Agreement, the quarterly
servicing and advisory fee (the "Base Fee") is based on the assets and
capital structure of PMC Commercial. As defined in the Investment
Management Agreement, the Base Fee is the sum of (i) 0.4167% (1.67% on
an annual basis) of the lesser of (a) the average quarterly value of
common equity capital or (b) the average quarterly value of all
invested assets and (ii) 0.21875% (0.875% on an annual basis) of the
difference between the average quarterly value of all invested assets
and the average quarterly value of common equity capital. For purposes
of calculating the Base Fee, the average quarterly value of common
equity capital shall not be increased by the proceeds received from
any public offering of common shares by PMC Commercial (other than
pursuant to its dividend reinvestment plan or any employee/trust
manager benefit plan) during the 180 calendar day period immediately
following such public offering. In no event will the aggregate annual
fees charged under the new agreement be greater than that which would
have been charged had there been no revision to the investment
management agreement.

Pursuant to the applicable investment management agreement between PMC
Advisers and PMC Commercial, PMC Advisers earned $1.6 million, $1.2
million and $429,000 during the years ended December 31, 1996, 1995 and
1994, respectively.

NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES:

As described in Note 1, PMC Advisers, PMC Funding, PMC Capital Corp.,
PMC Trust 1996-A and the Partnership are accounted for under the
equity method of accounting. The condensed balance sheet and income
statement, as applicable, for each of the entities on an individual
basis are provided for below (rounded to the nearest thousand).

PMC ADVISERS

The following is the condensed balance sheet for PMC Advisers as of
December 31, 1996 and 1995 and the condensed statements of income for
the years ended December 31, 1996, 1995 and 1994:

CONDENSED BALANCE SHEET

DECEMBER 31,
-------------------
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents .................. $ 63,000 $140,000
Due from affiliate ......................... 649,000 841,000
Other assets ............................... 7,000 2,000
-------- --------
$719,000 $983,000
======== ========

LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to parent ......................... $395,000 $365,000
Deferred fee revenue .................. 286,000 592,000
Other liabilities ..................... 12,000 --
-------- --------
693,000 957,000
-------- --------
SHAREHOLDER'S EQUITY:
Common stock .......................... 1,000 1,000
Additional paid-in capital ............ 25,000 25,000
-------- --------
26,000 26,000
-------- --------
$719,000 $983,000
======== ========
</TABLE>

F-25
<PAGE> 49

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1996 1995 1994
---------- ---------- ----------
INCOME:
<S> <C> <C> <C>
Management fee ................ $1,562,000 $1,190,000 $ 429,000
Other income .................. 14,000 55,000 194,000
---------- ---------- ----------
Total income ............... 1,576,000 1,245,000 623,000
---------- ---------- ----------
EXPENSES:
General and administrative .... 1,572,000 1,242,000 620,000
Other ......................... 4,000 3,000 3,000
---------- ---------- ----------
Total expenses ............. 1,576,000 1,245,000 623,000
---------- ---------- ----------

NET INCOME................. $ -- $ -- $ --
========== ========== ==========
</TABLE>

PMC Capital allocates overhead to PMC Advisers to the extent that PMC
Advisers utilizes the staff and facilities of PMC Capital. The
overhead allocated during the years ended December 31, 1996, 1995 and
1994, were $1,571,000, $1,190,000 and $620,000, respectively. These
amounts are included in Other income, net on the accompanying
Statements of Operations. In no event will the allocated expenses
exceed the income available from the operations of PMC Advisers.

PMC FUNDING CORP.

The following is the condensed balance sheet for PMC Funding Corp. as
of December 31, 1996 and 1995 and the condensed statements of income
for the years ended December 31, 1996 and 1995:

CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................... $ 81,000 $ 277,000
Property and equipment ............................. 628,000 646,000
Other assets ....................................... 26,000 7,000
---------- ----------
$ 735,000 $ 930,000
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Due to Parent ................................. $ 642,000 $ 766,000
Other liabilities ............................. -- 162,000
---------- ----------
642,000 928,000
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock and additional paid-in capital ... 451,000 401,000
Accumulated deficit ........................... (358,000) (399,000)
---------- ----------
93,000 2,000
---------- ----------
$ 735,000 $ 930,000
========== ==========
</TABLE>

F-26
<PAGE> 50
PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
INCOME:
Investment income ........................... $ 3,000 $ 3,000
Other income, net ........................... 173,000 46,000
---------- ----------
176,000 49,000
---------- ----------
EXPENSES:
General and administrative expense .......... 135,000 126,000
---------- ----------

NET INCOME (LOSS) ...................... $ 41,000 $ (77,000)
========== ==========
</TABLE>

PMC CAPITAL LIMITED PARTNERSHIP

On November 13, 1996, the Partnership (a newly formed special purpose
affiliate of the Company) completed a private placement of
approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $45.7 million of loans
contributed by PMC Capital to the Partnership. In connection with this
private placement, the Notes were given a rating of "Aa2" by Moody's
Investors Service. The Partnership has the exclusive obligation for
the repayment of the Notes, and the holders of the Notes have no
recourse to PMC Capital or its other subsidiaries or their assets in
the event of nonpayment of the loans. The net proceeds from the
issuance of the Notes (approximately $37.5 million before giving
effect to payment of offering costs of approximately $396,000 and
after giving effect to the funding of a $2.04 million reserve fund
held by the trustee as collateral) were distributed to PMC Capital.
The net effect of the contributed loans less the distributed funds
comprises the limited partners capital on the following condensed
statement of assets, liabilities and partners' capital.

The following is the condensed statement of assets, liabilities and
partners' capital for PMC Capital Limited Partnership as of December
31, 1996 and for the period November 8, 1996 (inception) to December
31, 1996:

CONDENSED STATEMENT OF
ASSETS, LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Loans receivable, net ............................................ $41,805,000
Restricted Investments - money market funds and cash ............. 5,444,000
Due from affiliates .............................................. 826,000
Deferred borrowing costs and other assets ........................ 640,000
-----------

$48,715,000
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ............................................... $40,183,000
Accrued interest payable .................................... 233,000
Due to affiliates ........................................... 83.000
-----------
40,499,000
-----------

PARTNERS' CAPITAL:
General Partner's interest ................................. 11,000
Limited Partner's interest ................................. 8,205,000
-----------
8,216,000
-----------
$48,715,000
===========
</TABLE>

F-27

<PAGE> 51

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. UNCONSOLIDATED WHOLLY-OWNED ENTITIES: (CONTINUED)

CONDENSED STATEMENT OF INCOME
FOR THE PERIOD NOVEMBER 8, 1996 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>

INCOME:
<S> <C>
Investment income ...................... $710,000
--------
EXPENSES:
Interest expense ....................... 362,000
General and administrative expense ..... 20,000
--------
382,000
--------
NET INCOME .................................. $328,000
========
</TABLE>

PMC CAPITAL CORP. AND PMC TRUST 1996-A:

The following is the condensed combined balance sheet for PMC Capital
Corp. (the independent trustee of the general partner for PMC Capital
Limited Partnership) and PMC Trust 1996-A (the general partner for PMC
Capital Limited Partnership), as of December 31, 1996. PMC Capital
Corp. and PMC Trust 1996-A did not have any income statement activity
from inception through December 31, 1996 other than approximately
$3,000 earned pursuant to PMC Trust 1996-A's interest in the
Partnership of which $2,000 was distributed as a dividend to PMC
Capital:

CONDENSED COMBINED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Cash ............................................................ $ 1,000
Investment in Partnership ....................................... 11,000
Due from parent ................................................. 250,000
------------
$ 262,000
============
SHAREHOLDERS' AND BENEFICIAL OWNERS EQUITY
Common stock and beneficial owners beneficial interest .......... 261,000
Retained earnings ............................................... 1,000
------------
$ 262,000
============
</TABLE>

F-28
<PAGE> 52

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16. COMBINED FINANCIAL STATEMENTS:

As described in Note 1, the consolidated financial statements include
the accounts of PMC and its wholly owned regulated investment company
subsidiaries. The accounts of PMC Advisers, PMC Funding Corp., the
Partnership, PMC Capital Corp. and PMC Trust 1996-A (the
"Unconsolidated Entities") are accounted for by the equity method of
accounting in conformity with Federal securities law. The following is
the condensed combined balance sheet as of December 31, 1996 and the
condensed combined income statement for the year ended December 31,
1996 for the Company and the Unconsolidated Entities.

CONDENSED COMBINED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>

DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Investments at value:
Loans receivable, net ..................................... $ 135,159
Cash equivalents .......................................... 49,816
Excess servicing asset .................................... 6,429
Restricted investments and real property owned ............ 6,976
------------
198,380
Other assets ................................................... 6,222
------------
Total assets .............................................. $ 204,602
============

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
SBA debentures payable .................................... $ 44,570
Notes payable ............................................. 75,183
Other liabilities ......................................... 14,946
------------
134,699
------------
Cumulative preferred stock of subsidiary .................. 7,000
------------

SHAREHOLDERS' EQUITY:
Common Stock .............................................. 112
Additional paid-in capital ................................ 62,125
Undistributed net operating income ........................ 1,101
Net unrealized depreciation on investments ................ (435)
------------
62,903
------------
Total liabilities and shareholders' equity ................ $ 204,602
============
</TABLE>

CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands)

<TABLE>
<S> <C>
INCOME:
Investment income ......................................... $ 21,835
Other income, net ......................................... 2,504
------------
Total income ........................................... 24,339
------------
EXPENSES:
Salaries and related benefits ............................. 3,180
General and administrative expenses ....................... 998
Interest .................................................. 6,070
Other ..................................................... 724
------------
Total expense .......................................... 10,972
------------
Net operating income ........................................... 13,367
Realized and unrealized gain (loss) on investments ............. (147)
------------
NET OPERATING INCOME AND REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS ............................. $ 13,220
============
</TABLE>

F-29

<PAGE> 53

PMC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS:

The estimates of fair value as required by SFAS No. 107 differ from
the value of the financial assets and liabilities determined by the
Board of Directors primarily as a result of the effects of discounting
future cash flows. Considerable judgement is required to interpret
market data and develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts of the Company could realize in a current market exchange or
the amount that ultimately will be realized by the Company upon
maturity or disposition.

The estimated fair values of the Company's financial instruments
pursuant to SFAS No. 107 are as follows:

<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Loans receivable, net ....... $ 93,354 $ 97,048 $110,499 $114,353
Cash and cash equivalents ... 50,017 50,017 31,574 31,574
Restricted investments ...... 1,229 1,229 1,785 1,785
Excess servicing asset ...... 6,429 6,429 7,514 7,514

Liabilities:
Debentures payable .......... 44,570 42,864 43,540 42,362
Notes payable ............... 35,000 34,310 35,000 34,881

</TABLE>

Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent loans
on the estimation of the fair values described above is not
considered to have a material effect and accordingly, delinquent
loans have been disregarded in the valuation methodologies employed.

Cash and cash equivalents, restricted investments and excess
servicing asset: The carrying amount is a reasonable estimation of
fair value.

Debentures payable and notes payable: The estimated fair value is
based on present value calculation based on prices of the same or
similar instruments after considering risk, current interest rates
and remaining maturities.

NOTE 18. WRITE-DOWN OF REGISTRATION COSTS:

In 1994, PMC Investment Corporation ("PMIC") filed a registration
statement with the Securities and Exchange Commission to register
shares of its common stock. The Company had incurred approximately
$136,000 in costs in connection with the filing of the registration
statement. PMIC, a licensed specialized small business investment
company, uses long-term funds provided by the SBA through the
issuance of Debentures (which are guaranteed by the SBA and on which
the interest rate is reduced through an SBA subsidy of 3% during the
first five years). Due to the lack of availability of SBA subsidized
Debentures or preferred stock for the SSBIC program, the Company
believed the registration would not be completed in the near term.
Accordingly, during the year ended December 31, 1995, the Company
expensed the costs of registration.

F-30
<PAGE> 54
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS

INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ................ $ 93,354 $ -- $ 93,354 $ 24,074
Cash equivalents ..................... 49,677 -- 49,677 13,178
Investment in subsidiaries ........... 8,585 (24,428)(a) 33,013 33,013
Excess servicing asset, net .......... 6,429 -- 6,429 --
Restricted investments ............... 1,229 -- 1,229 --
Real property owned .................. 303 -- 303 --
------------ ------------ ------------ ------------

Total investments ...................... 159,577 (24,428) 184,005 70,265
------------ ------------ ------------ ------------

OTHER ASSETS:
Receivable for loans sold ............ 2,508 -- 2,508 222
Due from affiliates .................. 1,097 (33,466)(b) 34,563 34,494
Deferred charges, deposits and
other assets ....................... 885 -- 885 216
Accrued interest receivable .......... 376 -- 376 157
Cash ................................. 340 -- 340 140
Property and equipment, net .......... 181 -- 181 82
------------ ------------ ------------ ------------

Total other assets ..................... 5,387 (33,466) 38,853 35,311
------------ ------------ ------------ ------------

TOTAL ASSETS ........................... $ 164,964 $ (57,894) $ 222,858 $ 105,576
============ ============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
SBA debentures payable ............... $ 44,570 $ -- $ 44,570 $ --
Notes payable ........................ 35,000 -- 35,000 35,000
Accounts payable ..................... 4,145 -- 4,145 132
Dividends payable .................... 3,635 -- 3,635 3,572
Allowance for credit losses
on loans sold ...................... 1,533 -- 1,533 --
Borrower advances .................... 1,795 -- 1,795 184
Accrued interest payable ............. 1,442 -- 1,442 433
Due to affiliates .................... 1,076 (33,466)(b) 34,542 1,076
Deferred fee revenue ................. 419 -- 419 167
Other liabilities .................... 1,446 -- 1,446 1,074
------------ ------------ ------------ ------------

Total liabilities ...................... 95,061 (33,466) 128,527 41,638
------------ ------------ ------------ ------------

Cumulative preferred stock
of subsidiary ........................ 7,000 3,000 4,000 --
------------ ------------ ------------ ------------

SHAREHOLDERS' EQUITY:
Cumulative preferred stock
of subsidiary, 3% .................. -- (3,000)(a) 3,000 --
Common stock ......................... 112 (22)(a) 134 112
Additional paid-in capital ........... 62,125 (22,373)(a) 84,498 62,125
Undistributed net operating income ... 1,101 (3,033)(a) 4,134 1,701
Net unrealized depreciation
on investments ..................... (435) -- (435) --
------------ ------------ ------------ ------------

62,903 (28,428) 91,331 63,938
Less treasury stock .................. -- 1,000 (1,000) --
------------ ------------ ------------ ------------

Total shareholders' equity ............. 62,903 (27,428) 90,331 63,938
------------ ------------ ------------ ------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ 164,964 $ (57,894) $ 222,858 $ 105,576
============ ============ ============ ============

NET ASSET VALUE PER COMMON SHARE ....... $ 5.64
============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS

INVESTMENTS AT VALUE, SEE ACCOMPANYING SCHEDULE:
Loans receivable, net ................ $ 26,305 $ 14,413 $ 28,562
Cash equivalents ..................... 5,172 14,668 16,659
Investment in subsidiaries ........... -- -- --
Excess servicing asset, net .......... 6,429 -- --
Restricted investments ............... 1,229 -- --
Real property owned .................. 163 140 --
------------ ------------ ------------

Total investments ...................... 39,298 29,221 45,221
------------ ------------ ------------

OTHER ASSETS:
Receivable for loans sold ............ 2,286 -- --
Due from affiliates .................. 9 29 31
Deferred charges, deposits and
other assets ....................... 86 167 416
Accrued interest receivable .......... 15 68 136
Cash ................................. 158 18 24
Property and equipment, net .......... 33 33 33
------------ ------------ ------------

Total other assets ..................... 2,587 315 640
------------ ------------ ------------

TOTAL ASSETS ........................... $ 41,885 $ 29,536 $ 45,861
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
SBA debentures payable ............... $ -- $ 20,570 $ 24,000
Notes payable ........................ -- -- --
Accounts payable ..................... 4,011 -- 2
Dividends payable .................... -- -- 63
Allowance for credit losses
on loans sold ...................... 1,533 -- --
Borrower advances .................... 1,048 231 332
Accrued interest payable ............. 51 563 395
Due to affiliates .................... 32,340 93 1,033
Deferred fee revenue ................. 32 90 130
Other liabilities .................... 298 26 48
------------ ------------ ------------

Total liabilities ...................... 39,313 21,573 26,003
------------ ------------ ------------

Cumulative preferred stock
of subsidiary ........................ -- -- 4,000
------------ ------------ ------------

SHAREHOLDERS' EQUITY:
Cumulative preferred stock
of subsidiary, 3% .................. -- -- 3,000
Common stock ......................... -- 21 1
Additional paid-in capital ........... 2,000 7,934 12,439
Undistributed net operating income ... 1,796 110 527
Net unrealized depreciation
on investments ..................... (224) (102) (109)
------------ ------------ ------------

3,572 7,963 15,858
Less treasury stock .................. (1,000) -- --
------------ ------------ ------------

Total shareholders' equity ............. 2,572 7,963 15,858
------------ ------------ ------------

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................. $ 41,885 $ 29,536 $ 45,861
============ ============ ============

NET ASSET VALUE PER COMMON SHARE .......
</TABLE>

(a) To eliminate PMC Capital, Inc.'s investment in its wholly owned investment
company subsidiaries.
(b) To eliminate intercompany advances.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS

F-31
<PAGE> 55
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment income:
Interest ............................. $ 18,571 $ -- $ 18,571 $ 3,950
Premium income ....................... 1,942 -- 1,942 1,937
Other investment income, net ......... 608 -- 608 260
------------ ------------ ------------ ------------

Total investment income ................ 21,121 -- 21,121 6,147

Other income, net ...................... 2,331 -- 2,331 1,805
Equity in income (loss) of
subsidiaries ......................... 369 (12,038)(a) 12,407 12,407
------------ ------------ ------------ ------------

Total income ........................... 23,821 (12,038) 35,859 20,359
------------ ------------ ------------ ------------

Expense:
Interest ............................. 5,708 -- 5,708 2,624
Salaries and related benefits ........ 3,180 -- 3,180 3,180
General and administrative ........... 843 -- 843 721
Profit sharing plan .................. 217 -- 217 217
Rent ................................. 213 -- 213 213
Legal and Accounting ................. 149 -- 149 139
Small Business Administration
fees ............................... 99 -- 99 --
Directors and shareholders
expense ............................ 45 -- 45 45
------------ ------------ ------------ ------------

Total expense .......................... 10,454 -- 10,454 7,139
------------ ------------ ------------ ------------

Net operating income .................. 13,367 (12,038) 25,405 13,220
------------ ------------ ------------ ------------

Realized and unrealized gain
(loss) on investments:
Loans written-off .................. (214) -- (214) --
Recoveries on loans written-off .... 35 -- 35 --
Change in unrealized
appreciation (depreciation)
on investments ................... 32 -- 32 --
------------ ------------ ------------ ------------

(147) -- (147) --
------------ ------------ ------------ ------------

Net operating income and realized
and unrealized gain (loss) on
investments .......................... $ 13,220 $ (12,038) $ 25,258 $ 13,220
============ ============ ============ ============

Earnings per common share .............. $ 1.18
============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
Investment income:
Interest ............................. $ 6,024 $ 3,233 $ 5,364
Premium income ....................... 5 -- --
Other investment income, net ......... 40 164 144
------------ ------------ ------------

Total investment income ................ 6,069 3,397 5,508

Other income, net ...................... 334 50 142
Equity in income (loss) of
subsidiaries ......................... -- -- --
------------ ------------ ------------

Total income ........................... 6,403 3,447 5,650
------------ ------------ ------------

Expense:
Interest ............................. 16 1,781 1,287
Salaries and related benefits ........ -- -- --
General and administrative ........... 35 31 56
Profit sharing plan .................. -- -- --
Rent ................................. -- -- --
Legal and Accounting ................. 3 1 6
Small Business Administration
fees ............................... -- 31 68
Directors and shareholders
expense ............................ -- -- --
------------ ------------ ------------

Total expense .......................... 54 1,844 1,417
------------ ------------ ------------

Net operating income .................. 6,349 1,603 4,233
------------ ------------ ------------

Realized and unrealized gain
(loss) on investments:
Loans written-off .................. (70) (144) --
Recoveries on loans written-off .... 20 -- 15
Change in unrealized
appreciation (depreciation)
on investments ................... (6) 80 (42)
------------ ------------ ------------

(56) (64) (27)
------------ ------------ ------------

Net operating income and realized
and unrealized gain (loss) on
investments .......................... $ 6,293 $ 1,539 $ 4,206
============ ============ ============

Earnings per common share ..............
</TABLE>

(a) To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
investment company subsidiaries.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS

F-32
<PAGE> 56
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL UNDISTRIBUTED APPRECIATION TOTAL
PREFERRED COMMON PAID-IN NET OPERATING (DEPRECIATION) TREASURY SHAREHOLDERS'
STOCK, 3% STOCK CAPITAL INCOME ON INVESTMENTS STOCK EQUITY
--------- -------- ---------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PMC CAPITAL, INC

BALANCES, JANUARY 1, 1996 .................... $ -- $ 109 $ 58,429 $ 1,334 $ -- $ -- $ 59,872

Net income ................................... -- -- -- 13,220 -- -- 13,220
Dividend reinvestment plan, 180,767 shares ... -- 3 3,696 -- -- -- 3,699
Dividends on common stock .................... -- -- -- (12,853) -- -- (12,853)
-------- -------- ---------- ------------ ------------ ---------- ------------

BALANCES, DECEMBER 31, 1996 .................. $ -- $ 112 $ 62,125 $ 1,701 $ -- $ -- $ 63,938
======== ======== ========== ============ ============ ========== ============

FIRST WESTERN SBLC, INC. AND SUBSIDIARY

BALANCES, JANUARY 1, 1996 .................... $ -- $ -- $ 2,000 $ 1,497 $ (218) $ (1,000) $ 2,279

Net income ................................... -- -- -- 6,299 (6) -- 6,293
Dividends to parent company .................. -- -- -- (6,000) -- -- (6,000)
-------- -------- ---------- ------------ ------------ ---------- ------------

BALANCES, DECEMBER 31, 1996 .................. $ -- $ -- $ 2,000 $ 1,796 $ (224) $ (1,000) $ 2,572
======== ======== ========== ============ ============ ========== ============

WESTERN FINANCIAL CAPITAL CORPORATION

BALANCES, JANUARY 1, 1996 .................... $ -- $ 21 $ 7,434 $ 401 $ (182) $ -- $ 7,674

Net income ................................... -- -- -- 1,459 80 -- 1,539
Contribution of capital ...................... -- -- 500 -- -- -- 500
Dividends to parent company .................. -- -- -- (1,750) -- -- (1,750)
-------- -------- ---------- ------------ ------------ ---------- ------------

BALANCES, DECEMBER 31, 1996 .................. $ -- $ 21 $ 7,934 $ 110 $ (102) $ -- $ 7,963
======== ======== ========== ============ ============ ========== ============

PMC INVESTMENT CORPORATION

BALANCES, JANUARY 1, 1996 .................... $ 3,000 $ 1 $ 12,439 $ 480 $ (67) $ -- $ 15,853

Net income ................................... -- -- -- 4,248 (42) -- 4,206
Dividends to parent company .................. -- -- -- (3,950) -- -- (3,950)
Dividends, preferred ......................... -- -- -- (251) -- -- (251)
-------- -------- ---------- ------------ ------------ ---------- ------------

BALANCES, DECEMBER 31, 1996 .................. $ 3,000 $ 1 $ 12,439 $ 527 $ (109) $ -- $ 15,858
======== ======== ========== ============ ============ ========== ============

ELIMINATION ADJUSTMENTS
Equity in income of subsidiaries ............. -- -- -- (12,038) -- -- (12,038)
Dividends to parent .......................... -- -- -- 11,700 -- -- 11,700
Stock of subsidiaries ........................ (3,000) (22) (22,373) -- -- 1,000 (24,395)
Undistributed earnings of subsidiaries ....... -- -- -- (2,695) -- -- (2,695)
-------- -------- ---------- ------------ ------------ ---------- ------------

(3,000) (22) (22,373) (3,033) -- 1,000 (27,428)
-------- -------- ---------- ------------ ------------ ---------- ------------

CONSOLIDATED ................................... $ -- $ 112 $ 62,125 $ 1,101 $ (435) $ -- $ 62,903
======== ======== ========== ============ ============ ========== ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.

F-33
<PAGE> 57
PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
CONSOLIDATED
BEFORE
ELIMINATION ELIMINATION PMC CAPITAL,
CONSOLIDATED ENTRIES ENTRIES INC.
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments ...... $ 13,220 $ (12,038)(a) $ 25,258 $ 13,220
Adjustments to reconcile net operating
income and realized and unrealized
gain (loss) on investments to net cash
provided by (used in) operating activities:
Loans funded, held for sale ............... (21,915) -- (21,915) --
Proceeds from sale of guaranteed loans .... 19,988 -- 19,988 --
Change in unrealized depreciation on
investments and loans written-off ..... 182 -- 182 --
Unrealized premium income, net ............ (5) -- (5) --
Amortization and depreciation ............. 1,084 -- 1,084 84
Accretion of loan discount and
deferred fees ........................... (957) -- (957) (167)
Deferred fees collected ................... 785 -- 785 52
Equity in income of unconsolidated
subsidiaries ............................ (369) -- (369) (369)
Net change in operating assets
and liabilities:
Accrued interest receivable ........... 347 -- 347 29
Other assets .......................... 357 -- 357 148
Accrued interest payable .............. 8 -- 8 (9)
Borrower advances ..................... (465) -- (465) (185)
Other liabilities ..................... 1,812 -- 1,812 260
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 14,072 (12,038) 26,110 13,063
------------ ------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................. (48,239) 3,239(b) (51,478) (14,184)
Principal collected and other adjustments .... 22,647 (3,239)(b) 25,886 7,384
Loans transferred to (from) affiliate ........ -- -- -- (34,379)
Purchase of furniture and fixtures and
other assets .............................. (127) -- (127) (31)
Release of (investment in) restricted cash ... 556 -- 556 --
Investment in subsidiaries ................... (893) 12,538(a) (13,431) (13,431)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ......................... (26,056) 12,538 (38,594) (54,641)
------------ ------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption
of SBA debentures ......................... 941 -- 941 --
Proceeds from issuance of common stock ...... 2,834 (500)(a) 3,334 2,834
Proceeds from subsidiaries .................. 37,803 (11,700)(c) 49,503 49,503
Payment of dividends on common stock ........ (11,935) 11,700(c) (23,635) (11,935)
Payment of dividends on preferred stock ..... (250) -- (250) --
Advances from (to) affiliates, net .......... 1,114 -- 1,114 (4,752)
Payment of issuance costs on notes
and debentures ............................ (80) -- (80) (15)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ......................... 30,427 (500) 30,927 35,635
------------ ------------ ------------ ------------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 18,443 -- 18,443 (5,943)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ............................ 31,574 -- 31,574 19,261
------------ ------------ ------------ ------------

CASH AND CASH EQUIVALENTS, END OF YEAR ......... $ 50,017 $ -- $ 50,017 $ 13,318
============ ============ ============ ============

SUPPLEMENTAL DISCLOSURE:
Interest paid ............................... $ 5,433 $ -- $ 5,433 $ 2,366
============ ============ ============ ============

Dividends reinvested ........................ $ 880 $ -- $ 880 $ 880
============ ============ ============ ============

Loans receivable acquired in exchange
for SBA debentures ........................ $ 158 $ -- $ 158 $ --
============ ============ ============ ============

Reclassification from loans receivable
to real property owned .................... $ 453 $ -- $ 453 $ --
============ ============ ============ ============

Loans contributed to unconsolidated
subsidiary, net ........................... $ 45,145 $ -- $ 45,145 $ 45,145
============ ============ ============ ============
<CAPTION>
FIRST WESTERN
WESTERN SBLC, FINANCIAL PMC
AND CAPITAL INVESTMENT
SUBSIDIARY CORPORATION CORPORATION
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating income and realized and
unrealized gain (loss) on investments ...... $ 6,293 $ 1,539 $ 4,206
Adjustments to reconcile net operating
income and realized and unrealized
gain (loss) on investments to net cash
provided by (used in) operating activities:
Loans funded, held for sale ............... (21,915) -- --
Proceeds from sale of guaranteed loans .... 19,988 -- --
Change in unrealized depreciation on
investments and loans written-off ..... 76 64 42
Unrealized premium income, net ............ (5) -- --
Amortization and depreciation ............. 907 34 59
Accretion of loan discount and
deferred fees ........................... (350) (166) (274)
Deferred fees collected ................... 35 90 608
Equity in income of unconsolidated
subsidiaries ............................ -- -- --
Net change in operating assets
and liabilities:
Accrued interest receivable ........... 111 114 93
Other assets .......................... 164 (3) 48
Accrued interest payable .............. 6 (14) 25
Borrower advances ..................... (225) 27 (82)
Other liabilities ..................... 1,597 (3) (42)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 6,682 1,682 4,683
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans funded ................................. (7,305) (7,473) (22,516)
Principal collected and other adjustments .... 4,660 8,117 5,725
Loans transferred to (from) affiliate ........ -- 9,996 24,383
Purchase of furniture and fixtures and
other assets .............................. -- (96) --
Release of (investment in) restricted cash ... 556 -- --
Investment in subsidiaries ................... -- -- --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ......................... (2,089) 10,544 7,592
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance or assumption
of SBA debentures ......................... -- 941 --
Proceeds from issuance of common stock ...... -- 500 --
Proceeds from subsidiaries .................. -- -- --
Payment of dividends on common stock ........ (6,000) (1,750) (3,950)
Payment of dividends on preferred stock ..... -- -- (250)
Advances from (to) affiliates, net .......... 4,861 65 940
Payment of issuance costs on notes
and debentures ............................ -- (65) --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ........................ (1,139) (309) (3,260)
------------ ------------ ------------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................. 3,454 11,917 9,015

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ............................ 1,876 2,769 7,668
------------ ------------ ------------

CASH AND CASH EQUIVALENTS, END OF YEAR ......... $ 5,330 $ 14,686 $ 16,683
============ ============ ============

SUPPLEMENTAL DISCLOSURE:
Interest paid ............................... $ 10 $ 1,795 $ 1,262
============ ============ ============

Dividends reinvested ........................ $ -- $ -- $ --
============ ============ ============

Loans receivable acquired in exchange
for SBA debentures ........................ $ -- $ 158 $ --
============ ============ ============

Reclassification from loans receivable
to real property owned .................... $ 292 $ 161 $ --
============ ============ ============

Loans contributed to unconsolidated
subsidiary, net ........................... $ -- $ -- $ --
============ ============ ============
</TABLE>

(a) To eliminate PMC Capital, Inc.'s equity in the income of its wholly owned
subsidiaries and the increase in investment in its wholly owned
subsidiaries.

(b) To eliminate the repurchase by PMC Investment Corporation of loans
previously participated with Western Financial Capital Corporation.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATING FINANCIAL STATEMENTS.

F-34
<PAGE> 58

REPORT OF INDEPENDENT ACCOUNTANTS

To the General Partner
PMC Capital Limited Partnership:

We have audited the accompanying statement of assets, liabilities and partners'
capital of PMC Capital Limited Partnership (the "Partnership") as of December
31, 1996, and the related statements of income, partners' capital and cash
flows for the period from November 8, 1996 (inception) to December 31, 1996.
These financial statements are the responsibility of the Partnership's General
Partner. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the General Partner, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PMC Capital Limited
Partnership as of December 31, 1996, and the results of its operations and its
cash flows for the period from November 8, 1996 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Dallas, Texas
March 5, 1997

F-35

<PAGE> 59
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS
INVESTMENTS AT VALUE:
Loans receivable, net ............................................. $ 41,805
Restricted investments - money market funds and cash ............. 5,444
--------

TOTAL INVESTMENTS ................................................... 47,249
--------

OTHER ASSETS:
Due from affiliates ............................................... 826
Deferred borrowing costs .......................................... 390
Interest receivable ............................................... 239
Other ............................................................. 11
--------

TOTAL OTHER ASSETS .................................................. 1,466
--------

TOTAL ASSETS ........................................................ $ 48,715
========

LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Notes payable ..................................................... $ 40,183
Accrued interest payable .......................................... 233
Due to affiliates ................................................. 83
--------

TOTAL LIABILITIES ................................................... 40,499
--------

COMMITMENTS AND CONTINGENCIES (NOTE 3)

PARTNERS' CAPITAL:
General Partner's interest ....................................... 11
Limited Partner's interest ....................................... 8,205
--------

8,216
--------

TOTAL LIABILITIES AND PARTNERS' CAPITAL ............................. $ 48,715
========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-36
<PAGE> 60
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF INCOME
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest ......................................................... $ 599
Other investment income, net ..................................... 111
--------

Total investment income ............................................ 710
--------

EXPENSES:
Interest ......................................................... 362
General and administrative ....................................... 20
--------

Total expenses ..................................................... 382
--------

Net income ......................................................... $ 328
========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-37
<PAGE> 61
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
Limited General
Partner's Partner's
Interest Interest Total
--------- --------- ---------
<S> <C> <C> <C>
BALANCE, NOVEMBER 8, 1996 (INCEPTION) ...... $ -- $ -- $ --

Limited Partner's contribution of loans
receivable and other assets .............. 45,681 -- 45,681

General Partner's cash contribution ........ -- 10 10

Net income ................................. 325 3 328

Partnership distributions .................. (37,801) (2) (37,803)
--------- --------- ---------

BALANCE, DECEMBER 31, 1996 ................. $ 8,205 $ 11 $ 8,216
========= ========= =========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-38
<PAGE> 62
PMC CAPITAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
PERIOD FROM NOVEMBER 8, 1996 (INCEPTION) TO DECEMBER 31, 1996
(IN THOUSANDS)

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 328
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization .................................................. 16
Accretion of loan discount and deferred fees .................. (28)
Net change in operating assets
and liabilities:
Interest receivable ....................................... (239)
Other assets .............................................. (11)
Accrued interest payable .................................. 233
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 299
--------

CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected and other adjustments ........................ 3,904
Investment in restricted cash, net ............................... (5,444)
--------
NET CASH USED IN INVESTING ACTIVITIES .............................. (1,540)
--------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ......................... 40,183
Proceeds from issuance of general
partnership interest .......................................... 10
Partner distributions ........................................... (37,803)
Advances from (to) affiliates, net .............................. (743)
Payment of issuance costs on notes .............................. (406)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 1,241
--------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... --

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................... --
--------

CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ --
========

SUPPLEMENTAL DISCLOSURE:
Interest paid ................................................... $ --
========

Loans receivable contributed from partners ...................... $ 45,681
========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

F-39
<PAGE> 63
PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS:

PMC Capital Limited Partnership ("the Partnership") was formed as a
Delaware limited partnership in November 1996 to act as a special
purpose affiliate of PMC Capital, Inc. ("PMC Capital"). PMC Capital
is a diversified, closed-end management investment company that has
elected to operate as a business development company under the
Investment Company Act of 1940. PMC engages in the business of
originating loans to small businesses either directly or through its
three principal subsidiaries. The Partnership was established to
acquire loans from PMC Capital and to issue fixed-rate debt through a
private placement. PMC Capital is either directly or indirectly the
sole partner of the Partnership.

PMC Capital Corp. is a Delaware corporation formed in November 1996 to
be the independent trustee of the general partner of the Partnership.
PMC Trust 1996-A is a Delaware business trust formed in November 1996
to be the general partner of the Partnership.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.

VALUATION OF INVESTMENTS

Loans receivable are carried at amortized cost which is the loan
principal balance less deferred fees and discounts, unless there is
doubt as to the realization of the loan (a "Problem Loan"). A
valuation reserve is established for a Problem Loan based on the
creditor's payment history, collateral value, guarantor support and
other factors.

Loans, including impaired loans, are generally classified as
non-accrual if they are past due as to maturity or payment of
principal or interest for a period of more than 60 days. If a loan or
a portion of a loan is classified as doubtful or is partially
reserved or charged-off, the loan is classified as non-accrual. Loans
that are on a current payment status or past due less than 60 days
may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.

Deferred fees consist of non-refundable fees less direct loan
origination costs. These fees are being recognized over the expected
life of the related loan as an adjustment of yield.

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

Realized gains or losses are measured by the difference between the
proceeds from the sale and the cost basis of the investment, without
regard to unrealized gains and losses previously recognized. The gain
or loss calculated also includes loans written-off or charged-down
during the year and recoveries of loans written-off or charged-down
in prior years.

Other changes in the value of investments are included as changes in
the unrealized appreciation (depreciation) on investments in the
statement of income.

F-40
<PAGE> 64

PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

INTEREST INCOME

Interest income on loans is accrued as earned. The accrual of
interest is generally suspended when the related loan becomes 60 days
past due ("Non-accrual Loan"). Interest income on a Non-accrual Loan
is recognized on the cash basis.

DEFERRED BORROWING COSTS

Costs incurred in connection with the issuance of notes payable are
included in deferred borrowing costs. These costs are amortized over
the estimated life of the related obligation.

STATEMENT OF CASH FLOWS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the statement of cash flows.

NOTE 2. LOANS RECEIVABLE:

On November 13, 1996, PMC Capital contributed approximately $45.7
million of loans (the "Contributed Loans") to the Partnership without
recourse to PMC Capital.

At December 31, 1996 their was no recorded investment in loans
identified as impaired.

Percentage of Loan Portfolio
State December 31, 1996
----- ----------------------------
<S> <C>

Texas 42%
Florida 10%
Other 48%
---
100%
===
</TABLE>

There were no loans receivable; (i) greater than 60 days past due,
(ii) on which litigation against the borrowers had commenced, or (iii)
which were in the process of liquidation at December 31, 1996.

NOTE 3. CREDIT RISK:

At December 31, 1996, loans to businesses in the lodging industry
comprised 85% of loans receivable and 74% of total assets. There can
be no assurance that the Partnership will experience the positive
results which PMC Capital has historically achieved from these lending
activities. Any economic factors that negatively impact the lodging
industry could have a material adverse effect on the business of the
Company. Additionally, loans to businesses located in Texas and
Florida currently comprise approximately 42% and 10% of the Company's
outstanding loan portfolio, respectively. A decline in economic
conditions in any of these states may adversely affect the
Partnership.

F-41

<PAGE> 65

PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

NOTE 4. NOTES PAYABLE:

On November 13, 1996, the Partnership completed a private placement
of approximately $40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the "Notes"). The Notes, issued at par, which have a
stated maturity in 2005 and bear interest at the rate of 6.725% per
annum, are collateralized by approximately $45.7 million of loans
contributed by PMC Capital to the Partnership. In connection with
this private placement, the Notes were given a rating of "Aa2" by
Moody's Investors Service. The Partnership has the exclusive
obligation for the repayment of the Notes, and the holders of the
Notes have no recourse to PMC Capital or its other subsidiaries or
their assets in the event of nonpayment of the loans. Required
principal payments to the noteholders are based upon the collection
of principal on the Contributed Loans. All principal collected on
the Contributed Loans during the monthly period (as defined in the
Trust Indenture) are used to make the required principal payment on
the first business day of the following month.

NOTE 5. PARTNERS' CAPITAL:

The net proceeds from the issuance of the Notes (approximately $37.5
million before giving effect to payment of offering costs of
approximately $396,000 and after giving effect to the funding of a
$2.04 million reserve fund held by the trustee as collateral) were
distributed to PMC Capital. Pursuant to an agreement between PMC
Capital and PMC Trust 1996-A, PMC Trust 1996-A waived any rights it
had under the partnership agreement to receive any portion of such
distribution.

NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS:

The estimates of fair value as required by Statement of Financial
Accounting Standards ("SFAS") No. 107 differ from the value of the
financial assets and liabilities determined by the General Partner
primarily as a result of the effects of discounting future cash
flows. Considerable judgement is required to interpret market data
and develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Partnership could realize in a current market exchange or the amount
that ultimately will be realized by the Partnership upon maturity or
disposition.

The estimated fair values of the Partnership's financial instruments
pursuant to SFAS No. 107 are as follows:

<TABLE>
<CAPTION>
1996
----------------------
Estimated
Carrying Fair
Amount Value
----------------------
(In thousands)

<S> <C> <C>
Assets:
Loans receivable, net ...... $41,805 $44,115
Restricted investments ..... 5,444 5,444
Liabilities:
Notes payable .............. 40,183 39,770
</TABLE>

Loans receivable, net: The estimated fair value for all fixed rate
loans is estimated by discounting the estimated cash flows using the
current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities. The impact of delinquent
loans on the estimation of the fair values described above is not
considered to have a material effect and accordingly, delinquent
loans have been disregarded in the valuation methodologies employed.

F-42

<PAGE> 66

PMC CAPITAL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS

NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)

Restricted investments : The carrying amount is a reasonable
estimation of fair value.

Notes payable: The estimated fair value is based on present value
calculation using prices of the same or similar instruments after
considering risk, current interest rates and remaining maturities.

NOTE 7. RELATED PARTY TRANSACTIONS:

At December 31, 1996, the balance in due to affiliates of $83,000
was a result of payments on loans receivable of affiliates deposited
directly by the borrower into the Partnership's operating bank
account. The balance in due from affiliates of $826,000 was a result
of payments on the Partnership's loans receivable deposited directly
by the borrower into an affiliate's operating bank account. These
balances were transferred to the appropriate company subsequent to
year end.

F-43

<PAGE> 67
EXHIBITS
---------

<TABLE>
<CAPTION>
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
3.1 Articles of Incorporation, as amended (incorporated by
reference to Exhibit 4(b)(1) to Amendment No. 9 to the
Registration Statement on Form N-2 (Registration No.
33-2535) (the "N-2 Registration Statement"), Amendment
No. 9 dated November 29, 1991.

3.2 By-Laws, as amended (incorporated by reference to
Exhibit 2 to Amendment No.7 to the N-2 Registration
Statement dated April 27, 1989).

4.1 Certificate of Common Stock (incorporated by reference
to Exhibit 4 to Amendment No. 1 to the N-2 Registration
Statement dated November 10, 1993).

*4.2 Debenture dated September 24, 1996 for $2,490,000 loan
with SBA.

4.3 Debenture dated February 4, 1987 for $2,480,000 loan
with SBA - incorporated by reference from Registrant's
Form N-2, Amendment No. 6, dated April 27, 1988.

4.4 Debenture dated February 17, 1988 for $1,500,000 loan
With SBA - incorporated by reference from Exhibit E
4(b)(5)(n) to the Registrant's Form N-2, Amendment
No. 7 dated April 27, 1991.

4.5 Debenture dated June 27, 1990 for $2,000,000 loan
with SBA - incorporated by reference from Exhibit
4(b)(5)(n) Registrant's Form N-2, Amendment No. 9,
dated April 29, 1991.

4.6 Debenture dated September 26, 1990 for $2,810,000
loan with SBA - incorporated by reference from Exhibit
4(b)(5)(o) to the Registrant's Form N-2, Amendment 9,
dated April 29, 1991.

4.7 Debenture dated September 26, 1990 for $1,500,000
loan with SBA - incorporated by reference from Exhibit
4(b)(5)(p) to the Registrant's Form N-2, Amendment 9,
dated April 29, 1991.

4.8 Debenture dated March 29, 1990 for $1,000,000 loan
with SBA - incorporated by reference from Exhibit 5(q)
from Registrant's Form N-2, Amendment No. 3, dated
August 18, 1992.

4.9 Debenture dated September 27, 1989 for $1,000,000
loan with SBA - incorporated by reference from Exhibit
5(r) from Registrant's Form N-2, Amendment No. 3,
dated August 18, 1992.
</TABLE>

E-1

<PAGE> 68

<TABLE>
<S> <C> <C>
4.10 Debenture dated September 27, 1989 for $1,500,000
loan with SBA - incorporated by reference from Exhibit
5(s) from Registrant's Form N-2, Amendment No. 3,
dated August 18, 1992.

4.11 Debenture dated January 2, 1990 for $3,000,000 loan
with SBA - incorporated by reference from Exhibit (5)(t)
from Registrant's Form N-2, Amendment No. 3, dated
August 18, 1992.

4.12 Debenture dated August 18, 1989 for $1,000,000 loan
with SBA - incorporated by reference from Exhibit (5)(u)
from Registrant's Form N-2, Amendment No. 3, dated
August 18, 1992.

**4.13 Debenture dated September 28, 1994 for $3,000,000
loan with SBA.

**4.14 Debenture dated September 28, 1994 for $3,000,000
loan with SBA.

**4.15 Senior Note dated July 19, 1993 for $6,000,000 with
Columbine Life Insurance Company.

**4.16 Senior Note dated July 19, 1993 for $9,000,000 with
Life Insurance Company of Georgia.

**4.17 Senior Note dated July 19, 1993 for $5,000,000 with
SouthLand Life Insurance Company.

**4.18 Senior Note dated December 15, 1993 for $2,000,000
with Peerless Insurance Company.

**4.19 Senior Note dated December 15, 1993 for $3,000,000
with Security Life of Denver Insurance Company.

***4.20 Debenture dated March 29, 1995 for $3,000,000
loan with SBA.

***4.21 Debenture dated June 28, 1995 for $5,000,000
loan with SBA.

***4.22 Debenture dated September 27, 1995 for $7,000,000
loan with SBA.

***4.23 Debenture dated September 29, 1987 for $800,000 loan
with SBA assumed from J & D Capital Corporation.

***4.24 Debenture dated December 20, 1989 for $650,000 loan
with SBA assumed from J & D Capital Corporation.

***4.25 Debenture dated June 27,1990 for $300,000 loan with
SBA assumed from J & D Capital Corporation.

***4.26 Debenture dated December 6, 1992 for $510,000 loan
with SBA assumed from J & D Capital Corporation.
</TABLE>

E-2

<PAGE> 69

<TABLE>
<S> <C> <C>
***4.27 Senior Note dated April 19, 1995 for $5,000,000 with
Security Life of Denver Insurance Company.

***4.28 Senior Note dated April 19, 1995 for $2,000,000
with Peerless Insurance Company.

***4.29 Senior Note dated April 19, 1995 for $2,000,000
with Indiana Insurance Company.

***4.30 Senior Note dated April 19, 1995 for $1,000,000 with
Security Life of Denver Insurance Company.

*4.31 Debenture dated June 27, 1990 for $1,030,000
assumed from ESLO Capital Corporation.

*10.1 Employment contract between the Registrant and
Lance B. Rosemore dated June 30, 1996.

*10.2 Employment contract between the Registrant and
Andrew S. Rosemore dated June 30, 1996.

*10.3 Employment contract between the Registrant and
Fredric M. Rosemore dated June 30, 1996.

*10.4 Employment contract between the Registrant and
Jan F. Salit dated June 30, 1996.

*10.5 Employment contract between the Registrant and
Barry N. Berlin dated June 30, 1996.

**10.6 Employment contract between the Registrant and
Mary J. Brownmiller dated August 1, 1994.

*10.7 Master Promissory Note for $15,000,000
with Bank One, Texas N.A.

*10.8 Servicing Agreement by and among Sun Trust
Bank, PMC Capital Limited Partnership and
PMC Capital, Inc.

*21 Subsidiaries of Registrant

*27 Financial Data Schedule
</TABLE>
- -----------------------

* Filed herewith
** Previously filed with the Commission as an exhibit to the
Registrant's Form 10-K for the fiscal year ended December 31,
1994
*** Previously filed with the Commission as an exhibit to the
Registrant's Form 10-K for the fiscal year ended December 31,
1995

E-3

<PAGE> 1
EXHIBIT 4.2

Page 1 of 3

SBIC License No. 04/04-0183 Loan No. 04644751-10

DEBENTURE
*******************

$2,490,000 Date of Issuance: September 25, 1996

Western Financial Capital Corporation (the "Company"), Licensee
17290 Preston Road, 3rd Floor
Dallas, Texas 75252

For value received, the Company hereby promises to pay to the order of Chemical
Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust
Agreement dated as of February 1, 1995, as same may be amended from time to
time, by and among the Trustee, the U.S. Small Business Administration ("SBA")
and SBIC Funding Corporation, and as the Holder hereof the principal sum of two
million four hundred ninety thousand dollars ($2,490,000.00) (the "Original
Principal Amount") on September 1, 2006 (the "Maturity Date") at such location
as SBA, as guarantor of this debenture, may direct and to pay interest
semiannually on March 1st and September 1st (the "Payment Dates") of each year,
as herein provided, at the rate of 7.59% per annum on the basis of a year of
365 days, for the actual number of days (including the first day but excluding
the last day) elapsed (the "Stated Interest Rate"), on said principal sum from
the date of the issuance hereof until payment of such principal sum has been
made or duly provided for. The Company shall deposit all payments with respect
to this debenture not later than 12:00 noon (Washington, D.C. time) on the
applicable Payment Date or the next business day if the Payment Date is not a
business day, all as directed by SBA.

This debenture is issued by the Company and guaranteed by SBA, pursuant and
subject to Section 303 of the Small Business Investment Act of 1958, as amended
(the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the
regulations promulgated under the Act, as amended from time to time, provided,
however, that 13 C.F.R. Sections 107.1810 and 107.1830 through 107.1850 as in
effect on the date of this debenture are incorporated herein as if fully set
forth.
<PAGE> 2
Page 2 of 3

The Company may elect to prepay this debenture, as a whole and not in part, on
any Payment Date, in the manner and at the price as next described. The
prepayment price (the "Prepayment Price") shall be an amount equal to the
outstanding principal balance of this debenture, plus interest accrued and
unpaid thereon to the Payment Date selected for prepayment, plus a prepayment
premium (the "Prepayment Premium"). The Prepayment Premium amount is
calculated as a declining percentage (the "Applicable Percentage") multiplied
by the Original Principal Amount of this debenture in accordance with the
following table:

<TABLE>
<CAPTION>
Consecutive Payment Dates Applicable Percentage
<S> <C> <C> <C>
1st or 2nd 5 %
3rd or 4th 4 %
5th or 6th 3 %
7th or 8th 2 %
9th or (10th-If Not also Maturity Date) 1 %
</TABLE>

No Prepayment Premium is required to repay this debenture on its Maturity Date.
No Prepayment Premium is required when the prepayment occurs on a Payment Date
that is on or after the 11th consecutive Payment Date of this debenture, if
this debenture has a 20 consecutive Payment Date term.

The amount of the Prepayment Price shall be sent to SBA or such agent as SBA
shall direct, by wire payment in immediately available funds, not less than
three business days prior to the regular payment date. Until the Company is
notified otherwise in writing by SBA, any Prepayment Price shall be paid to the
account maintained by the Trustee, entitled the SBA Prepayment Subaccount, and
shall include an identification of the Company by name and SBA-assigned license
number, the loan number appearing on the face hereof, and such other
information as SBA or its agent may specify.

This debenture shall be deemed issued in the District of Columbia as of the
day, month, and year first stated above. The terms and conditions of this
debenture shall be construed in accordance with, and its validity and
enforcement governed by, federal law.

The warranties, representations, or certifications made to SBA on SBA Form 1022
or the Company's application letter for an SBA commitment related to this
debenture are incorporated herein as if fully set forth.
<PAGE> 3
Page 3 of 3

Should any provision of this debenture or any of the documents incorporated by
reference herein be declared illegal or unenforceable by a court of competent
jurisdiction, the remaining provisions shall remain in full force and effect
and this debenture shall be construed as if said provisions were not contained
herein.

All notices to Company which are required or may be given under this debenture
shall be sufficient in all respects if sent to the above-noted address of the
Company. For the purposes of this debenture, the Company may change this
address only upon written approval of SBA.

COMPANY ORGANIZED AS CORPORATION

IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its
duly authorized officer and its corporate seal to be hereunto affixed and
attested by its Secretary or Assistant Secretary as of the date of issuance
stated above.

CORPORATE SEAL

WESTERN FINANCIAL CAPITAL
CORPORATION, Licensee

\s\
-----------------------------------
By: Andrew S. Rosemore, President

Attest:

\s\
- ----------------------------
Lance B. Rosemore, Secretary

<PAGE> 1
EXHIBIT 4.31

Page 1 of 3

SBIC License No. 01/01-0300 Loan No. 04624900-01

DEBENTURE
*******************

$1,030,000 Date of Issuance: June 27, 1990

ESLO Capital Corporation (the "Company"), Licensee
212 Wright Street
Newark, New Jersey 07114

For value received, the Company hereby promises to pay to the order of Chemical
Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust
Agreement dated as of March 1, 1990, as same may be amended from time to time,
by and among the Trustee, the U.S. Small Business Administration ("SBA") and
SBIC Funding Corporation, and as the Holder hereof the principal sum of one
million thirty thousand dollars ($1,030,000.00) (the "Original Principal
Amount") on June 1, 2000 at such location as SBA, as guarantor of this
debenture, may direct and to pay interest semiannually on June 1st and December
1st (the "Payment Dates") of each year, as herein provided, at the rate of
9.30% per annum on the basis of a year of 365 days, for the actual number of
days (including the first day but excluding the last day) elapsed (the "Stated
Interest Rate"), on said principal sum from the date of the issuance hereof
until payment of such principal sum has been made or duly provided for. The
Company shall deposit all payments with respect to this debenture not later
than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the
next business day if the Payment Date is not a business day, all as directed by
SBA.

This debenture is issued by the Company and guaranteed by SBA, pursuant and
subject to Section 303 of the Small Business Investment Act of 1958, as amended
(the "Act") (15 U.S.C. Section 683). This debenture is subject to the
regulations under the Act, as amended from time to time (the "Regulations"),
provided, however, that Regulation 13 C.F.R. Section 107.203 is incorporated
herein as if fully set forth.
<PAGE> 2
Page 2 of 3

The Company may elect to prepay this debenture, as a whole and not in part, on
any Payment Date after the ninth consecutive Payment Date in the manner and at
the price as next described. The prepayment price shall be an amount equal to
the outstanding principal balance of this debenture, plus interest accrued and
unpaid thereon to the Payment Date selected for prepayment, plus a prepayment
premium (the "Prepayment Premium") calculated as a declining percentage (the
"Applicable Percentage") of the dollar amount of the Stated Interest Rate times
the Original Principal Amount in accordance with the following table (the
"Prepayment Price"):

<TABLE>
<CAPTION>
Consecutive Payment Dates Applicable Percentage
<S> <C> <C> <C>
10th or 11th 100 %
12th or 13th 80 %
14th or 15th 60 %
16th or 17th 40 %
18th or 19th 20 %
</TABLE>

The warranties, representations, or certifications made to SBA on SBA Form 1022
related to this debenture are incorporated herein as if fully set forth.
<PAGE> 3
Page 3 of 3

COMPANY ORGANIZED AS CORPORATION

CORPORATE SEAL

ESLO CAPITAL CORPORATION
Licensee

\s\
-----------------------------------
By: Leo Katz, President

ATTEST:

\s\
- -----------------------
Estelle Katz, Secretary

<PAGE> 1
EXHIBIT 10.1

EXECUTIVE EMPLOYMENT CONTRACT

THIS AGREEMENT made as of July 1, 1996 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North
Miami Beach, Dade County, Florida, and Dallas, Dallas County, Texas,
hereinafter referred to as the "CORPORATION", and Lance B. Rosemore,
hereinafter referred to as "EXECUTIVE".

WITNESSETH THAT:

In consideration of the promises herein contained, the parties hereto
mutually agree as follows:

1. Employment: The Corporation hereby employs the Executive as
its Chief Executive Officer and President with such powers and duties as may be
specified by the Board of Directors. The Executive hereby accepts employment
upon the terms and conditions as hereinafter set forth.

2. Terms: Subject to the provisions for termination as
hereinafter provided, the term of this Agreement shall begin immediately and
shall terminate on June 30, 1999 or such later date as determined by the Board
of Directors. The term of this Executive Employment Contract may be extended
annually by the Board of Directors.

3. Compensation: For all services rendered by the Executive
under this contract, the Executive shall be paid at a minimum at the annual
rate effective as of July 1, 1996. The rate may be increased by the Board at
their discretion. The preceding is payable pursuant to the normal payroll
practices of the Corporation.

The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur
reasonable expenses for the promotion of the business of the Corporation. The
Corporation will reimburse the Executive for all such reasonable expenses upon
the presentation by the Executive, from time to time, of an itemized account of
such expenditures.

The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife
and minor children; B) a monthly automotive allowance of $550, whereby the
Executive is to provide an automobile to be utilized for his own company needs.
All maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) an agreed upon country club membership and monthly
maintenance fees so that Executive may entertain clients and other business
associates of the Corporation. All other charges of the Executive related to
non-business activities will be the responsibility of the Executive.

5. Extent of Services: The Executive shall devote a substantial
portion of business time, attention and energies to the business of the
Corporation, and shall not, during the term of this Agreement engage in any
other business activities, whether or not such activities are pursued for gain,
profit or other pecuniary advantage. This provision is not meant to prevent
him from A) devoting reasonable time to civic or philanthropic activities or B)
investing his assets in such form or manner providing that it does not require
any substantial services on the part of the Executive that will interfere with
the Executive's employment pursuant to this Agreement. Executive's employment
is considered as full-time.

6. Working Facilities: The Executive shall be furnished with
such facilities and services suitable to his position and adequate for the
performance of his duties.

7. Duties: The Executive is employed in an executive and
supervisory capacity and shall perform such duties consistent herewith as the
Board of Directors of the Corporation shall from
<PAGE> 3
time to time specify. The precise services of the Executive may be extended or
curtailed, from time to time, at the discretion of the Board of Directors of
the Corporation.

8. Disclosure of Information: The Executive recognizes and
acknowledges that the Corporation's operating procedures or service techniques
are valuable, special and unique assets of the Corporation's business. The
Executive will not, during or after the term of his employment, disclose the
list of the Corporation's operating procedures, or service techniques to any
person, firm, corporation, association or other entity for any reason or
purpose whatsoever. In the event of breach or threatened breach by the
Executive of the provisions of this paragraph, the Corporation shall be
entitled to an injunction retraining any such breach. Nothing herein shall be
construed as prohibiting the Corporation from pursuing any other remedies
available to the Corporation for such breach or threatened breach, including
the recovery of damages from the Executive. The Executive and the Company will
execute a supplemental Code of Ethics in the form attached hereto as Exhibit
"A".

9. Vacations: The Executive shall be entitled each year to a
vacation in accordance with the vacation policy of the Company.

10. Disability: If the Executive is unable to perform his
services by reason of illness or total incapacity, he shall receive his full
salary for one (1) year of said total incapacity. Should said Executive be
total incapacitated beyond a one-year period, so that he is not able to devote
full time to his employment in said Corporation, then this Agreement shall
terminate.

11. Death During Employment: If the Executive dies during the
term of this employment, the Corporation shall pay to the estate the Executive
the compensation which would be equal to twenty four (24) months compensation,
such compensation to be paid over the course of twenty four (24) months in the
same manner and under the same terms as it would have been paid if he had still
been working for the Corporation. Additionally, the estate will be paid any
<PAGE> 4
accumulated vacation pay. Such payments pursuant to this paragraph shall
constitute the full compensation of said Executive and he and his estate shall
have no further claim for compensation by reason of his employment by the
Corporation.

12. Assignment: The acts and obligations of the Corporation under
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the Corporation.

13. Invalidity: If any paragraph or part of this Agreement is
invalid, it shall not affect the remainder of this Agreement but the remainder
shall be binding and effective against all parties.

14. Termination: The Corporation cannot terminate this agreement
except for: 1) the intentional, unapproved misuse of Corporate funds 2)
professional incompetency, or 3) willful neglect of duties or responsibilities.

15. Additional Compensation: If the Corporation's stock is
purchased by an outside party and/or the present Board of Directors is removed,
this agreement will survive such changed in full force and stead. If the new
Board of Directors asks the Executive to resign or substantially modify the
duties or working conditions of the Executive so that such duties or working
conditions would not be accordance with the spirit of this agreement, then
Executive could resign and be entitled to 2.99 times the average of the last
five (5) years compensation paid to Executive. Executive will be paid such sum
in the form as he deems appropriate at that time. However, all payments made
pursuant to this paragraph shall be in accordance with Section 280 G of the
Internal Revenue Code.

16. Remedies for Breach: Because damages would be difficult to
estimate, Corporation agrees to pay to the Employee, in case Employer shall
violate this contract of service by dismissing Employee without just cause
before the end of the term hereof, as liquidated damages and not as a penalty
for such breach, a sum of money equal to the amount of compensation which
Employee might have earned from the date of such breach to the end of the term
hereof, as if Employee had been permitted fully to perform the terms of this
Agreement.
<PAGE> 5
17. Indemnification: The Corporation hereby agrees to indemnify
and hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his
contractual duties. Said indemnification shall include but not be limited to
reasonable cost incurred in defending the Executive in his faithful performance
of contractual duties.

18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms,
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.
<PAGE> 6
IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.

Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.

/s/
- ---------------------- ------------------------
By: Andrew S. Rosemore
Executive Vice President
- ----------------------

"EXECUTIVE"

/s/
- ---------------------- ------------------------
By: Lance B. Rosemore,
President
- ----------------------

(CORPORATE SEAL)

<PAGE> 1
EXHIBIT 10.2

EXECUTIVE EMPLOYMENT CONTRACT

THIS AGREEMENT made as of July 1, 1996 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North
Miami Beach, Dade County, Florida, and Dallas, Dallas County, Texas,
hereinafter referred to as the "CORPORATION", and Andrew S. Rosemore,
hereinafter referred to as "EXECUTIVE".

WITNESSETH THAT:

In consideration of the promises herein contained, the parties hereto
mutually agree as follows:

1. Employment: The Corporation hereby employs the Executive as
its Executive Vice President and Chief Operating Officer with such powers and
duties as may be specified by the Board of Directors. The Executive hereby
accepts employment upon the terms and conditions as hereinafter set forth.

The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife
and minor children; B) a monthly automotive allowance of $550, whereby the
Executive is to provide an automobile to be utilized for his own company needs.
All maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) an agreed upon country club membership and monthly
maintenance fees so that Executive may entertain clients and other business
associates of the Corporation. All other charges of the Executive related to
non- business activities will be the responsibility of the Executive.

6. Working Facilities: The Executive shall be furnished with
such facilities and services suitable to his position and adequate for the
performance of his duties.
<PAGE> 3
7. Duties: The Executive is employed in an executive and
supervisory capacity and shall perform such duties consistent herewith as the
Board of Directors of the Corporation shall from time to time specify. The
precise services of the Executive may be extended or curtailed, from time to
time, at the discretion of the Board of Directors of the Corporation.

9. Vacations: The Executive shall be entitled each year to a
vacation in accordance with the vacation policy of the Company.

11. Death During Employment: If the Executive dies during the
term of this employment, the Corporation shall pay to the estate the Executive
the compensation which would be equal to twenty four (24) months compensation,
such compensation to be paid over the course of twenty four (24) months in the
same manner and under the same terms as it would have been paid
<PAGE> 4
if he had still been working for the Corporation. Additionally, the estate
will be paid any accumulated vacation pay. Such payments pursuant to this
paragraph shall constitute the full compensation of said Executive and he and
his estate shall have no further claim for compensation by reason of his
employment by the Corporation.

12. Assignment: The acts and obligations of the Corporation under
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the Corporation.

13. Invalidity: If any paragraph or part of this Agreement is
invalid, it shall not affect the remainder of this Agreement but the remainder
shall be binding and effective against all parties.

17. Indemnification: The Corporation hereby agrees to indemnify
and hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his
contractual duties. Said indemnification shall include but not be limited to
reasonable cost incurred in defending the Executive in his faithful performance
of contractual duties.

<TABLE>
<S> <C>
Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.

\s\
- -------------------------------- --------------------------------
By: Lance B. Rosemore
President

- ---------------------------------

"EXECUTIVE"

\s\
- --------------------------------- --------------------------------
By: Andrew S. Rosemore,
Executive Vice President and Chief
Operating Officer
- ---------------------------------

(CORPORATE SEAL)
</TABLE>

<PAGE> 1
EXHIBIT 10.3

EXECUTIVE EMPLOYMENT CONTRACT

THIS AGREEMENT made as of July 1, 1996 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North
Miami Beach, Dade County, Florida, and Dallas, Dallas County, Texas hereinafter
referred to as the "CORPORATION", and Fredric M. Rosemore, hereinafter referred
to as "EXECUTIVE".

WITNESSETH THAT:

In consideration of the promises herein contained, the parties hereto
mutually agree as follows:

1. Employment: The Corporation hereby employs the Executive as
its Chairman of the Board with such powers and duties as may be specified by
the Board of Directors. The Executive hereby accepts employment upon the terms
and conditions as hereinafter set forth.

3. Compensation: For all services rendered by the Executive under
this contract, the Executive shall be paid at a minimum at the annual rate
effective as of July 1, 1996. The rate may be increased by the Board at their
discretion. The preceding is payable pursuant to the normal payroll practices
of the Corporation.

The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and Executive justifies such
bonus compensation.

4. Authorized Expenses: The Executive is authorized to incur
reasonable expenses for the promotion of the business of the Corporation. The
Corporation will reimburse the Executive for all such reasonable expenses upon
the presentation by the Executive, from time to time, of an itemized account of
such expenditures.
<PAGE> 2
The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to the use of a company owned automobile, all maintenance
expenses will be the responsibility of the Corporation.

5. Extent of Services: The Executive shall devote a substantial
portion of business time, attention and energies to the business of the
Corporation, and shall not, during the term of this Agreement engage in any
other business activities, whether or not such activities are pursued for gain,
profit or other pecuniary advantage. This provision is not meant to prevent
him from A) devoting reasonable time to civic or philanthropic activities or B)
investing his assets in such form or manner providing that it does not require
any substantial services on the part of the Executive that will interfere with
the Executive's employment pursuant to his Agreement. Executive's employment
is considered as full-time.

6. Working Facilities: The Executive shall be furnished with such
facilities and services suitable to his position and adequate for the
performance of his duties.

7. Duties: The Executive is employed in an executive and
supervisory capacity and shall perform such duties consistent herewith as the
Board of Directors of the Corporation shall from time to time specify. The
precise services of the Executive may be extended or curtailed, from time to
time, at the discretion of the Board of Directors of the Corporation.

8. Disclosure of Information: The Executive recognizes and
acknowledges that the Corporation's operating procedures or service techniques
are valuable, special and unique assets of the Corporation's business. The
Executive will not, during or after the term of his employment disclose the
list of the Corporation's operating procedures, or service techniques to any
person, firm,
<PAGE> 3
corporation, association or other entity for any reason or purpose whatsoever.
In the event of breach or threatened breach by the Executive of the provisions
of this paragraph, the Corporation shall be entitled to an injunction
restraining any such breach. Nothing herein shall be construed as prohibiting
the Corporation from pursuing any other remedies available to the Corporation
for such breach or threatened breach, including the recovery of damages from
the Executive. The Executive and Company will execute a supplemental Code of
Ethics in the form attached hereto as Exhibit "A".

9. Vacations: The Executive shall be entitled each year to a
vacation in accordance with the vacation policy of the Company.

10. Disability: If the Executive is unable to perform his services
by reason of illness or total incapacity, he shall receive his full salary for
one (1) year of said total incapacity. Should said Executive be total
incapacitated beyond a one-year period, so that he is not able to devote full
time to his employment in said Corporation, then this Agreement shall
terminate.

11. Death During Employment: If the Executive dies during the term
of this employment, the Corporation shall pay to the estate of the Executive
the compensation which would be equal to twenty four (24) months compensation,
such compensation to be paid over the course of twenty four (24) months in the
same manner and under the same terms as it would have been paid if he had still
been working for the Corporation. Additionally, the estate will be paid any
accumulated vacation pay. Such payments pursuant to his paragraph shall
constitute the full compensation of said Executive and he and his estate shall
have no further claim for compensation by reason of his employment by the
Corporation.

12. Assignment: The acts and obligations of the corporation under
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the Corporation.
<PAGE> 4
13. Invalidity: If any paragraph or part of this Agreement is
invalid, it shall not affect the remainder of this Agreement but the remainder
shall be biding and effective against all parties.

14. If the Corporation's stock is purchased by an outside party
and/or the present Board of Directors is removed, this agreement will survive
such changes in full force and stead. If the new Board of Directors asks the
Executive to resign or substantially modify the duties or working conditions of
the Executive so that such duties or working conditions would not be in
accordance with the spirit of this agreement, then Executive could resign and
be entitle to 2.99 times the average of the last five (5) years compensation
paid to Executive. Executive will be paid such sum in the form as he deems
appropriate at that time. However, all payments made pursuant to this
paragraph shall be in accordance with Section 280 G of the Internal Revenue
Code.

15. Termination: The Corporation cannot terminate this agreement
except for: 1) the intentional, unapproved misuse of Corporate funds 2)
professional incompetency, or 3) willful neglect of duties or responsibilities.

17. Indemnification: The Corporation hereby agrees to indemnify
and hold the Executive harmless from any loss for any corporate undertaking, as
contemplated in Paragraph 7 herein, whereby a claim, allegation or cause of
action shall be made against the Executive in the performance of his
contractual duties. Said Indemnification shall include but not be limited to
reasonable cost incurred in defending the Executive in his faithful performance
of contractual duties.
<PAGE> 5

18. Entire Agreement: This contract embodies the whole Agreement
between the parties hereto and there are no inducements, promises, terms
conditions or obligations made or entered into by the Corporation or the
Executive other than contained herein. This contract may not be changed except
in writing.

IN WITNESS WHEREOF, the parties here hereunto signed and sealed this
Agreement the date first above written.

Signee Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.

\s\
- --------------------------- -----------------------------
By: Lance B. Rosemore
President
- ---------------------------

"EXECUTIVE"

\s\
- --------------------------- -----------------------------
By: Fredric M. Rosemore
Chairman of the Board
- ---------------------------

(CORPORATE SEAL)

<PAGE> 1
EXHIBIT 10.4

EXECUTIVE EMPLOYMENT CONTRACT

THIS AGREEMENT made as of July 1, 1996 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North
Miami Beach, Dade County, Florida, and Dallas, Dallas County, Texas,
hereinafter referred to as the "CORPORATION", and Jan F. Salit, hereinafter
referred to as "EXECUTIVE".

WITNESSETH THAT:

In consideration of the promises herein contained, the parties hereto
mutually agree as follows:

1. Employment: The Corporation hereby employs the Executive as
its Executive Vice President and Chief Investment Officer with such powers and
duties as may be specified by the Board of Directors. The Executive hereby
accepts employment upon the terms and conditions as hereinafter set forth.

The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
<PAGE> 2
4. Authorized Expenses: The Executive is authorized to incur
reasonable expenses for the promotion of the business of the Corporation. The
Corporation will reimburse the Executive for all such reason able expenses upon
the presentation by the Executive, from time to time, of an itemized account of
such expenditures.

6. Working Facilities: The Executive shall be furnished with
such facilities and services suitable to his position and adequate for the
performance of his duties.

7. Duties: The Executive is employed in an executive and
supervisory capacity and shall perform such duties consistent herewith as the
Board of Directors of the Corporation shall from time to time specify. The
precise services of the Executive may be extended or curtailed, from time
<PAGE> 3
to time, at the discretion of the Board of Directors of the Corporation.

9. Vacations: The Executive shall be entitled each year to a
vacation in accordance with the vacation policy of the Company.

11. Death During Employment: If the Executive dies during the
term of this employment, the Corporation shall pay to the estate the Executive
the compensation which would be equal to twenty four (24) months compensation,
such compensation to be paid over the course of twenty four (24) months in the
same manner and under the same terms as it would have been paid if he had still
been working for the Corporation. Additionally, the estate will be paid any
accumulated vacation pay. Such payments pursuant to this paragraph shall
constitute the full compensation of said Executive and he and his estate shall
have no further claim for compensation
<PAGE> 4
by reason of his employment by the Corporation.

12. Assignment: The acts and obligations of the Corporation under
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the Corporation.

13. Invalidity: If any paragraph or part of this Agreement is
invalid, it shall not affect the remainder of this Agreement but the remainder
shall be binding and effective against all parties.

14. If the Corporation's stock is purchased by an outside party
and/or the present Board of Directors is removed, this agreement will survive
such changes in full force and stead. If the new Board of Directors asks the
Executive to resign or substantially modify the duties or working conditions of
the Executive so that such duties or working conditions would not be in
accordance with the spirit of this agreement, then Executive could resign and
be entitled to 2.99 times the average of (i) the last five (5) years
compensation paid to Executive or (ii) such Executive has not been employed
five (5) years, the average annual salary since commencement of this contract.
Executive will be paid such sum in the form as he deems appropriate at that
time. However, all payments made pursuant to this paragraph shall be in
accordance with Section 280 G of the Internal Revenue Code.

Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.

\s\
- ---------------------------------- -----------------------------
By: Lance B. Rosemore
President

- ----------------------------------

"EXECUTIVE"

\s\
- ---------------------------------- ----------------------------
By: Jan F. Salit,
Executive Vice President
and Chief Investment Officer

- ----------------------------------

(CORPORATE SEAL)

<PAGE> 1
EXHIBIT 10.5

EXECUTIVE EMPLOYMENT CONTRACT

THIS AGREEMENT made as of July 1, 1996 by and between PMC Capital,
Inc., a Florida Corporation with its principal places of business in North
Miami Beach, Dade County, Florida, and Dallas, Dallas County, Texas,
hereinafter referred to as the "CORPORATION", and Barry N. Berlin, hereinafter
referred to as "EXECUTIVE".

WITNESSETH THAT:

In consideration of the promises herein contained, the parties hereto
mutually agree as follows:

1. Employment: The Corporation hereby employs the Executive as
its Chief Financial Officer with such powers and duties as may be specified by
the Board of Directors. The Executive hereby accepts employment upon the terms
and conditions as hereinafter set forth.

The Board of Directors may consider bonus compensation for the
Executive if the performance of PMC Capital, Inc. and the Executive justifies
such bonus compensation.
4. Authorized Expenses: The Executive is authorized to incur
reasonable expenses for
<PAGE> 2
the promotion of the business of the Corporation. The Corporation will
reimburse the Executive for all such reasonable expenses upon the presentation
by the Executive, from time to time, of an itemized account of such
expenditures.

The Executive shall be entitled to such additional and other fringe
benefits as the Board of Directors shall from time to time authorize, including
but not limited to: A) health insurance coverage for the Executive, his wife
and minor children; B) a monthly automotive allowance of $450, whereby the
Executive is to provide an automobile to be utilized for his own company needs.
All maintenance, insurance etc. (excluding fuel) will be the responsibility and
expense of the Executive; C) the cost of all continuing professional education
related courses required to maintain CPA certification.

6. Working Facilities: The Executive shall be furnished with
such facilities and services suitable to his position and adequate for the
performance of his duties.

7. Duties: The Executive is employed in an executive and
supervisory capacity and shall perform such duties consistent herewith as the
President of the Corporation shall from time to time specify. The precise
services of the Executive may be extended or curtailed, from time to time,
<PAGE> 3
at the discretion of the Board of Directors of the Corporation.

9. Vacations: The Executive shall be entitled each year to a
vacation in accordance with the vacation policy of the Company.

11. Death During Employment: If the Executive dies during the
term of this employment, the Corporation shall pay to the estate the Executive
the compensation which would be equal to twenty four (24) months compensation,
such compensation to be paid over the course of twenty four (24) months in the
same manner and under the same terms as it would have been paid if he had still
been working for the Corporation. Additionally, the estate will be paid any
accumulated vacation pay. Such payments pursuant to this paragraph shall
constitute the full compensation of said Executive and he and his estate shall
have no further claim for compensation
<PAGE> 4
by reason of his employment by the Corporation.

12. Assignment: The acts and obligations of the Corporation under
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the Corporation.

13. Invalidity: If any paragraph or part of this Agreement is
invalid, it shall not affect the remainder of this Agreement but the remainder
shall be binding and effective against all parties.

14. If the Corporation's stock is purchased by an outside party
and/or the present Board of Directors is removed, this agreement will survive
such changes in full force and stead. If the new Board of Directors asks the
Executive to resign or substantially modify the duties or working conditions of
the Executive so that such duties or working conditions would not be in
accordance with the spirit of this agreement, then Executive could resign and
be entitled to 2.99 times the average of (I) the last five (5) years
compensation paid to Executive or (ii) such Executive has not been employed
five (5) years, the average annual salary since commencement of this contract.
Executive will be paid such sum in the form as he deems appropriate at that
time. However, all payments made pursuant to this paragraph shall be in
accordance with Section 280 G of the Internal Revenue Code.

Signed, Sealed and Delivered "Corporation"
In the presence of: PMC Capital, Inc.

\s\
- ----------------------------------- -----------------------------
By: Lance B. Rosemore
President

- -----------------------------------

"EXECUTIVE"

\s\
- ----------------------------------- -----------------------------
By: Barry N. Berlin,
Chief Financial Officer

- ----------------------------------

(CORPORATE SEAL)

<PAGE> 1

EXHIBIT 10.7

EXECUTION

LOAN AGREEMENT

May 15, 1996

PMC Capital, Inc.
17290 Preston Road
Dallas, Texas 75252

Ladies and Gentlemen:

This Loan Agreement (this "Loan Agreement") will serve to set forth
the terms of the financing transactions by and between PMC CAPITAL, INC., a
Florida corporation ("Borrower"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION
("Bank"):

1. CREDIT FACILITY. Subject to the terms and conditions set
forth in this Loan Agreement and the other agreements, instruments and
documents evidencing, governing, and/or pertaining to the Loan, as hereinafter
defined (collectively, together with this Loan Agreement, referred to
hereinafter as the "Loan Documents"), Bank hereby agrees to lend to Borrower,
on a revolving basis from time to time during the period commencing on the date
hereof and continuing through the Maturity Date, such amounts as Borrower may
request hereunder; provided, however, the total principal amount outstanding at
any time shall not exceed $15,000,000 (the "Revolving Line of Credit").
Subject to the terms and conditions hereof, Borrower may borrow, repay and
reborrow hereunder. The sums advanced under the Revolving Line of Credit shall
be used for the funding of Commercial Loans by Borrower or any of its
Subsidiaries. All advances under the Revolving Line of Credit shall be
collectively called the "Loan". Any request by Borrower of an advance
hereunder shall be received by Bank not later than 10:00 a.m., Dallas, Texas
time, on the requested date of such advance. Each request by Borrower for an
advance shall specify (i) the aggregate amount of such requested advance, and
(ii) the purpose for such advance if it is other than the funding of Commercial
Loans, with such requests to be in the form attached hereto as Exhibit A. Any
request for an advance received by Bank after 10:00 a.m., Dallas, Texas time
will be deemed to be a request for Bank to advance funds on the next following
Business Day.
<PAGE> 2
PMC Capital, Inc.
May 15, 1996
Page 2

2. PROMISSORY NOTE. The Loan shall be evidenced by a promissory
note (together with any renewals, extensions and increases thereof, the "Note")
duly executed by Borrower and payable to the order of Bank, in the form
attached hereto as Exhibit A. Interest on the Note shall accrue at the rate
set forth therein. The principal of and interest on the Note shall be due and
payable in accordance with the terms and conditions set forth in the Note and
in this Loan Agreement.

3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants, and upon each request for an advance under the Revolving Line of
Credit further represents and warrants, to Bank as follows:

(a) Existence. Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Florida and all other states where qualification is required, and has
all requisite power and authority to execute and deliver the Loan
Documents.

(b) Binding Obligations. The execution, delivery, and
performance of this Loan Agreement and all of the other Loan Documents
by Borrower have been duly authorized by all necessary action by
Borrower, and constitute legal, valid and binding obligations of
Borrower, enforceable in accordance with their respective terms,
except as limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and
except to the extent specific remedies may generally be limited by
equitable principles.

(c) No Consent. The execution, delivery and performance
of this Loan Agreement and the other Loan Documents, and the
consummation of the transactions contemplated hereby and thereby, do
not (i) conflict with, result in a violation of, or constitute a
default under (A) any provision of its articles or certificate of
incorporation or bylaws or any agreement or other instrument binding
upon Borrower, or (B) any law, governmental regulation, court decree
or order applicable to Borrower
<PAGE> 3
PMC Capital, Inc.
May 15, 1996
Page 3

(including without limitation, the Investment Company Act of 1940, as
amended), or (ii) require the consent, approval or authorization of
any third party.

(d) Financial Condition. Each financial statement of
Borrower supplied to the Bank truly discloses and fairly presents
Borrower's Consolidated financial condition as of the date of each
such statement. There has been no material adverse change in such
financial condition or results of operations of Borrower subsequent to
the date of the most recent financial statement supplied to the Bank.

(e) Litigation. There are no actions, suits or
proceedings, pending or, to the knowledge of Borrower, threatened
against or affecting Borrower or any Subsidiary of Borrower or their
properties, before any court or governmental department, commission or
board, which, if determined adversely to Borrower or such Subsidiary,
would have a material adverse effect on the financial condition,
properties, or operations of Borrower.

(f) Taxes; Governmental Charges. Borrower has filed all
federal, state and local tax reports and returns required by any law
or regulation to be filed by it and has either duly paid all taxes,
duties and charges indicated due on the basis of such returns and
reports, or made adequate provision for the payment thereof, and the
assessment of any material amount of additional taxes in excess of
those paid and reported is not reasonably expected.

4. CONDITIONS PRECEDENT TO ADVANCES. Bank's obligation to make
any advance under this Loan Agreement and the other Loan Documents shall be
subject to the conditions precedent that, as of the date of such advance and
after giving effect thereto (i) all representations and warranties made to Bank
in this Loan Agreement and the other Loan Documents shall be true and correct,
as of and as if made on such date, (ii) no material adverse change in the
individual or Consolidated financial condition of Borrower since the effective
date of the most recent financial statements furnished to Bank by Borrower
shall have occurred and
<PAGE> 4
PMC Capital, Inc.
May 15, 1996
Page 4

be continuing, (iii) no event has occurred and is continuing, or would result
from the requested advance, which with notice or lapse of time, or both, would
constitute an Event of Default, and (iv) Bank's receipt of all Loan Documents
appropriately executed by Borrower and all other proper parties.

5. AFFIRMATIVE COVENANTS. Until (i) the Note and all other
obligations and liabilities of Borrower under this Loan Agreement and the other
Loan Documents are fully paid and satisfied, and (ii) Bank has no further
commitment to lend hereunder, Borrower agrees and covenants that it will,
unless Bank shall otherwise consent in writing:

(a) Accounts and Records. Maintain its books and records
in accordance with generally accepted accounting principles.

(b) Right of Inspection. Permit Bank to visit its
properties and installations and to examine, audit and make and take
away copies or reproductions of Borrower's books and records, at all
reasonable times. Such examinations, audits and preparation of copies
will be paid by Bank.

(c) Right to Additional Information. Furnish Bank with
such additional information and statements, lists of assets and
liabilities, tax returns, and other reports with respect to Borrower's
individual and Consolidated financial condition and business
operations as Bank may request from time to time.

(d) Compliance with Laws. Conduct its business, and
cause its Subsidiaries to conduct their businesses, in an orderly and
efficient manner consistent with good business practices, and perform
and comply with all statutes (including without limitation, the
Investment Company Act of 1940, as amended), rules, regulations and/or
ordinances imposed by any governmental unit upon Borrower, its
Subsidiaries, their businesses, operations and properties (including
without limitation, all applicable environmental statutes, rules,
regulations and ordinances).
<PAGE> 5
PMC Capital, Inc.
May 15, 1996
Page 5

(e) Taxes. Pay and discharge when due all of its
indebtedness and obligations, including without limitation, all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower, its Subsidiaries or their
properties, income, or profits, prior to the date on which penalties
would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's or any of its Subsidiaries'
properties, income, or profits; provided, however, Borrower will not
be required to pay and discharge any such assessment, tax, charge,
levy, lien or claim so long as (i) the legality of the same shall be
contested in good faith by appropriate judicial, administrative or
other legal proceedings, and (ii) Borrower shall have established on
its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien or claim in accordance with
generally accepted accounting principles, consistently applied.

(f) Insurance. Maintain insurance with respect to its
properties and business against such contingencies and casualties, of
such types (including fire and casualty, public liability, larceny,
embezzlement, and other criminal misappropriation insurance) and in
such amounts and with such carriers as are acceptable to Bank.

(g) Notice of Indebtedness. Promptly inform Bank of the
creation, incurrence or assumption by Borrower of any actual or
contingent liabilities not permitted under this Loan Agreement.

(h) Notice of Litigation. Promptly after the
commencement thereof, notify Bank of all actions, suits and
proceedings before any court or any governmental department,
commission or board affecting Borrower, any of its Subsidiaries or any
of their properties in which an adverse decision could have a material
adverse effect upon Borrower's individual or Consolidated financial
conditions, businesses or operations.
<PAGE> 6
PMC Capital, Inc.
May 15, 1996
Page 6

(i) Notice of Material Adverse Change. Promptly inform
Bank of (i) any and all material adverse changes in Borrower's
individual or Consolidated financial condition, and (ii) all claims
made against Borrower or any of its Subsidiaries which could
materially affect the individual or Consolidated financial condition
of Borrower.

(j) Additional Documentation. Execute and deliver, or
cause to be executed and delivered, any and all other agreements,
instruments or documents which Bank may reasonably request in order to
give effect to the transactions contemplated under this Loan Agreement
and the other Loan Documents.

(k) Repayment of Intercompany Debt. Cause each of its
Subsidiaries to apply all net proceeds from the sale of any Commercial
Loan to indebtedness then owed by such Subsidiary to Borrower,
provided that said repayment is not in conflict with any statutes,
rules and/or regulations imposed by any governmental unit upon
Borrower.

6. NEGATIVE COVENANTS. Until (i) the Note and all other
obligations and liabilities of Borrower under this Loan Agreement and the other
Loan Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower will not, without the prior written
consent of Bank:

(a) Nature of Business. Make any material change in the
nature of its business as carried on as of the date hereof.

(b) Indebtedness. Create, incur or assume any
indebtedness for borrowed money or issue or assume any other note,
debenture, bond or other evidences of indebtedness, or guarantee any
such indebtedness or such evidences of indebtedness of others, other
than (i) borrowings from Bank, and (ii) borrowings outstanding on the
date hereof and disclosed in writing to Bank.
<PAGE> 7
PMC Capital, Inc.
May 15, 1996
Page 7

(d) Liens. Create or incur any lien or encumbrance on
any of its assets, other than (i) liens and security interest securing
indebtedness owing to Bank, (ii) liens for taxes, assessments or
similar charges which are (1) not yet due or (2) being contested in
good faith by appropriate proceedings and for which Borrower has
established adequate reserves, and (iii) liens and security interest
existing as of the date hereof which have been disclosed to and
approved by the Bank in writing.

(e) Transfer of Ownership. Permit the sale or other
disposition of all or substantially all of the outstanding capital
stock or property of Borrower.

(f) Transactions with Affiliates. Enter into any
transaction, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service, with any
Affiliate (as hereinafter defined) of Borrower, except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's
business and upon fair and reasonable terms no less favorable to
Borrower than would be obtained in a comparable arm's-length
transaction with a person or entity not an Affiliate of Borrower.

7. FINANCIAL COVENANTS. Until (i) the Note and all other
obligations and liabilities of Borrower under this Loan Agreement and the other
Loan Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower will maintain the following financial
covenants:

(a) Net Worth. Borrower will maintain, at all times, Net
Worth of not less than $63,000,000.

(b) Liabilities/Net Worth. Borrower will maintain, at
all times, a ratio of (i) total liabilities to (ii) Net Worth of not
greater than 2.0 to 1.0.
<PAGE> 8
PMC Capital, Inc.
May 15, 1996
Page 8

(c) Maximum Delinquencies. Borrower will maintain, at
all times, a Delinquency Ratio (expressed as a percentage) not in
excess of nine percent (9%). The Delinquency Ratio shall be computed
by dividing (i) the aggregate outstanding principal amount of
Delinquent Loans owned by Borrower and its Subsidiaries by (ii) the
sum of (x) the aggregate outstanding principal amount of Commercial
Loans owned by Borrower and its Subsidiaries plus (y) assets acquired
by Borrower and its Subsidiaries in satisfaction of debt, including
any assets acquired through foreclosure, by deed-in-lieu of
foreclosure, liquidation or other similar actions.

(d) Asset Coverage Ratio. Borrower will maintain, at all
times, an Asset Coverage Ratio of not less than 1.75 to 1.0. "Asset
Coverage Ratio" means the ratio of (i) Borrower's cash and cash
equivalents plus the aggregate outstanding principal balance of
Performing Commercial Loans then owned by Borrower or its Subsidiaries
less the aggregate outstanding amount of "B pieces" to (ii) the
outstanding principal amount of Senior Debt. The Asset Coverage Ratio
shall be calculated on a Consolidated basis.

(e) Maximum Net Charge-offs. Borrower will maintain, as
of the end of each fiscal year, a Maximum Net Charge-Offs Ratio
(expressed as a percentage) of not greater than 2%. The Maximum Net
Charge-Offs Ratio shall be computed by dividing (i) the sum of (x) the
Net Amount of Charge-Offs plus (y) the change in unrealized
depreciation and amortization on Borrower's investments during such
fiscal year by (ii) the average of the outstanding principal balance
of the Commercial Loans owned by Borrower and its Subsidiaries during
such fiscal year.

8. REPORTING REQUIREMENTS. Until (i) the Note and all other
obligations and liabilities of Borrower under this Loan Agreement and the other
Loan Documents are fully paid and satisfied, and (ii) the Bank has no further
commitment to lend hereunder, Borrower will, unless Bank shall otherwise
consent in writing, furnish to Bank:
<PAGE> 9
PMC Capital, Inc.
May 15, 1996
Page 9

(a) SEC Filings. As soon as available, and in any event
(i) within sixty days after the end of each of the first three fiscal
quarters of Borrower, a copy of Borrower's 10-Q, (ii) within 120 days
after the end of each fiscal year of Borrower, a copy of Borrower's
10-K, and (iii) promptly upon their becoming available, copies of all
registration statements, other periodic reports and statements and
schedules filed by Borrower with any securities exchange, the
Securities and Exchange Commission or any similar governmental
authority.

(b) Annual Financial Statements. As soon as available
and in any event within 120 days after the end of each fiscal year of
Borrower, a Consolidated and consolidating balance sheet and income
statement of Borrower as of the end of such fiscal year, in each case
audited by independent public accountants of recognized standing
acceptable to Bank.

(c) Compliance Certificate. A certificate signed by the
president, chief financial officer or executive vice president of
Borrower, within 60 days after the end of each fiscal quarter, stating
that Borrower is in full compliance with all of its obligations under
this Loan Agreement and all other Loan Documents and is not in default
of any term or provisions hereof or thereof, and demonstrating
compliance with all financial ratios and covenants set forth in this
Loan Agreement.

9. EVENTS OF DEFAULT. Each of the following shall constitute an
"Event of Default" under this Loan Agreement:

(a) The failure, refusal or neglect of Borrower to pay
when due any part of the principal of, or interest on, the Note or any
other indebtedness or obligations owing to Bank by Borrower from time
to time and such failure continues for a period of fifteen (15) days
after notice of such failure is given by Lender to Borrower.
<PAGE> 10
PMC Capital, Inc.
May 15, 1996
Page 10

(b) The failure of Borrower to timely and properly
observe, keep or perform any covenant, agreement, warranty or
condition required herein or in any of the other Loan Documents and
such failure remains unremedied for a period of fifteen (15) days
after notice of such failure is given by Lender to Borrower.

(c) The occurrence of an event of default under any of
the other Loan Documents or under any other agreement now existing or
hereafter arising between Bank and Borrower.

(d) Any representation contained herein or in any of the
other Loan Documents made by Borrower is false or misleading in any
material respect and remains unremedied after notice is given by
Lender to Borrower.

(e) The occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing by Borrower to
any third party under any agreement or understanding.

(f) If Borrower: (i) becomes insolvent, or makes a
transfer in fraud of creditors, or makes an assignment for the benefit
of creditors, or admits in writing its inability to pay its debts as
they become due; (ii) generally is not paying its debts as such debts
become due; (iii) has a receiver, trustee or custodian appointed for,
or take possession of, all or substantially all of the assets of such
party, either in a proceeding brought by such party or in a proceeding
brought against such party and such appointment is not discharged or
such possession is not terminated within sixty (60) days after the
effective date thereof or such party consents to or acquiesces in such
appointment or possession; (iv) files a petition for relief under the
United States Bankruptcy Code or any other present or future federal
or state insolvency, bankruptcy or similar laws (all of the foregoing
hereinafter collectively called "Applicable Bankruptcy Law") or an
involuntary petition for relief is filed against such party under any
Applicable Bankruptcy Law and such involuntary petition is not
<PAGE> 11
PMC Capital, Inc.
May 15, 1996
Page 11

dismissed within sixty (60) days after the filing thereof, or an order
for relief naming such party is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension,
reorganization or other relief of debtors now or hereafter existing is
requested or consented to by such party; (v) fails to have discharged
within a period of thirty (30) days any attachment, sequestration or
similar writ levied upon any property of such party; or (vi) fails to
pay within thirty (30) days any final money judgment against such
party.

(g) The liquidation, dissolution, merger or consolidation
of Borrower.

(h) The entry of any judgment against Borrower or the
issuance or entry of any attachment or other lien against any of the
property of Borrower for an amount in excess of $200,000, if
undischarged, unbonded or undismissed within thirty (30) days after
such entry.

(i) Either Lance Rosemore ceases to hold the position of
Chief Executive Officer or Andrew Rosemore ceases to hold the position
of Chief Operating Officer.

Nothing contained in this Loan Agreement shall be construed to limit the events
of default enumerated in any of the other Loan Documents and all such events of
default shall be cumulative.

10. REMEDIES. Upon the occurrence of any one or more of the
foregoing Events of Default, (a) the entire unpaid balance of principal of the
Note, together with all accrued but unpaid interest thereon, and all other
indebtedness owing to Bank by Borrower at such time shall, at the option of
Bank, become immediately due and payable without further notice, demand,
presentation, notice of dishonor, notice of intent to accelerate, notice of
acceleration, protest or notice of protest of any kind, all of which are
expressly waived by Borrower, and (b) Bank may, at its option, cease further
advances under the Note; provided, however, concurrently and automatically with
the occurrence of an Event of Default under subparagraph (f) in the immediately
<PAGE> 12
PMC Capital, Inc.
May 15, 1996
Page 12

preceding paragraph (i) further advances under the Note shall cease, and (ii)
the Note and all other indebtedness owing to Bank by Borrower at such time
shall, without any action by Bank, become due and payable, without further
notice, demand, presentation, notice of dishonor, notice of acceleration,
notice of intent to accelerate, protest or notice of protest of any kind, all
of which are expressly waived by Borrower. All rights and remedies of Bank set
forth in this Loan Agreement and in any of the other Loan Documents may also be
exercised by Bank, at its option to be exercised in its sole discretion, upon
the occurrence of an Event of Default.

11. DEFINITIONS. For purposes of this Loan Agreement, the
following terms have the meanings given below:

"Affiliate" means any individual or entity directly or
indirectly controlling, controlled by, or under common control with,
another individual or entity.

"B pieces" means that portion of Commercial Loans retained by
Borrower or its Subsidiaries out of Commercial Loans sold under an
asset securitization.

"Commercial Loans" means loans made by Borrower or any of its
Subsidiaries to any person other than an Affiliate of Borrower for
business or commercial purposes and not for family, consumer or
household use, which loans are secured by real property or personal
property.

"Consolidated" refers to the consolidation of any person or
entity, in accordance with generally accepted accounting principles,
with its properly consolidated subsidiaries.

"Delinquent Loans" means, at any time, the sum of (x) the
aggregate unpaid principal amount of Commercial Loans owned by
Borrower or any of its Subsidiaries which are thirty-one (31) or more
days delinquent (whether under the initial payment plan or a modified
payment plan established pursuant to a workout) plus (y) assets
acquired in
<PAGE> 13
PMC Capital, Inc.
May 15, 1996
Page 13

satisfaction of debt, including any assets acquired through
foreclosure, by deed-in-lieu of foreclosure, liquidation or other
similar actions, plus (z) Commercial Loans then subject to any legal
suit, arbitration proceeding or other similar action or proceeding.

"Maturity Date" means May 15, 1998.

"Net Amount of Charge-Offs" means, for any fiscal year, the
aggregate amount of Commercial Loans charged-off (without reduction)
by Borrower or its Subsidiaries during such fiscal year minus the
aggregate amount of Commercial Loans previously charged-off by
Borrower or its Subsidiaries that is recovered during such fiscal
year.

"Net Worth" means with respect to Borrower, as of any date,
Borrower's total assets less total liabilities.

"Performing Commercial Loans" means a Commercial Loan with
respect to which (i) no payment of principal or interest is thirty-one
(31) days or more past due (whether under the initial payment plan or
a modified payment plan established pursuant to a workout), and (ii)
there is no claim of fraud in connection with the origination of such
Commercial Loan.

"Senior Debt" means (i) the Loan, (ii) all obligations of
Borrower issued to certain insurance companies per attached Schedule
1, (iii) all other obligations of Borrower for borrowed money and (iv)
all liabilities of Borrower under any guarantee or endorsement of the
type of debt described in the immediately preceding clause (iii).

"Subsidiary" means, with respect to any person or entity, any
corporation, association, partnership, joint venture or other business
or corporate entity, enterprise or organization which is directly or
indirectly (through one or more intermediaries) controlled by or owned
fifty percent or more by such person or entity.
<PAGE> 14
PMC Capital, Inc.
May 15, 1996
Page 14

12. RIGHTS CUMULATIVE. All rights of Bank under the terms of this
Loan Agreement shall be cumulative of, and in addition to, the rights of Bank
under any and all other agreements between Borrower and Bank (including, but
not limited to, the other Loan Documents), and not in substitution or
diminution of any rights now or hereafter held by Bank under the terms of any
other agreement.

13. WAIVER AND AGREEMENT. Neither the failure nor any delay on
the part of Bank to exercise any right, power or privilege herein or under any
of the other Loan Documents shall operate as a waiver thereof, nor shall any
single or partial exercise of such right, power or privilege preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. No waiver of any provision in this Loan Agreement or in any of the
other Loan Documents and no departure by Borrower therefrom shall be effective
unless the same shall bein writing and signed by Bank, and then shall be
effective only in the specific instance and for the purpose for which given and
to the extent specified in such writing. No modification or amendment to this
Loan Agreement or to any of the other Loan Documents shall be valid or
effective unless the same is signed by the party against whom it is sought to
be enforced.

14. BENEFITS. This Loan Agreement shall be binding upon and inure
to the benefit of Bank and Borrower, and their respective successors and
assigns, provided, however, that Borrower may not, without the prior written
consent of Bank, assign any rights, powers, duties or obligations under this
Loan Agreement or any of the other Loan Documents.

15. NOTICES. All notices, requests, demands or other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and given by (i) personal delivery, (ii) expedited delivery
service with proof of delivery, or (iii) United States mail, postage prepaid,
registered or certified mail, return receipt requested, sent to the intended
addressee at the address set forth on the signature page hereof and shall be
deemed to have been received either, in the case of personal delivery, as of
the time of personal delivery, in the
<PAGE> 15
PMC Capital, Inc.
May 15, 1996
Page 15

case of expedited delivery service, as of the date of first attempted delivery
at the address and in the manner provided herein, or in the case of mail, upon
deposit in a depository receptacle under the care and custody of the United
States Postal Service. Either party shall have the right to change its address
for notice hereunder to any other location within the continental United States
by notice to the other party of such new address at least thirty (30) days
prior to the effective date of such new address.

16. CONSTRUCTION. This Loan Agreement and the other Loan
Documents have been executed and delivered in the State of Texas, shall be
governed by and construed in accordance with the laws of the State of Texas,
and shall be performable by the parties hereto in the county in Texas where the
Bank's address set forth on the signature page hereof is located.

17. INVALID PROVISIONS. If any provision of this Loan Agreement
or any of the other Loan Documents is held to be illegal, invalid or
unenforceable under present or future laws, such provision shall be fully
severable and the remaining provisions of this Loan Agreement or any of the
other Loan Documents shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its
severance.

18. EXPENSES. Borrower shall pay all costs and expenses
(including, without limitation, reasonable attorneys' fees) in connection with
(i) the preparation, negotiation and execution of this Loan Agreement and the
other Loan Documents, which costs and expenses shall not exceed $5,000, (ii)
any action required in the course of administration of the indebtedness and
obligations evidenced by the Loan Documents, and (iii) any action in the
enforcement of Bank's rights upon the occurrence of Event of Default.

19. PARTICIPATION OF THE LOAN. Borrower agrees that Bank may, at
its option, sell interests in the Loan and its rights under this Loan Agreement
to a financial institution or institutions and, in connection with each such
sale, Bank may
<PAGE> 16
PMC Capital, Inc.
May 15, 1996
Page 16

disclose any financial and other information available to Bank concerning
Borrower to each perspective purchaser.

20. ENTIRE AGREEMENT. This Loan Agreement (together with the
other Loan Documents) contains the entire agreement among the parties regarding
the subject matter hereof and supersedes all prior written and oral agreements
and understandings among the parties hereto regarding same.

21. CONFLICTS. In the event any term or provision hereof is
inconsistent with or conflicts with any provision of the other Loan Documents,
the terms and provisions contained in this Loan Agreement shall be controlling.

22. COUNTERPARTS. This Loan Agreement may be separately executed
in any number of counterparts, each of which shall be an original, but all of
which, taken together, shall be deemed to constitute one and the same
instrument.

23. RENEWAL AND EXTENSION. On or before April 15th of each
calendar year which occurs prior to the Maturity Date (as the same may have
been extended hereunder) but no sooner than thirty (30) days preceding such
date, Borrower may submit a request to Bank to extend the Maturity Date for an
additional calendar year (e.g., Borrower may submit, between March 15, 1997 and
April 15, 1997, the first of such requests to extend the Maturity Date to May
15, 1999, being one year after the original Maturity Date), by delivering to
Bank a written request to extend the Maturity Date. Bank may decline to grant
such extension for any reason in its sole and absolute discretion. IF BANK
DECLINES TO EXTEND THE MATURITY DATE, BORROWER SHALL BE REQUIRED TO REPAY THE
ENTIRE PRINCIPAL BALANCE OF THE OBLIGATIONS AND ALL ACCRUED UNPAID INTEREST ON
THE MATURITY DATE AS THE SAME MAY PREVIOUSLY HAVE BEEN EXTENDED IN ACCORDANCE
HEREWITH. BANK IS UNDER NO OBLIGATION TO EXTEND OR REFINANCE THE LOAN AT THAT
TIME. IF BANK AGREES TO EXTEND THE LOAN, BANK MAY, IN ITS SOLE DISCRETION,
SPECIFY THE CONDITIONS APPLICABLE TO SUCH EXTENSION WHICH MAY INCLUDE, WITHOUT
LIMITATION, THE DELIVERY TO BANK OF SUCH DOCUMENTS, INSTRUMENTS AND ASSURANCES
AS BANK MAY DEEM NECESSARY OR APPROPRIATE TO EVIDENCE SUCH EXTENSION.
<PAGE> 17
PMC Capital, Inc.
May 15, 1996
Page 17

If the foregoing correctly sets forth our mutual agreement, please so
acknowledge by signing and returning this Loan Agreement to the undersigned.

Very truly yours,

BANK ONE, TEXAS, N.A.

By: \s\
--------------------------------
David L. Perdue
Senior Vice President

Bank's Address:
1717 Main Street, 3rd Floor
Dallas, Texas 75201

ACCEPTED as of the date first
written above.

BORROWER: Borrower's Address:

PMC CAPITAL, INC. 17290 Preston Road
Dallas, Texas 75252

By: \s\
--------------------------------
Lance B. Rosemore
President and CEO
<PAGE> 18
EXHIBIT A

REQUEST FOR ADVANCE

Reference is made to that certain Loan Agreement dated as of May 15,
1996 (as from time to time amended, the "Agreement"), by and between PMC
CAPITAL, INC. ("Borrower"), and BANK ONE, TEXAS, N.A. ("Bank"). Terms which
are defined in the Agreement are used herein with the meanings given them in
the Agreement. Pursuant to the terms of the Agreement Borrower hereby requests
Bank to make an advance to Borrower in the principal amount of $__________
and specifies ____________, 19__, as the date Borrower desires for Bank to make
such advance and to deliver to Borrower the proceeds thereof.

To induce Bank to make such advance Borrower hereby represents,
warrants, acknowledges, and agrees that:

(a) The officer of Borrower signing this instrument is the
duly elected, qualified and acting officer as indicated below such
officer's signature hereto having all necessary authority to act for
Borrower in making the request herein contained.

(b) The representations and warranties of Borrower set forth
in the Agreement and the other Loan Documents are true and correct on
and as of the date hereof (except to the extent that the facts on
which such representations and warranties are based have been changed
by the extension of credit under the Agreement), with the same effect
as though such representations and warranties had been made on and as
of the date hereof.

(c) There does not exist on the date hereof any condition or
event which constitutes an Event of Default which has not been waived
in writing of the Agreement; nor will any such Event of Default exist
upon Borrower's receipt and application of the advance requested
hereby. Borrower will use the advance hereby requested for the
funding of Commercial Loans.

(d) Except to the extent waived in writing, Borrower has
performed and complied with all agreements and conditions in the
Agreement required to be performed or

-1-
<PAGE> 19
complied with by Borrower on or prior to the date hereof, and each of
the conditions precedent to advances contained in the Agreement
remains satisfied.

(e) The Loan Documents have not been modified, amended or
supplemented by any unwritten representations or promises or by any
course of dealing. The Agreement and the other Loan Documents are
hereby ratified, approved, and confirmed in all respects.

The officer signing this instrument hereby certifies that, to the best
of his knowledge after due inquiry, the above representations, warranties,
acknowledgements, and agreements of Borrower are true, correct and complete.

IN WITNESS WHEREOF, this instrument is executed as of
____________, 1996.

PMC CAPITAL, INC.

By:
---------------------------
Name:
Title:

-2-

<PAGE> 1
EXHIBIT 10.8

SERVICING AGREEMENT

by and among

SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION,
as Trustee and as Supervisory Servicer

PMC CAPITAL LIMITED PARTNERSHIP,
as Issuer

and

PMC CAPITAL, INC.,
as Servicer

_____________________________________________

Dated as of November 1, 1996
_____________________________________________

$40,746,221
PMC CAPITAL LIMITED PARTNERSHIP
LOAN-BACKED FIXED RATE NOTES,
SERIES 1996-A
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITIONS

ARTICLE II - REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1 Representations and Warranties of Servicer . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Covenants of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.3 Closing Certificate and Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.4 Fidelity Bond and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.5 Access to Certain Documentation and Information Regarding the Loans . . . . . . . . . . . . 6
Section 2.6 Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE III - GENERAL ADMINISTRATION AND SERVICING OF LOANS
Section 3.1 General Duties of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.2 No Assignment or Delegation of Duties by Servicer . . . . . . . . . . . . . . . . . . . . . 8
Section 3.3 Establishment of Lockbox Account; Notices to Obligors; Deposits in Lockbox Account . . . . 9
Section 3.4 Permitted Withdrawals From the Lockbox Account . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.5 Payment of Taxes and Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.6 Collection of Certain Loan Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 3.7 Limitation of Liability of Servicer's Officers and Others . . . . . . . . . . . . . . . . . 11
Section 3.8 Servicing Compensation; Advances and Expenses . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.9 The Trustee's, the Noteholders' and Supervisory Servicer's Right To Examine Servicer
Records and Audit Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.10 Maintenance and Release of Loan Documentation; Satisfaction of Mortgages . . . . . . . . . 12
Section 3.11 Notice of Liens and Other Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.12 Waivers, Releases, Condemnations, Easements and Alterations . . . . . . . . . . . . . . . . 14
Section 3.13 Limitation on Liability of Servicer and Others . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.14 Property Address Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE IV - SPECIFIC SERVICING PROCEDURES
Section 4.1 Assumption Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.2 Servicing Delinquent Accounts; Liquidation of Loans . . . . . . . . . . . . . . . . . . . . 16
Section 4.3 Foreclosure Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.4 Title, Management and Disposition of REO Property . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE V - REPORTS TO BE PROVIDED BY SERVICER
Section 5.1 Determination Date Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)

<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.2 Reports of Foreclosure and Abandonment of Mortgaged Property . . . . . . . . . . . . . . . 24
Section 5.3 Quarterly Statement as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 5.4 Annual Independent Public Accountants' Servicing Report . . . . . . . . . . . . . . . . . . 24
Section 5.5 Servicer's Financial Statements; Annual Certification . . . . . . . . . . . . . . . . . . . 24

ARTICLE VI - DEFAULTS
Section 6.1 Servicer Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 6.2 Notice of Servicer Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 6.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.4 Additional Remedies of Trustee Upon Servicer Defaults . . . . . . . . . . . . . . . . . . . 27
Section 6.5 Supervisory Servicer To Act; Appointment of Successor . . . . . . . . . . . . . . . . . . . 28
Section 6.6 Waiver of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE VII - TERMINATION
Section 7.1 Servicer Not To Resign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 7.2 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE VIII - MISCELLANEOUS PROVISIONS
Section 8.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.2 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.5 No Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.8 Notification to Rating Agency and Noteholders . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.9 Indulgences; No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 8.10 Titles Not To Affect Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.11 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.12 Recordation of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>

-ii-
<PAGE> 4
EXHIBIT A - Form of Trust Receipt
EXHIBIT B - Form of Lockbox Letter Agreement
EXHIBIT C - Form of Lockbox Notice Letter
EXHIBIT D - Form of Determination Date Report
EXHIBIT E - Form of Annual Statement
EXHIBIT F - Quarterly Officer's Certificate
EXHIBIT G - Officer's Certificate
EXHIBIT H - Form of Obligor Letter

SCHEDULE I - Definitions

-iii-
<PAGE> 5

SERVICING AGREEMENT

This Servicing Agreement (this "Agreement"), dated as of November 1,
1996, is made and entered into by and among SunTrust Bank, Central Florida,
National Association, as trustee (the "Trustee"), and as Supervisory Servicer
(the "Supervisory Servicer"), PMC Capital Limited Partnership, a Delaware
limited partnership, as issuer (the "Issuer"), and PMC Capital, Inc., a Florida
corporation, as servicer (the "Servicer").

PRELIMINARY STATEMENT

The Issuer is the owner of the Loans and the other property being
pledged, assigned and conveyed by it to the Trustee for inclusion in the Trust
Estate pledged to secure the Notes issued pursuant to the Indenture. The
Servicer is in the business, among other things, of servicing mortgage loans.
The Issuer hereby appoints the Servicer to service the Loans which are included
in the Trust Estate, and the Servicer hereby accepts that appointment.

All covenants and agreements made by the Issuer, the Servicer and the
Trustee herein are for the benefit of the Holders from time to time of the
Notes and the Supervisory Servicer. The Issuer, the Trustee and the Servicer
are entering into this Agreement for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged.

In consideration of the mutual agreements herein contained, the
Issuer, the Servicer, the Supervisory Servicer and the Trustee hereby agree as
follows:

ARTICLE I

DEFINITIONS

All capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in Schedule 1 attached hereto. Unless
otherwise provided, all calculations of interest pursuant to this Agreement are
based on a 360-day year of twelve 30-day months.

SERVICING AGREEMENT - PAGE 1

<PAGE> 6
ARTICLE II

REPRESENTATIONS, WARRANTIES AND COVENANTS

SECTION 1 REPRESENTATIONS AND WARRANTIES OF SERVICER. The
Servicer hereby represents and warrants to the Trustee, the Noteholders, the
Supervisory Servicer and the Issuer as of the Closing Date, and at all times
during the term of this Agreement shall be deemed to represent and warrant,
that:

(a) The Servicer has been duly formed and is validly
existing under the laws of the jurisdiction of its formation and is
duly qualified to do business and is in good standing under the laws
of each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the enforceability of, or its
ability to service, a Loan and no demand for such qualification has
been made upon the Servicer by any state, and, in any event the
Servicer is or will be in compliance with the laws of any such state
to the extent necessary to insure the enforceability of each Loan and
the servicing of the Loans in accordance with the terms of this
Agreement;

(b) The Servicer holds all material licenses,
certificates and permits from all governmental authorities necessary
for the conduct of its business (except where the failure to obtain
same would not materially and adversely affect the Servicer's ability
to perform its obligations hereunder in accordance with the terms of
this Agreement) and has received no notice of proceedings relating to
the revocation of any such license, certificate or permit which singly
or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, would materially and adversely affect the conduct of the
business, results of operations, net worth or condition (financial or
otherwise) of the Servicer;

(c) The Servicer has the full power and authority to
execute, deliver and perform, and to enter into and consummate all
transactions contemplated by this Agreement, has duly authorized the
execution, delivery and performance of this Agreement, has duly
executed and delivered this Agreement and this Agreement constitutes a
legal, valid and binding obligation of the Servicer, enforceable
against it in accordance with its terms, except as such enforcement
may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights in general and (ii) by general equity principles
(regardless of whether such enforcement is considered in a proceeding
in equity or at law);

(d) Neither the execution and delivery by the Servicer
of this Agreement, the consummation by the Servicer of the
transactions contemplated hereby, nor the fulfillment of or compliance
by the Servicer with the terms and conditions of this

SERVICING AGREEMENT - PAGE 2
<PAGE> 7
Agreement will conflict with or result in a breach of any of the
terms, conditions or provisions of the Servicer's organizational
documents or bylaws or any legal restriction or any material agreement
or instrument to which the Servicer is now a party or by which it is
bound, or constitute a default or result in an acceleration under any
of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Servicer or its
property is subject;

(e) At the date hereof, the Servicer does not believe,
nor does it have any reason or cause to believe, that it cannot
perform each of its covenants contained in this Agreement;

(f) There is no litigation pending or, to the Servicer's
knowledge, threatened, which, if determined adversely to the Servicer,
would materially and adversely affect the execution, delivery or
enforceability of this Agreement, or the ability of the Servicer to
service the Loans hereunder in accordance with the terms hereof or
which would have a material adverse effect on the financial condition
of the Servicer;

(g) No consent, approval, authorization or order of any
court or governmental agency or body is required for the execution,
delivery and performance by the Servicer of or compliance by the
Servicer with this Agreement or the consummation by the Servicer of
the transactions contemplated by this Agreement or if any such
consent, approval, authorization or order is required, the Servicer
has obtained or will obtain it prior to the time necessary for the
Servicer to perform its obligations hereunder;

(h) Neither this Agreement nor any statement, report or
other document furnished or to be furnished pursuant to this Agreement
or in connection with the transactions contemplated hereby contains
any untrue statement of material fact or omits to state a material
fact necessary to make the statements relating to the Servicer
contained therein not misleading; and

(i) The Servicer is not in default with respect to any
order or decree of any court or any order, regulation or demand of any
federal, state, municipal or governmental agency, which default might
have consequences that would materially and adversely affect the
condition (financial or other) or operations of the Servicer or its
properties or might have consequences that would materially and
adversely affect its performance hereunder.

Upon discovery by either the Issuer, the Servicer, the Supervisory
Servicer or the Trustee of a material breach of any of the foregoing
representations and warranties, the party discovering such breach shall give
prompt written notice to the other parties, with a copy to the Noteholders and
the Rating Agency. Within 30 days of its discovery or its

SERVICING AGREEMENT - PAGE 3
<PAGE> 8
receipt of notice of any such breach of a representation or warranty, the
Servicer shall cure such breach in all material respects; provided that, if
such failure shall be of a nature that it cannot be cured within 30 days, the
Servicer shall give written notice to the Supervisory Servicer and the Trustee,
with a copy to the Noteholders and the Rating Agency, within such 30 day period
of the corrective action it proposes to take and shall thereafter pursue such
corrective action diligently until such default is cured but in no event longer
than 90 days from the date of such notice.

SECTION 2 COVENANTS OF SERVICER. The Servicer hereby agrees
that during the term of this Agreement, unless the Trustee shall otherwise
expressly consent in writing:

(a) Compliance With Agreements and Applicable Laws. The
Servicer shall perform each of its obligations under this Agreement
and comply with all material requirements of any law, rule or
regulation applicable to it and the terms of the Loans and any related
agreements.

(b) Existence. The Servicer shall maintain its
existence and shall at all times continue to be duly organized under
the laws of the state of its organization and duly qualified and duly
authorized (as described in Sections 2.1(a), (b) and (c) hereof) and
shall conduct its business in accordance with the terms of its
organizational documents and bylaws.

(c) Financial Statements; Accountants' Reports; Other
Information. The Servicer shall keep or cause to be kept in
reasonable detail books and records of account of the Servicer's
assets and business, including, but not limited to, books and records
relating to the transaction, which books and records relating to the
transaction shall be furnished to the Trustee upon reasonable request.

(d) Access to Records; Discussions With Officers and
Accountants. The Servicer shall, upon the reasonable request of the
Supervisory Servicer, the Trustee or any Noteholder, permit the
Supervisory Servicer, the Trustee or any such Noteholder or any of
their authorized designees:

(i) to inspect the books and records of the
Servicer as they may relate to the Loans and the obligations
of the Servicer under this Agreement; and

(ii) to discuss the affairs, finances and accounts
of the Servicer relating to this transaction with any
Authorized Officer of the Servicer.

Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Servicer. Such inspections shall be at the expense of the party
performing such inspection unless a Servicer

SERVICING AGREEMENT - PAGE 4
<PAGE> 9
Default shall have occurred and be continuing, in which case any such
inspection shall be at the expense of the Servicer. The books and
records of the Servicer will be maintained at the address of the
Servicer designated herein for receipt of notices, unless the Servicer
shall otherwise advise the Supervisory Servicer, the Trustee and the
Noteholders in writing.

(e) Notice of Material Events. The Servicer shall
promptly and in any event, within five Business Days of the occurrence
thereof, inform the Supervisory Servicer, the Trustee, the Noteholders
and the Rating Agency in writing of the occurrence of any of the
following:

(i) the submission of any claim or the initiation
of any legal process, litigation or administrative or judicial
investigation against the Servicer involving potential damages
or penalties in an uninsured amount in excess of $1,000,000 in
any one instance or $5,000,000 in the aggregate;

(ii) any change in the location of the Servicer's
principal office or any change in the location of the
Servicer's books and records;

(iii) the occurrence of any Servicer Default;

(iv) the commencement of any proceedings
instituted by or against the Servicer in any federal, state or
local court or before any governmental body or agency, or
before any arbitration board, or the promulgation of any
proceeding or any proposed or final rule which, if adversely
determined, would result in a material adverse change in the
financial condition or operations of the Servicer;

(v) the commencement of any proceedings by or
against the Servicer under any applicable bankruptcy,
reorganization, liquidation, rehabilitation, insolvency or
other similar law now or hereafter in effect or of any
proceeding in which a receiver, liquidator, conservator,
trustee or similar official shall have been, or may be,
appointed or requested for the Servicer or any of its assets;

(vi) the receipt of notice that (A) any license,
permit, charter, registration or approval necessary for the
performance by the Servicer of its obligations under this
Agreement is to be, or may be, suspended or revoked, or (B)
the Servicer is to cease and desist any practice, procedure or
policy employed by the Servicer in the conduct of its
business, and such cessation may result in a material adverse
change in the financial condition or operations of the
Servicer;

SERVICING AGREEMENT - PAGE 5
<PAGE> 10
(vii) any merger, consolidation or sale of
substantially all of the assets of the Servicer; or

(viii) the final payment in full of the Notes.

(f) Maintenance of Licenses. The Servicer shall
maintain all licenses, permits, charters and registrations which are
material to the performance by the Servicer of its obligations under
this Agreement.

(g) Notices. The Servicer shall promptly notify the
Trustee, the Noteholders, the Rating Agency and the Supervisory
Servicer in writing of any event, circumstance or occurrence which may
materially and adversely affect the ability of the Servicer to service
any Loan or to otherwise perform and carry out its duties,
responsibilities and obligations under and in accordance with this
Agreement.

SECTION 3 CLOSING CERTIFICATE AND OPINION. On the Closing
Date, the Servicer will deliver to the Issuer, the Placement Agent, the
Supervisory Servicer, the Noteholders and the Trustee an Opinion of Counsel,
dated the Closing Date, in form and substance satisfactory to the Noteholders,
as to the due authorization, execution and delivery of this Agreement by the
Servicer and the enforceability thereof and such other matters as reasonably
requested by the Noteholders. On the Closing Date, the Servicer shall also
deliver an Officers' Certificate, dated the Closing Date, signed by two
Authorized Officers, to the effect that:

(a) the representations and warranties contained in
Section 2.1 hereof are true and correct in all material respects as of
the Closing Date;

(b) no Servicer Default exists hereunder; and

(c) the Servicer maintains such errors and omissions
insurance and fidelity bond coverage as is required by this Agreement.

SECTION 4 FIDELITY BOND AND INSURANCE. The Servicer shall
maintain with a responsible company, at its own expense, a blanket fidelity
bond in a minimum amount of $1,000,000 and an errors and omissions insurance
policy with coverage in an amount deemed reasonable by the Servicer, with
coverage on all officers, employees or other persons acting in any capacity
requiring such persons to handle funds, money, documents or papers relating to
the Loans ("Servicer Employees"). Any such fidelity bond and errors and
omissions insurance shall protect and insure the Trust Estate and the Trustee,
as Trustee for the Noteholders, its officers, employees and agents against
losses, including losses resulting from forgery, theft, embezzlement, fraud,
errors and omissions and negligent acts of such Servicer Employees. No
provision of this Section 2.4 requiring such

SERVICING AGREEMENT - PAGE 6
<PAGE> 11
fidelity bond and errors and omissions insurance shall diminish or relieve the
Servicer from its duties and obligations as set forth in this Agreement. Upon
the request of the Trustee, the Servicer shall cause to be delivered to the
Trustee a certified true copy of such fidelity bond and insurance policy.
Coverage of the Servicer under a policy or bond obtained by an Affiliate of the
Servicer and providing the coverage required by this Section shall satisfy the
requirements of this Section.

SECTION 5 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION
REGARDING THE LOANS. The Servicer shall provide to the Trustee, the Issuer,
the Supervisory Servicer, the Noteholders and their representatives or
designees access to the documentation regarding the Loans, such access being
afforded without charge but only upon reasonable request and during normal
business hours at the offices of the Servicer provided that such access shall
not be requested more frequently than is reasonable or justifiable.

The Servicer shall at all times maintain accurate records and books of
account and an adequate system of audit and internal controls. All accounting
and loan servicing records pertaining to each Loan shall be maintained in such
manner as will permit the Trustee, the Noteholders and the Supervisory Servicer
or their duly authorized representatives and designees to examine and audit and
make legible reproductions of records during reasonable business hours. All
such records shall be maintained until no Notes remain Outstanding or such
longer period as is required by Law, including but not limited to, all
transaction registers and loan ledger histories.

SECTION 6 MERGER OR CONSOLIDATION. The Servicer will keep in
full effect its existence, rights and franchises, and will obtain and preserve
its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement or any of the Loans and to perform its duties
under this Agreement.

Any Person into which the Servicer may be merged or consolidated, or
any Person resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be an established mortgage loan servicing institution that has
a net worth of at least $50,000,000 (unless otherwise consented to in writing
by the Trustee and the Noteholders) and shall be the successor of the Servicer
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto except for notice thereof to the Rating
Agency, anything herein to the contrary notwithstanding, provided such
successor accepts the terms and conditions of this Agreement. The Servicer
shall, upon making a determination that it will enter into any such merger or
consolidation, send written notice thereof to the Trustee, the Noteholders, the
Supervisory Servicer and the Rating Agency which shall in no event be less than
30 days prior written notice.

SERVICING AGREEMENT - PAGE 7
<PAGE> 12
SECTION 7 INDEMNIFICATION. The Servicer agrees to indemnify
and hold the Issuer, the Trust Estate, the Placement Agent, the Supervisory
Servicer, the Trustee and the Noteholders each harmless against any and all
claims, losses, damages, penalties, fines, forfeitures, reasonable legal fees
and related costs, judgments, and other costs and expenses resulting from any
claim, demand, defense or assertion based on or grounded upon, or resulting
from, a material breach of any of the Servicer's representations and warranties
contained in this Agreement or the negligence, bad faith or willful misconduct
of the Servicer relating to the performance of its duties hereunder and
servicing the Loans in compliance with the terms of this Agreement. The
Issuer, the Placement Agent, the Supervisory Servicer or the Trustee, as the
case may be, shall immediately notify the Servicer if a claim is made by a
third party with respect to this Agreement or the Loans. Notwithstanding
anything to the contrary contained herein, no Person acting as Servicer
hereunder shall have any liability under this Section 2.7 for the
indemnification of any claim based upon or arising from the action or omission
of any predecessor Servicer.

ARTICLE III

GENERAL ADMINISTRATION AND SERVICING OF LOANS

SECTION 1 GENERAL DUTIES OF SERVICER. For and on behalf of
the Issuer, the Trustee and the Holders, the Servicer shall service and
administer the Loans in accordance with the provisions of this Agreement and
the instructions of the Trustee hereunder. Unless otherwise specified herein
with respect to specific obligations of the Servicer, the Servicer shall
service and administer the Loans in the best interests of, and for the benefit
of, the Holders, in accordance with the Servicing Standard.

(a) Consistent with the terms of this Agreement, the Servicer may
waive, modify or vary any term of any Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Obligor if, in the Servicer's reasonable determination, such waiver,
modification, postponement or indulgence is not materially adverse to the
interests of the Trustee on behalf of the Noteholders and the Servicer would
make the same determination if it serviced the Loan for its own account;
provided, however, that the Servicer may not permit any modification with
respect to any Loan that would change the Loan Rate, forgive the payment of any
principal or interest (unless in connection with the liquidation of the related
Loan) or defer or extend the final maturity date of such Loan beyond the term
of the Notes without the written consent of all of the Noteholders. Without
limiting the generality of the foregoing, and subject to the consent of the
Trustee and in accordance with the Servicing Standard, the Servicer shall
continue, and is hereby authorized and empowered, to execute and deliver on
behalf of the Trustee, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Loans and with respect to the Mortgaged Properties. If
reasonably required by the Servicer, the Trustee shall furnish the Servicer

SERVICING AGREEMENT - PAGE 8
<PAGE> 13
with any powers of attorney and other documents necessary or appropriate to
enable the Servicer to carry out its servicing and administrative duties under
this Agreement.

SECTION 2 NO ASSIGNMENT OR DELEGATION OF DUTIES BY SERVICER.
The Servicer, as an independent contractor, shall service and administer the
Loans and shall have full power and authority, acting alone, to do any and all
things in connection with such servicing and administration which the Servicer
may deem necessary or desirable and consistent with the terms of this
Agreement. The Servicer may not enter into subservicing agreements for any
servicing and administration of Loans without the prior written consent of the
Trustee and the Required Noteholders (which consent shall not be unreasonably
withheld) and without notice thereof to the Rating Agency. Except as expressly
provided herein, the Servicer shall not assign or transfer any of its rights,
benefits or privileges hereunder to any other Person, or delegate to or
subcontract with, or authorize or appoint any other Person to perform any of
the duties, covenants or obligations to be performed by the Servicer hereunder,
without notice to the Rating Agency and without the prior written consent of
the Trustee and the Required Noteholders (which consent shall not be
unreasonably withheld), and absent such written consent any agreement,
instrument or act purporting to effect any such assignment, transfer,
delegation or appointment shall be void. The Servicer shall be liable for all
acts and omissions of any delegate, subcontractor or other agent appointed
pursuant to this Agreement. Nothing contained in this Section 3.2 shall
prohibit or be deemed to prohibit the Servicer from contracting with third
parties to perform duties that are not duties of the Servicer hereunder that
the Servicer deems reasonably necessary in connection with the servicing of the
Loans including, without limitation, title work, surveying, environmental
consulting, property management and maintenance, construction, engineering and
architectural consulting.

SECTION 3 ESTABLISHMENT OF LOCKBOX ACCOUNT; NOTICES TO
OBLIGORS; DEPOSITS IN LOCKBOX ACCOUNT. On or prior to the Closing Date, the
Servicer shall cause to be established and maintained, at its expense if the
Servicer is PMC, if not, then at the expense of the Trust Estate, the Lockbox
Account with Bank One, Texas, National Association or another Financial
Institution having a long-term unsecured debt rating of at least A-2 or its
equivalent by the Rating Agency, at all times that it holds the Lockbox Account
(the "Required Rating"). The creation of the Lockbox Account shall be
evidenced by a letter agreement in the form of Exhibit B hereto. A copy of
such executed letter agreement shall be furnished to the Trustee, the Placement
Agent, the Supervisory Servicer, the Noteholders and the Rating Agency.

(a) Within two days after the Closing Date, the Servicer will
prepare and deliver to the Trustee, with a copy of such correspondence to the
Noteholders, notices in the form attached hereto as Exhibit C, to each of the
Obligors directing each such Obligor to send all future Monthly Payments or
Principal Prepayments directly to the Lockbox Account. The Trustee shall mail
the notices at the expense of the Servicer.

SERVICING AGREEMENT - PAGE 9
<PAGE> 14
(b) Notwithstanding the foregoing notices, if the Servicer
receives any Collections, including, without limitation, any Monthly Payments,
Principal Prepayments, late payment charges or other payments relating to a
Loan, the Servicer will receive such funds in trust for the Trustee and, if the
Servicer is not a financial institution having a rating of at least "P-1" or
its equivalent by the Rating Agency, will forward such funds to the Lockbox
Account no later than the Business Day immediately following the date the
Servicer obtains knowledge of such receipt. In addition, any Liquidation
Proceeds received by the Servicer will be deposited into the Lockbox Account no
later than the Business Day immediately following the day the Servicer obtains
knowledge of such receipt.

(c) Upon receipt of notice that the institution holding the
Lockbox Account no longer has the Required Rating or that Bank One, Texas,
National Association no longer wishes to hold the Lockbox Account, the Servicer
will, within five Business Days, establish and maintain, at its expense if the
Servicer is PMC, or if not, at the expense of the Trust Estate, a new Lockbox
Account at a Financial Institution having the Required Rating and approved by
the Trustee. Such Lockbox Account shall be evidenced by a letter agreement in
the form of Exhibit B hereto. A copy of the executed letter agreement shall be
furnished to the Trustee, the Noteholders, the Supervisory Servicer and the
Rating Agency within five Business Days after the new Lockbox Account is
established. Within five Business Days of establishing the new Lockbox
Account, the Servicer will prepare and deliver to the Trustee, with a copy of
such correspondence to the Noteholders, notices, in the form of Exhibit C
attached hereto, to each of the Obligors directing each such Obligor to send
all future Monthly Payments or Principal Prepayments directly to the Lockbox
Account. The Trustee shall mail the notices at the expense of the Servicer if
the Servicer is PMC, or if not, at the expense of the Trust Estate.

SECTION 4 PERMITTED WITHDRAWALS FROM THE LOCKBOX ACCOUNT. The
Trustee shall have the sole right to withdraw funds from the Lockbox Account
and shall, on a daily basis, withdraw all deposits to the Lockbox Account and
transfer such funds to the Collection Account established under the Indenture.

SECTION 5 PAYMENT OF TAXES AND OTHER CHARGES. If the Servicer
receives notice that any taxes, assessments or other charges which are or may
become a lien upon the Mortgaged Property are overdue, the Servicer will give a
written demand to the Obligor to pay such amounts and will verify whether such
payment has been made within 60 days after mailing such notice (but in any
event prior to the time that any taxing authority commences to exercise its
available remedies), subject to any right, pursuant to the Mortgage, of an
Obligor who is contesting the validity of such charges and has paid to the
Servicer a deposit or security in the amount of the contested charge plus
possible costs, interest and penalties or who has otherwise established
adequate reserves against such liability in accordance with generally accepted
accounting principles; provided, further, however, that this provision shall
not have the effect of permitting the Servicer to take, or fail to take, any
action in respect of the payments described herein that would adversely

SERVICING AGREEMENT - PAGE 10
<PAGE> 15
affect the interest of the Trustee in any Mortgaged Property. If such amounts
have not been paid by the Obligor or the Obligor has not deposited or reserved
funds therefor as described in the immediately preceding sentence, the Servicer
will promptly make such payment as a Servicing Expense and request
reimbursement from the Obligor, and from the Trustee in accordance with Section
3.8 hereof.

SECTION 6 COLLECTION OF CERTAIN LOAN PAYMENTS. The Servicer
shall make reasonable efforts to collect all payments called for under the
terms and provisions of the Loans. Consistent with the foregoing, the Servicer
shall not, unless the charging or collection of any such late payment charge,
prepayment charge, assumption fee or any penalty or interest would result in
the violation or contravention of applicable Law, waive or permit to be waived
any late payment charge, prepayment charge, assumption fee or any penalty or
interest in connection with the prepayment of a Loan. Notwithstanding any
other provisions hereof, the Servicer shall not charge or impose on any
Obligor, nor seek to charge or impose on any Obligor, nor assert a right to
receive, any fee, charge, premium or penalty that if charged or collected would
violate or contravene any Law, including usury laws or the terms of the related
Loan.

SECTION 7 LIMITATION OF LIABILITY OF SERVICER'S OFFICERS AND
OTHERS. No director, officer, employee or agent of the Servicer shall be under
any liability to the Trustee, the Issuer, the Supervisory Servicer, the Holders
or any other persons for any action taken by them or for their refraining to
take any action in good faith pursuant to this Agreement or for errors in
judgment; except that such provision shall not protect any of them from
liability which would be imposed by reason of willful misfeasance, willful
misconduct, bad faith or negligence.

SECTION 8 SERVICING COMPENSATION; ADVANCES AND EXPENSES. As
compensation for its services hereunder, the Servicer shall be paid the
Servicing Fee. The Servicer shall be required to pay all expenses incurred by
it in connection with its servicing activities hereunder and shall be entitled
to reimbursement therefore as described below. The Servicing Fee shall be paid
to the Servicer and Servicing Expenses reimbursed to the Servicer pursuant to
Section 6.3 of the Indenture.

(a) All reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance by the Servicer of its servicing
obligations hereunder ("Servicing Expenses") shall constitute routine servicing
responsibilities of the Servicer, which shall include, but are not limited to,
expenditures for the following, subject to the provisions of this Agreement,
(a) attorneys' fees, trustee fees under any deed of trust, recording, filing
and publication fees, title report and title search costs, costs associated
with environmental audits, court costs, witness fees and all other costs
incurred in respect of any enforcement of a Loan, any judicial foreclosure, or
any foreclosure sale, trustee's sale or acquisition in lieu of foreclosure, or
in respect of the insurance, sale or other disposition of any Mortgaged
Property or REO Property; (b) repair, restoration, maintenance or other

SERVICING AGREEMENT - PAGE 11
<PAGE> 16
protection of any Mortgaged Property (whether incurred before or after such
property became an REO Property) in accordance with and subject to the
provisions of this Agreement, as applicable; and (c) compliance with the
Servicer's obligations under Section 3.5 hereof. Servicing Expenses shall not
include any portion of the Servicer's overhead or normal salary and operating
expenses.

SECTION 9 THE TRUSTEE'S, THE NOTEHOLDERS' AND SUPERVISORY
SERVICER'S RIGHT TO EXAMINE SERVICER RECORDS AND AUDIT OPERATIONS. The
Trustee, the Noteholders and the Supervisory Servicer and their designees shall
have the right upon reasonable prior notice, during normal business hours and
as often as reasonably required, to examine and audit (at no cost to the
Servicer unless a Servicer Default has occurred and is then continuing) any and
all of the books, records or other information of the Servicer directly
relating to the Loans, whether held by the Servicer or by another on behalf of
the Servicer, which may be relevant to the performance or observance by the
Servicer of the terms, covenants or conditions of this Agreement. The Trustee,
the Noteholders and the Supervisory Servicer shall have the right upon
reasonable prior notice, during normal business hours and as often as
reasonably required to perform ongoing diligence of the Servicer's operations
through loan reviews, re-appraisals (at no cost to the Servicer) or other
reasonable review of Servicer operations. No amounts payable in respect of the
foregoing (other than costs associated with re-appraisals) shall be paid from
the Trust Estate.

SECTION 10 MAINTENANCE AND RELEASE OF LOAN DOCUMENTATION;
SATISFACTION OF MORTGAGES. The Servicer shall retain, with respect to each
Loan, the originals (or copies if originals are not available) of all of the
instruments and documents relating to the Loan that would be maintained by a
prudent lender servicing such Loan for its own account (the "Servicer Loan
File"), except for those original instruments and documents constituting a part
of the Trustee Loan File that are required to be held by the Trustee.

Each Servicer Loan File shall remain the property of the Issuer
pledged to the Trustee for the benefit of the Holders and shall be held by the
Servicer in trust for the benefit of the Trustee on behalf of the Holders.
Upon written request of the Trustee, the Servicer shall immediately deliver all
or any of such instruments, records and documents in its possession or custody
to the Trustee, together with a list identifying each Loan to which such
records pertain. The Servicer, at its option, may microfilm, microfiche or
otherwise condense any records or documents constituting a part of, or relating
to, any Loan or any Servicer Loan File, provided that the Servicer, upon
written request by the Trustee, promptly reproduces in their entirety any or
all such records or documents at no cost to the Trustee.

(a) The Servicer shall maintain each Servicer Loan File for a
period of four years after the related Loan has been paid in full, is
foreclosed upon or is otherwise liquidated, or such longer period as may be
required by Law. The Servicer shall maintain an

SERVICING AGREEMENT - PAGE 12
<PAGE> 17
appropriate account record for each Loan which shall include the permanent loan
number for each Loan serviced by the Servicer as shown on the Loan Schedule.
Any system utilized for the Loan account records shall be capable of producing,
for any Loan, an account transcript itemizing in chronological order the date,
amount and application of each Monthly Payment by due date and other
information affecting the amounts paid by the Obligor, including the latest
outstanding Loan Principal Balance.

(b) The Servicer shall not grant a satisfaction or release of a
Mortgage without having obtained payment in full of the indebtedness secured by
the Mortgage or otherwise prejudice any right the Trustee may have under the
mortgage instruments, subject to Section 4.1 hereof. Upon the prepayment in
full or other liquidation of a Loan, the Servicer shall immediately deposit the
prepayment or Liquidation Proceeds in the Lockbox Account and prepare and
deliver to the Trustee and Supervisory Servicer a request for the appropriate
instrument releasing the Mortgaged Property from the lien of the Mortgage,
together with an Officer's Certificate (i) certifying that (A) all amounts that
the Obligor is obligated to pay under the Underlying Note, the Mortgage and any
other document pertaining to the Loan, including, but not limited to, all
required payments of principal and interest, have been paid in full and
deposited in the Lockbox Account; or (B) all Liquidation Proceeds which the
Servicer reasonably believes will be collected with respect to a Liquidated
Loan have been collected and deposited in the Lockbox Account; and (ii)
requesting that (X) the Trustee Loan File for such Loan be released by the
Trustee to the Servicer and (Y) the Trustee execute and deliver to the Servicer
the appropriate instrument necessary to release the lien of the Mortgage,
together with the Underlying Note bearing written evidence of cancellation or
assignment thereof, as appropriate.

The Trustee shall, upon receipt of a written request from a Servicing
Officer and approval of the Supervisory Servicer, execute any document provided
to the Trustee by the Servicer or take any other action requested in such
request, that is, in the opinion of the Servicer as evidenced by such request,
required by any state or other jurisdiction to discharge the lien of a Mortgage
upon the satisfaction thereof and the Trustee will sign and post, but will not
guarantee receipt of, any such documents to the Servicer, or such other party
as the Servicer may direct, within five Business Days of the Trustee's receipt
of such certificate or documents. Such certificate or documents shall
establish to the Trustee's satisfaction that the related Loan has been paid in
full by or on behalf of the Obligor and that such payment has been deposited in
the Lockbox Account.

Upon receipt of the Trustee Loan File, the Servicer shall record the
mortgage release or satisfaction in the proper recording office, deliver the
Underlying Note and/or the recorded original of such instrument of release or
satisfaction to the Obligor, deposit any remaining documents into the Servicer
Loan File, and retain the Servicer Loan File as provided in section (a) and (b)
above. Any costs and expenses associated with the release of any Loan shall be
the expense of the Trust Estate to the extent not paid by the applicable
Obligor.

SERVICING AGREEMENT - PAGE 13
<PAGE> 18
No applications for partial release of any part of a Mortgaged
Property may be approved without the consent of the Trustee.

(c) From time to time as is appropriate, the Servicer may request
the Trustee to deliver or cause to be delivered to the Servicer all or part of
the documents constituting a part of the Trustee Loan File to facilitate the
servicing or foreclosure of any Loan, the acquisition of any Mortgaged Property
in lieu of foreclosure, the partial release of any Mortgaged Property from the
lien of the Mortgage or the making of any corrections to the Underlying Note or
the Mortgage or other documents constituting the Trustee Loan File. To make
such request, the Servicer shall deliver to the Trustee an Officer's
Certificate requesting that possession of all, or any document constituting
part of, the Trustee Loan File be released to the Servicer; such certificate
shall certify the reason for such release. The Servicer also shall deliver to
the Trustee together with such certificate a Trust Receipt signed by a
Servicing Officer, in substantially the form attached as Exhibit A hereto.

If the Servicer at any time seeks to initiate a foreclosure proceeding
with respect to any Mortgaged Property, then the Servicer shall deliver to the
Trustee, for signature by the Trustee, as appropriate, any court pleadings,
requests for Trustee's sale or other documents necessary to the foreclosure or
to any legal action brought to obtain judgment against the Obligor on the
Underlying Note or the Mortgage, or to obtain a deficiency judgment, or to
enforce any other remedies or rights provided by the Underlying Note or the
Mortgage or otherwise available at law or in equity. The Servicer shall also
deliver to the Trustee an Officer's Certificate requesting that such pleadings
or documents be executed by the Trustee and certifying as to the reason such
documents or pleadings are required and that the execution and delivery thereof
by the Trustee will not invalidate the Mortgage except for the termination of
such lien upon completion of the proposed foreclosure. Notwithstanding the
foregoing, the Servicer shall cause possession of any Trustee Loan File or
documents therein that have been released by the Trustee to be returned to the
Trustee when the need for such file or documents no longer exists, but in any
event within 30 calendar days after release by the Trustee unless (i) the Loan
has been liquidated and the Liquidation Proceeds relating to the Loan have been
deposited in the Lockbox Account or (ii) the Trustee Loan File or documents so
released have been delivered to an attorney, a public trustee or other public
official, as required by Law, to initiate or pursue legal action or other
proceedings to foreclose the applicable Mortgage, and the Servicer has
delivered to the Trustee an Officer's Certificate certifying as to the name and
address of the Person to which the Trustee Loan File, or documents therefrom,
have been delivered and the purpose or purposes of such delivery.

(d) The Servicer shall, at its expense if the Servicer is PMC, if
not, at the expense of the Trust Estate, prepare and deliver to the Trustee any
instruments required in connection with substitution of a Loan pursuant to
Section 3.3(f) of the Indenture and will pay any recording or filing costs
associated therewith.

SERVICING AGREEMENT - PAGE 14
<PAGE> 19
SECTION 11 NOTICE OF LIENS AND OTHER ACTIONS. The Servicer
shall, at all times, exercise reasonable efforts to prevent any lien or
judicial levy upon or writ of attachment against a Mortgaged Property of which
the Servicer is notified or otherwise has knowledge, which is, or may be,
superior to the lien of the Mortgage.

SECTION 12 WAIVERS, RELEASES, CONDEMNATIONS, EASEMENTS AND
ALTERATIONS. Any applications for partial releases of real property and
releases of personal property which are part of a Mortgaged Property, the
creation or release of easements, waivers of rights under any Mortgage, consent
to alteration, removal or demolition of improvements and other matters
affecting the Mortgage or the Mortgaged Property shall be subject to the prior
written approval of the Trustee which consent shall not be unreasonably
withheld.

SECTION 13 LIMITATION ON LIABILITY OF SERVICER AND OTHERS. The
Servicer and any director, officer, employee or agent of the Servicer may rely
on any document of any kind which it in good faith reasonably believes to be
genuine and to have been adopted or signed by the proper authorities respecting
any matters arising hereunder. Subject to the terms of Section 2.7 herein, the
Servicer shall have no obligation to appear with respect to, prosecute or
defend any legal action which is not incidental to the Servicer's duty to
service the Loans in accordance with this Agreement. The Issuer agrees to
indemnify and hold the Servicer harmless from any loss, claim, demand,
liability or expense (including, without limitation, past acts of predecessor
Servicers and fees and expenses of legal counsel) arising from or relating to
the performance of its duties under this Agreement which do not result from the
Servicer's negligence, bad faith or willful misconduct.

SECTION 14 PROPERTY ADDRESS CHANGE. The Servicer shall note in
its records and notify the Trustee of all changes of address of an Obligor or
of a Mortgaged Property of which the Servicer is notified or of which the
Servicer has knowledge.

ARTICLE IV

SPECIFIC SERVICING PROCEDURES

SECTION 1 ASSUMPTION AGREEMENTS. When a Mortgaged Property
has been or is about to be conveyed by the Obligor, the Servicer shall, to the
extent it has knowledge of such conveyance or prospective conveyance, exercise
its rights to accelerate the maturity of the related Loan under any
"due-on-sale" clause contained in the related Mortgage or Underlying Note;
provided, however, that the Servicer shall not exercise any such right if the
"due-on-sale" clause, in the reasonable belief of the Servicer, is not
enforceable under applicable law or if such enforcement would materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Loan. In such event, the Servicer shall enter into an
assumption and modification agreement with the

SERVICING AGREEMENT - PAGE 15
<PAGE> 20
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Underlying Note and, unless
prohibited by applicable law or the Mortgage, the Obligor remains liable
thereon, provided that the Servicer may enter into an assumption agreement with
the transferee and release the transferor-Obligor from liability only if (a)
the transferee qualifies for credit under the customary credit policies of the
Servicer, (b) any applicable Law requires that the transferor-Obligor be
released from liability on the Loan, (c) an officer of the Servicer has
examined and approved all instruments as are necessary to carry out the
assumption transaction and approved such instruments as to form and substance,
(d) the execution and delivery of such instruments by all necessary parties
will not cause the unpaid principal balance and any accrued interest thereon
for the Loan to be uncollectible in whole or in part, and (e) upon closing the
assumption transaction (i) the Mortgage will continue to be a first lien upon
the Mortgaged Property, and (ii) the Loan Rate and Monthly Payment for the Loan
will not be changed nor will the term of the Note be extended. For each
proposed assumption transaction, the Servicer shall deliver an Officer's
Certificate to the Trustee certifying that each of the applicable requirements
specified in the immediately preceding sentence have been satisfied together
with the assumption instruments requiring execution by the Trustee. Such
certificate shall also indicate whether the seller/transferor of the Mortgaged
Property will be released from liability on the Loan and that the Servicer has
made a good faith determination that any such release will not adversely affect
the collectibility of the Loan.

The Servicer is also authorized with the prior approval of the Trustee
to enter into a substitution of liability agreement with such transferee,
pursuant to which the original Obligor is released from liability and such
person is substituted as Obligor and becomes liable under the Underlying Note.
The Servicer shall notify the Trustee that any such substitution or assumption
agreement has been completed by forwarding to the Trustee the original of such
substitution or assumption agreement, which original shall be added by the
Trustee to the related Trustee's Loan File and shall, for all purposes, be
considered a part of such Trustee's Loan File to the same extent as all other
documents and instruments constituting a part thereof. Any fee collected by
the Servicer for consenting to any such conveyance or entering into an
assumption or substitution agreement shall be retained by or paid to the
Servicer as additional servicing compensation.

Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Loan by operation of law or any assumption which the Servicer may be restricted
by law from preventing, for any reason whatsoever.

SECTION 2 SERVICING DELINQUENT ACCOUNTS; LIQUIDATION OF LOANS.
The Servicer shall exercise diligence in obtaining payment of Monthly Payments
when due

SERVICING AGREEMENT - PAGE 16
<PAGE> 21
under the terms of each Loan and shall use reasonable efforts to contact any
delinquent Obligor.

If any delinquent Obligor shall be or become a bankrupt or otherwise
become the subject of any insolvency or similar proceeding, the Servicer shall
notify the Trustee of such event and, thereafter, shall carry out all
reasonable actions necessary for the benefit and protection of the interests of
the Trustee and the Holders, including, but not limited to, with the consent of
the Trustee, retention of counsel to represent the Trustee in any bankruptcy or
other court proceedings relating to such Obligor or the Mortgaged Property.

If any Loan previously reported on a Determination Date Report as more
than 90 days delinquent is subsequently reported as being brought current, the
Trustee, through the Servicer, will verify with the relevant Obligor that the
Obligor paid the delinquent payments, by requesting that the Servicer send the
Obligor the letter in the form attached hereto as Exhibit H.

(a) In the event that any payment due under any Loan and not
postponed pursuant to Section 3.1 is not paid when the same becomes due and
payable, or in the event the Obligor fails to perform any other covenant or
obligation under such Loan and such failure continues beyond any applicable
grace period, the Servicer shall take such other action as it shall deem to be
in the best interests of the Trustee and the Holders. The Servicer shall
foreclose upon or otherwise effect the ownership in the name of the Trustee of
Mortgaged Properties relating to defaulted Loans as to which no satisfactory
arrangements can be made for collection of delinquent payments in accordance
with the customary collection policies of Servicer and the provisions of
Section 3.1. In connection with such foreclosure or other conversion, the
Servicer shall exercise collection and foreclosure procedures with the same
degree of care and skill in its exercise or use as it would exercise or use
under the circumstances in the conduct of its own affairs and shall in any
event, comply with the Servicing Standard. The Servicer shall use its
reasonable efforts to realize upon such defaulted Loans in accordance with the
Servicing Standard. The Servicer shall be responsible for all other costs and
expenses incurred by it in any foreclosure proceedings; provided, however, that
it shall be entitled to reimbursement thereof as contemplated in Sections 3.8
and 4.3 hereof.

No modification, recast or extension of a Loan other than as provided
above and in Section 3.1 is permitted without the prior written consent of the
Trustee.

Notwithstanding the foregoing provisions of this Section 4.2, the
Servicer shall not, on behalf of the Trustee, obtain title to a Mortgaged
Property by deed in lieu of foreclosure or otherwise, or take any other action
with respect to any Mortgaged Property, if, as a result of any such action, the
Trustee, on behalf of the Noteholders, could, in the reasonable judgment of the
Servicer, made in accordance with the Servicing Standard, be considered to hold
title to, to be a "mortgagee-in possession" of, or to be an "owner" or

SERVICING AGREEMENT - PAGE 17
<PAGE> 22
"operator" of such Mortgaged Property within the meaning of CERCLA or any
comparable law, unless the Servicer has previously determined in accordance
with the Servicing Standard, based on a Phase I Environmental Assessment (and
any additional environmental testing that the Servicer deems necessary and
prudent) of such Mortgaged Property conducted by an Independent Person who
regularly conducts Phase I Environmental Assessments and performed during the
twelve-month period preceding any such acquisition of title or other action;
that the Mortgaged Property is in material compliance with applicable
environmental laws and regulations or, if not, that it would maximize the
recovery to the Noteholders on a present value basis to acquire title to or
possession of the Mortgaged Property and to effect such compliance.

(b) If the environmental testing contemplated by Section 4.2(b)
above establishes that any of the conditions set forth therein have not been
satisfied with respect to any Mortgaged Property securing a defaulted Loan, the
Servicer shall, in accordance with the Servicing Standard, prepare a written
report to the Trustee and the Noteholders summarizing the environmental
condition of the Mortgaged Property and proposing a course of action to pursue
with respect to such Mortgaged Property. In the event that the Servicer has
not received from the Trustee the written objection to such proposed course of
action of the Holders of more than 50% of the Outstanding Note Amount within 30
days of the Trustee's distributing such notice, the Servicer shall be deemed to
have been directed by the Noteholders to take such proposed action.

(c) The Servicer shall report to the Trustee monthly in writing as
to any actions taken by the Servicer with respect to any Mortgaged Property as
to which the environmental testing contemplated in Section 4.2(b) above has
revealed that any of the conditions set forth have not been satisfied, in each
case until the earliest to occur of satisfaction of all such conditions and the
release of the Lien of the related Mortgage on such Mortgaged Property.

(d) If foreclosure has been approved as provided above, the
Servicer shall initiate or cause to be initiated the foreclosure action
according to such procedures as are authorized by Law and the practices in the
locality where the Mortgaged Property is located. In the event that title to
the Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Trustee for the benefit of the Holders.

(e) The Servicer shall have the right to determine, in accordance
with the Servicing Standard, the advisability of seeking to obtain a deficiency
judgment if the state in which the Mortgaged Property is located and the terms
of the Loan permit such an action and shall, in accordance with the Servicing
Standard, seek such deficiency judgment if it deems advisable.

SERVICING AGREEMENT - PAGE 18
<PAGE> 23
(f) After a Loan has become a Liquidated Loan, the Servicer shall
promptly prepare and forward to the Trustee a liquidation report detailing the
Liquidation Proceeds received from the Liquidated Loan, expenses incurred with
respect thereto and any Realized Loss incurred in connection therewith.

(g) The Servicer may accept a deed in lieu of foreclosure,
provided that (i) marketable title as evidenced by a policy of title insurance
can be conveyed to and acquired by the Trustee or its designee; (ii) no cash
consideration is to be paid to the Obligor by the Trustee; and (iii) the
Servicer has obtained from the Obligor a written acknowledgement that the deed
is being accepted as an accommodation to the Obligor and on the condition that
the Mortgaged Property will be transferred to the Trustee or its designee free
and clear of all claims, liens, encumbrances, attachments, reservations or
restrictions except for those to which the Mortgaged Property was subject at
the time the Mortgaged Property became subject to the Mortgage. Title shall be
conveyed directly from the Obligor to the Trustee for the benefit of the
Holders.

SECTION 3 FORECLOSURE EXPENSES. The Servicer shall prepare a
written estimate of the amount of attorneys' fees, trustee's fees and other
costs in respect of any foreclosure or acquisition in lieu of foreclosure.
Estimated fees and other costs in respect of any foreclosure or acquisition in
lieu of foreclosure in excess of the amount customary for routine cases or fees
for extraordinary legal services must be approved in writing in advance by the
Trustee. The Servicer shall arrange payment of attorneys' fees, trustees' fees
and other foreclosure costs at the commencement of foreclosure proceedings.

The Servicer may reimburse itself for any Servicing Expenses paid by
the Servicer, made in connection with such Loan or such foreclosure or other
action, out of amounts received by the Servicer in connection with liquidation
of the Loan, prior to remittance of any such amounts to the Lockbox Account.

SECTION 4 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY.
Upon the acquisition of REO Property by the Servicer by foreclosure or
conveyance in lieu of foreclosure, the Servicer shall notify the Trustee
promptly that the REO Property has been acquired and shall thereafter: (i)
deliver the deed or certificate of sale to the Trustee, or its nominee; (ii)
manage, conserve and protect the REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located
including the rental of the same, or any part thereof, as the Servicer deems to
be in the best interest of the Trustee for the benefit of the Holders; (iii)
pay all costs such as taxes and assessments relating to the REO Property; (iv)
process any claims for redemption and otherwise comply with any redemption
procedures required by Law; (v) sell or otherwise dispose of the REO Property
and remit the proceeds to the Trustee; and (vi) timely file any and all
federal, state and local tax or information returns or reports as are required
as a result of the acquisition or disposition of REO Property and perform any
withholding required in connection therewith. The Servicer shall not acquire
any REO Property relating

SERVICING AGREEMENT - PAGE 19
<PAGE> 24
to a Charged-Off Loan that is required to be released from the lien of the
Indenture and disposed of by the Issuer on the next Payment Date. If any REO
Property is expected to be acquired, the Servicer shall inform the Issuer, the
Noteholders and the Trustee and the Issuer shall comply with Section 5.14 of
the Indenture.

The Servicer shall manage, conserve, protect and operate each REO
Property for the Trustee solely for the purpose of its prudent and prompt
disposition and sale. The Servicer shall, either itself or through an agent
selected by the Servicer, manage, conserve, protect and operate the REO
Property in the same manner that it manages, conserves, protects and operates
other foreclosed property for its own account and in the same manner that
similar property in the same locality as the REO Property is managed. The
Servicer shall attempt to sell the same (and may temporarily rent the same) on
such terms and conditions as the Servicer deems to be in the best interest of
the Trustee and the Holders.

(a) Until the REO Property is disposed of, the Servicer shall (i)
take appropriate action to secure the REO Property and maintain proper
surveillance over it; (ii) advance all costs such as taxes and assessments;
(iii) maintain the REO Property so as to preserve its value and prevent any
additional deferred maintenance; and (iv) submit monthly statements for
services to the Trustee, together with additional documentation including
statements of income and expenses (accompanied by copies of paid invoices for
every expense item).

(b) Until the REO Property is disposed of, the Servicer shall
maintain for such REO Property, a standard hazard insurance policy providing
fire and extended coverage in an amount equal to the full replacement cost of
all improvements on the Mortgaged Property, which requirement may be satisfied
by a master force placed or blanket insurance policy insuring against hazard
losses. If the Mortgaged Property is in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards (and such flood insurance has been made available) Servicer shall
maintain a flood hazard insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration with an insurance
carrier generally acceptable to commercial mortgage lending institutions for
properties, similar to the REO Property in an amount representing coverage not
less than the lesser of (i) the full insurable value of such REO Property, or
(ii) the maximum amount of insurance which is available under the Flood
Disaster Protection Act of 1973, as amended from time to time. The Servicer
will also maintain comprehensive general liability insurance and business
interruption insurance (to the extent applicable) in such amounts as are then
customary for similarly situated properties and businesses.

(c) The Servicer shall advance all funds necessary for the proper
operation, management, insurance and maintenance of the REO Property. On each
Determination

SERVICING AGREEMENT - PAGE 20
<PAGE> 25
Date Report, the Servicer shall schedule its reasonable expenses with respect
to any REO Property for the related Collection Period.

(d) The Servicer shall deposit all funds collected and received in
connection with the operation or disposition of any REO Property in the Lockbox
Account no later than the Business Day immediately following notice of receipt
of such funds, net of funds necessary for the proper operation, management,
insurance and maintenance of the REO Property.

(e) If as of the date of disposition of any REO Property there
remain unpaid Servicing Fees with respect to the related Loan, the Servicer,
shall be entitled to payment for the unpaid Servicing Fees and reimbursement
for the unreimbursed related Servicing Expenses from proceeds received in
connection with the disposition prior to remittance of any proceeds to the
Trustee.

Disposition of REO Property shall be carried out by the Servicer at
such price and upon such terms and conditions as the Servicer, in its judgment,
believes to be in the best interests of the Holders, subject to and in
accordance with Section 4.2. Upon the sale of any Mortgaged Property, the
Servicer shall remit the net cash proceeds remaining after payment of expenses
of the sale to the Lockbox Account.

(f) If any Charged-Off Loan is expected to be released from the
lien of the Indenture on the next Payment Date, the Servicer shall not commence
a foreclosure proceeding or accept a deed in lieu of foreclosure. Any
determination by the Servicer that a Loan is a Charged-Off Loan shall be made
in good faith.

ARTICLE V

REPORTS TO BE PROVIDED BY SERVICER

SECTION 1 DETERMINATION DATE REPORTS.

(a) Monthly Reports. Each month, not later than 12:00
noon Dallas time on the fifth Business Day preceding each Payment
Date, the Servicer shall deliver to the Trustee, by telecopy, the
receipt and legibility of which shall be confirmed telephonically,
with hard copy thereof to be delivered on the next Business Day, with
copies to the Supervisory Servicer (if other than the Trustee), the
Noteholders and the Rating Agency, a Determination Date Report in the
form attached hereto as Exhibit D signed by a Servicing Officer
stating the date (day, month and year), referring to this Agreement by
name and date and stating, as of the close of business on the
immediately preceding Determination Date:

SERVICING AGREEMENT - PAGE 21
<PAGE> 26
(i) the aggregate amount of all funds received in
respect of scheduled principal payments on the Loans during
the related Collection Period;

(ii) the aggregate amount of interest received on
the Loans during the related Collection Period;

(iii) the number and Loan Principal Balances of all
Loans which were the subject of Principal Prepayments during
the related Collection Period and the aggregate amount of
Principal Prepayments received with respect to the Loans
during such Collection Period;

(iv) the aggregate Loan Principal Balance of the
Loans as of the related Determination Date, stating any REO
Properties separately;

(v) the loan number and Loan Principal Balance of
each Delinquent Loan for the related Collection Period;

(vi) the loan number and the aggregate number and
aggregate Loan Principal Balance of Loans delinquent 31 days,
91 days and 181 or more days as of the Determination Date;

(vii) the loan number and the aggregate number and
aggregate Loan Principal Balance of Loans which were
Charged-Off Loans as of the Determination Date and the related
recovery thereon;

(viii) the 30-Day Delinquent Percentage, the 180-Day
Delinquent Percentage, the Charge-Off Percentage and the
Cumulative Net Charge-Off Percentage as of the related
Determination Date;

(ix) the number and aggregate Loan Principal
Balance of Loans (i) which will be released from the lien of
the Indenture during the related Collection Period or on the
related Payment Date, (ii) which have been repurchased
including the Takeout Price therefor and (iii) which have been
substituted for a Substitute Loan including any Asset
Substitution Shortfall therefor;

(x) the number and aggregate Loan Principal
Balance of Loans which were in foreclosure as of the related
Determination Date;

(xi) with respect to any Loan that became an REO
Property during the related Collection Period, (a) the Loan
Principal Balance of such Loan as of the date title to such
REO Property was acquired, (b) the book value and

SERVICING AGREEMENT - PAGE 22
<PAGE> 27
length of time held of each REO Property as of the related
Determination Date, and (c) the income and expenses incurred
by the Servicer in connection with any REO Property during the
related Collection Period;

(xii) the amount of any Realized Losses incurred
during the related Collection Period;

(xiii) the cumulative Realized Losses since the
Closing Date;

(xiv) the Required Principal Payment (as defined in
the Indenture) for the related Payment Date and information as
to the calculation of such amount;

(xv) the amount of the interest accrued on the
Notes and information as to the calculation of such amount;

(xvi) the Outstanding Note Amount;

(xvii) the Servicing Fee, Supervisory Servicer's
Fee, if any, Trustee's Fee and Rating Agency fee due on the
related Payment Date;

(xviii) the amount of all Servicing Expenses paid by
Servicer during such Collection Period and any and all other
amounts deducted by the Servicer in accordance with the terms
hereof from Collections received by the Servicer prior to
remittance thereof to the Lockbox Account and a detailed
report describing the type and amount of all such Servicing
Expenses and other deductions;

(xix) information as to any Funds Retention Event;

(xx) the Required Reserve Amount, including the
beginning balance thereof, additions thereto and transfers
therefrom during the related Collection Period; and

(xxi) such other information as the Trustee, the
Noteholders or the Rating Agency may reasonably require.

To the extent that there are inconsistencies between the
telecopy of the Servicer's Certificate and the hard copy thereof, the
Trustee shall be entitled to rely upon the telecopy.

(b) Annual Statement. Within 90 days after the end of
each calendar year, the Servicer shall furnish to the Trustee and the
Noteholders such information

SERVICING AGREEMENT - PAGE 23
<PAGE> 28
in the form attached hereto as Exhibit E as is reasonably necessary to
provide to the Holders a statement containing the aggregate amount of
principal of and interest on the Notes paid during the prior calendar
year, aggregated for such calendar year or applicable portion thereof
during which such Person was a Holder. Such obligation of the
Servicer shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Servicer
pursuant to any requirements of the Code as from time to time are in
force.

(c) Computer Data. Prior to the Closing Date the
Servicer shall provide the Supervisory Servicer with all data on the
Servicer's computer relating to the Loans in an electronically
readable form specified by the Supervisory Servicer and shall update
such data at least monthly.

(d) Other Reports. The Servicer shall furnish to the
Trustee, the Noteholders, the Rating Agency and the Supervisory
Servicer, during the term of this Agreement, such periodic, special or
other reports, Officer's Certificates, data relating to the Loans or
information, whether or not provided for herein, as shall be
reasonably requested, all such reports or information to be provided
by and in accordance with such applicable instructions and directions
as the Trustee, the Noteholders or the Supervisory Servicer may
reasonably require; provided, however, the Servicer shall be
reimbursed for the reasonable cost of providing such additional
reports.

SECTION 2 REPORTS OF FORECLOSURE AND ABANDONMENT OF MORTGAGED
PROPERTY. Each year the Servicer shall make any reports of foreclosures and
abandonments of any Mortgaged Property required by the Code.

SECTION 3 QUARTERLY STATEMENT AS TO COMPLIANCE. The Servicer
will deliver to the Trustee, the Noteholders, the Rating Agency and the
Supervisory Servicer, quarterly, no later than each April 15, July 15, October
15 and January 15, for each quarterly period ending on each March 31, June 30,
September 30 and December 31, commencing on January 15, 1997, an Officer's
Certificate in the form attached hereto as Exhibit F stating that (a) the
Servicer has fully complied with the provisions of this Agreement, (b) a review
of the activities of the Servicer during the preceding quarter and of the
Servicer's performance under this Agreement has been made under such officer's
supervision and (c) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations, duties and
responsibilities under this Agreement throughout such quarterly period (or,
with respect to the first such report, since the Closing Date) and no Servicer
Default exists, or, if there has been a default or failure in the fulfillment
of any such obligation, specifying each such default or failure known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.

SERVICING AGREEMENT - PAGE 24
<PAGE> 29
SECTION 4 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING
REPORT. The Servicer at its expense shall cause a nationally recognized firm
of independent certified public accountants to furnish a statement to the
Trustee, the Supervisory Servicer, the Noteholders, and each Rating Agency on
or before May 1 of each year, commencing on May 1, 1997, to the effect that,
with respect to the most recently ended fiscal year, such firm has examined
certain records and documents relating to the Servicer's performance of its
servicing obligations under this Agreement and that, on the basis of such
examination, conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers, such firm is of the opinion that such
servicing has been conducted substantially in compliance in all material
respects with the requirements of the standard servicing procedures outlined in
the Uniform Single Attestation Program for Mortgage Bankers, except for such
exceptions noted therein.

SECTION 5 SERVICER'S FINANCIAL STATEMENTS; ANNUAL
CERTIFICATION. Within 120 days after the end of each fiscal year beginning
with the fiscal year ending December 31, 1996, the Servicer shall submit to the
Trustee, the Noteholders and the Rating Agency a copy of its annual audited
financial statements or in the event the Servicer is not PMC, a copy of the
annual audited consolidated financial statement of its parent. Within 45 days
after the end of each of the first three fiscal quarters of each fiscal year
beginning with the quarter ending September 30, 1996, the Servicer shall submit
to the Trustee, the Noteholders and the Rating Agency a copy of its quarterly
financial statements. Such financial statements shall, to the extent required
by the Securities Exchange Act of 1934, as amended, whether or not the Servicer
is subject to such Act, include a balance sheet, income statement, statement of
retained earnings, beneficiaries' (or shareholders') equity, statement of cash
flows and all related notes and schedules and shall be in comparative form.

Contemporaneously with the submission of the financial statements
required by the preceding paragraph, the Servicer shall deliver to the Trustee,
the Noteholders and the Rating Agency an Officer's Certificate in the form
attached hereto as Exhibit G to the effect that:

(a) such officer has confirmed that the Fidelity Bond,
the Errors and Omissions Insurance Policy and any other bonds or
insurance required by Section 2.4 hereof are in full force and effect;
and

(b) the representations and warranties of the Servicer
set forth in Section 2.1 are true and correct in all material respects
as if made on the date of such certification.

The Servicer shall also furnish and certify such other information as
to its organization, activities and personnel as the Trustee, the Noteholders
the Rating Agency or the Supervisory Servicer may reasonably request from time
to time.

SERVICING AGREEMENT - PAGE 25
<PAGE> 30
ARTICLE VI

DEFAULTS

SECTION 1 SERVICER DEFAULTS. The happening of any one or more
of the following events shall constitute a Servicer Default hereunder:

(a) Any failure by the Servicer to make any payment,
deposit, advance or transfer of funds required to be paid, deposited,
advanced or transferred under the terms of this Agreement, and such
failure continues unremedied for five Business Days after discovery by
Servicer of such failure or receipt by Servicer of notice of such
failure;

(b) Failure on the part of the Servicer duly to observe
or perform in any material respect any of the covenants or agreements
contained in this Agreement which continues unremedied for 30 days
after the giving of written notice of such failure or breach as the
case may be, to the Servicer; provided, however, if such failure shall
be of a nature that it cannot be cured within 30 days, such failure
shall not constitute a Servicer Default hereunder if within such
30-day period the Servicer gives notice to the Trustee and the
Supervisory Servicer of the corrective action it proposes to take,
which corrective action is agreed in writing by the Trustee to be
satisfactory and the Servicer shall thereafter pursue such corrective
action diligently until such default is cured;

(c) A decree or order of a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings,
or for the winding-up or liquidation of its affairs, shall have been
entered against the Servicer, and such decree or order shall have
remained in force undischarged or unstayed for a period of 90 days;

(d) The Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Servicer or of or relating to all or
substantially all of its property;

(e) The Servicer shall admit in writing its inability to
pay its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute, make
an assignment for the benefit of its creditors or voluntarily suspend
payments of its obligations;

(f) The Servicer shall cease to be an Eligible Servicer;

SERVICING AGREEMENT - PAGE 26
<PAGE> 31
(g) A material adverse change occurs in the financial
condition of the Servicer, which change materially impairs the ability
of the Servicer to perform its obligations under this Agreement; or

(h) Any representation or warranty made by the Servicer
in any Transaction Document proves to have been incorrect in any
material respect when made, which has a material adverse effect on the
Noteholders and which continues to have a material adverse effect or
be incorrect in any material respect for a period of 30 days after
written notice of such inaccuracy, requiring it to be remedied, has
been given to the Servicer by the Trustee, the Supervisory Servicer or
any Noteholder; provided, however, if such inaccuracy is of a nature
that it cannot be remedied within such 30-day period the Servicer
gives notices to the Trustee and the Supervisory Servicer of the
corrective action it proposes to take, which corrective action is
agreed in writing by the Trustee to be satisfactory and the Servicer
shall thereafter pursue such corrective action diligently until such
default is cured but in no event longer than 90 days from the date of
such notice.

SECTION 2 NOTICE OF SERVICER DEFAULT. In the case of a
Servicer Default referred to in Section 6.1 hereof or upon any termination of
the Servicer pursuant to Article VII hereof, the Trustee shall immediately
notify the Supervisory Servicer by telephone or telecopy (telephonic notice to
be followed by written notice within one Business Day) and shall promptly
notify the Rating Agency and the Holders by first-class mail.

SECTION 3 REMEDIES. So long as any such Servicer Default shall
not have been remedied within any applicable cure period, the Trustee may, and
at the direction of the Noteholders holding not less than 66 2/3% of the
Outstanding Note Amount shall, by notice in writing specifying the termination
date to the Servicer and the Supervisory Servicer (and to the Trustee if given
by the Holders), terminate all of the rights and obligations of the Servicer
under this Agreement and in and to the Loans and the proceeds thereof. On or
after the receipt by the Servicer of such written notice, all authority and
power shall pass to and be vested in the Supervisory Servicer pursuant to and
under this Section; and, without limitation, the Supervisory Servicer is hereby
authorized and empowered to execute and deliver, on behalf of the Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments, and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the purposes of
such notice of termination, whether to complete the transfer and assignment of
the Loans and related documents or otherwise. Any costs and expenses of the
Trustee, the Supervisory Servicer or the Servicer caused by such termination
and transfer will be at the expense of the Servicer. The Servicer agrees to
cooperate with the Supervisory Servicer in effecting the termination of the
Servicer's responsibilities and rights hereunder, including, without
limitation, the transfer to the Supervisory Servicer for administration by it
of any cash amounts held by the Servicer or thereafter received relating

SERVICING AGREEMENT - PAGE 27
<PAGE> 32
to the Loans and all Servicer Files. In addition to any other amounts which
are then, or, notwithstanding the termination of its activities as Servicer,
may become payable to the Servicer under this Agreement, the Servicer shall be
entitled to receive out of any delinquent payment on account of interest on a
Loan due during a Collection Period prior to the notice of termination received
pursuant to this Section 6.3 and received after such notice, that portion of
such payment which it would have received pursuant to Section 3.8 hereof if
such notice had not been given.

SECTION 4 ADDITIONAL REMEDIES OF TRUSTEE UPON SERVICER
DEFAULTS. Upon any Servicer Default, the Trustee, in addition to the rights
specified in Section 6.3 hereof, shall have the right, in its own name and as
Trustee, to take all actions now or hereafter existing at law, in equity or by
statute to enforce its rights and remedies and to protect the interests, and
enforce the rights and remedies, of the Noteholders (including the institution
and prosecution of all judicial, administrative and other proceedings and the
filings of proofs of claim and debt in connection therewith). No remedy
provided for by this Agreement shall be exclusive of any other remedy, and each
and every remedy shall be cumulative and in addition to any other remedy and no
delay or omission to exercise any right or remedy shall impair any such right
or remedy or shall be deemed to be a waiver of any Servicer Default.

SECTION 5 SUPERVISORY SERVICER TO ACT; APPOINTMENT OF
SUCCESSOR. On the effective date of any resignation of the Servicer pursuant
to Section 7.1 hereof or on the date the Servicer is removed as servicer
pursuant to this Article VI, the Supervisory Servicer (or any successor
appointed by the Supervisory Servicer pursuant to the Supervisory Servicing
Agreement) hereof shall be the successor in all respects to the Servicer in its
capacity as servicer under this Agreement and the transactions set forth or
provided for herein and shall be subject to all the responsibilities, duties
and liabilities (other than any liabilities of the predecessor Servicer)
relating thereto placed on the Servicer by the terms and provisions hereof in
accordance with and subject to the terms and conditions of the Supervisory
Servicing Agreement. The Supervisory Servicer (or other successor) shall
assume all of the rights and obligations of the Servicer in accordance with the
terms and conditions of the Supervisory Servicing Agreement which shall control
over any provisions herein covering the same subject matter. The Servicer
shall, upon request of the Trustee or the Supervisory Servicer but at the
expense of the Servicer, deliver to the Supervisory Servicer (or other
successor), all Servicer Loan Files, documents and records (including computer
tapes and diskettes) relating to the Loans and an accounting of any amounts
collected and held by the Servicer and otherwise use its reasonable efforts to
effect the orderly and efficient transfer of servicing rights and obligations
to the assuming party.

The Servicer agrees to cooperate with the Trustee and the Supervisory
Servicer or any other successor servicer in effecting the termination of the
Servicer's servicing responsibilities and rights hereunder and shall promptly
provide the Supervisory Servicer or such successor servicer, as applicable, all
documents and records reasonably requested by it to enable it to assume the
Servicer's functions hereunder and shall promptly also transfer to the
Supervisory Servicer

SERVICING AGREEMENT - PAGE 28
<PAGE> 33
or such successor servicer, as applicable, all amounts which then have been or
should have been deposited in the Lockbox Account by the Servicer or which are
thereafter received with respect to the Loans. Neither the Trustee, the
Supervisory Servicer nor any other successor servicer shall be held liable by
reason of any failure to make, or any delay in making, any distribution
hereunder or any portion thereof caused by (i) the failure of the Servicer to
deliver, or any delay in delivering, cash, documents or records to it, or (ii)
restrictions imposed by any regulatory authority having jurisdiction over the
Servicer hereunder. The Supervisory Servicer shall provide written notice of
each appointment of a successor to the Servicer hereunder, other than the
Supervisory Servicer, to each Holder and the Rating Agency, and the Trustee.

SECTION 6 WAIVER OF DEFAULTS. The Trustee (with the consent of
Required Noteholders and with notice to the Rating Agency) may, on behalf of
all Noteholders, waive any events permitting removal of the Servicer as
servicer pursuant to this Article VI. Upon any waiver of a past default, such
default shall cease to exist, and any Servicer Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereto except to the extent expressly so waived.

ARTICLE VII

TERMINATION

SECTION 1 SERVICER NOT TO RESIGN. The Servicer shall not
assign this Agreement or resign from the obligations and duties hereby imposed
on it except by mutual consent of the Servicer and the Trustee (with the
Required Noteholders' consent), or upon the determination that the Servicer's
duties hereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the Servicer. Any such determination permitting
the resignation of the Servicer shall be evidenced by a Certificate of an
Authorized Officer of the Servicer to such effect delivered to the Trustee, the
Noteholders, the Supervisory Servicer and the Rating Agency. No such
resignation shall become effective until a successor has assumed the Servicer's
responsibilities and obligations hereunder in accordance with Section 6.5.

SECTION 2 TERM OF AGREEMENT. This Agreement shall continue in
existence and effect until the earlier of (a) the later of the final payment or
other liquidation of the last Loan or the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Loan and the remittance
of all funds due thereunder, (b) the payment in full of the Notes in accordance
with the Indenture and the discharge of the Indenture in

SERVICING AGREEMENT - PAGE 29
<PAGE> 34
accordance with the terms thereof, or (c) mutual consent of the Servicer, the
Trustee, the Supervisory Servicer and all Holders in writing.

ARTICLE VIII

MISCELLANEOUS PROVISIONS

SECTION 1 AMENDMENT. This Agreement may be amended from time
to time by the Servicer, the Issuer and the Trustee by written agreement, with
30 days prior written notice to the Rating Agency and with prior written notice
to and consent of the Supervisory Servicer.

SECTION 2 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.

SECTION 3 NOTICES. All demands, notices and communications
hereunder shall be in writing and shall be duly given if addressed to the
appropriate Notice Address and delivered by hand or sent by nationally
recognized express courier, or mailed by registered mail, postage prepaid, or
transmitted by telecopy, and shall be effective upon receipt, except when
telecopied, in which case, any such communication shall be effective upon
telecopy against receipt of answer back or written confirmation thereof.

SECTION 4 SEVERABILITY OF PROVISIONS. If any one or more of
the covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity
or enforceability of the other covenants, agreements, provisions or terms of
this Agreement. The parties hereto further agree that the holding by any court
of competent jurisdiction that any remedy pursued by the Trustee hereunder is
unavailable or unenforceable shall not affect in any way the ability of the
Trustee to pursue any other remedy available to it.

SECTION 5 NO PARTNERSHIP. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties hereto, and the services of the Servicer shall be rendered as an
independent contractor and not as agent for the Trustee.

SECTION 6 COUNTERPARTS. This Agreement may be executed in one
or more counterparts and by the different parties hereto on separate
counterparts, each of which,

SERVICING AGREEMENT - PAGE 30
<PAGE> 35
when so executed, shall be deemed to be an original; such counterparts,
together, shall constitute one and the same agreement.

SECTION 7 SUCCESSORS AND ASSIGNS. This Agreement shall inure
to the benefit of and be binding upon the Servicer, the Issuer, the Supervisory
Servicer and the Trustee and their respective successors and assigns.

SECTION 8 NOTIFICATION TO RATING AGENCY AND NOTEHOLDERS. The
Trustee shall give prompt notice to the Rating Agency and the Noteholders of
the occurrence of any of the following events of which it has received notice:
(a) any modification or amendment to this Agreement, the Indenture or any other
Transaction Documents, (b) any proposed removal, replacement, resignation or
change of the Trustee or the Servicer, (c) any Event of Default under the
Indenture or any Servicer Default and (d) the final payment in full of the
Notes. Whenever the terms of this Agreement require that notice or reports be
given to the Rating Agency or the Noteholders, the Person to provide such
notice or reports shall first give them to the Trustee who shall provide them
to the Rating Agency or the Noteholders, as applicable. Additionally, the
Trustee, upon receipt, shall provide copies to the Rating Agency and the
Noteholders of all compliance reports, Determination Date Reports, financial
statements, operating reports, environmental reports and any and all other
reports received by the Trustee from the Servicer, the Issuer or the
Supervisory Servicer from time to time.

SECTION 9 INDULGENCES; NO WAIVERS. Neither the failure nor any
delay on the part of a party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted
such waiver.

SECTION 10 TITLES NOT TO AFFECT INTERPRETATION. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.

SECTION 11 ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
The express terms hereof control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms hereof.

SERVICING AGREEMENT - PAGE 31
<PAGE> 36
SECTION 12 RECORDATION OF AGREEMENT. To the extent permitted by
applicable law, this Agreement is subject to recordation in all appropriate
public offices for real property records in all the counties or the comparable
jurisdictions in which any Mortgaged Property is situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected by the Servicer and at its expense upon the written request of the
Trustee.

SECTION 13 FURTHER ASSURANCES. Notwithstanding any other provision
of this Agreement, the Trustee shall have no obligation to consent to any
amendment or modification of this Agreement unless it has been provided
reasonable security or indemnity against its out-of-pocket expenses (including
reasonable attorneys' fees) to be incurred in connection therewith by the
person requesting the amendment. To the extent permitted by law, the Servicer
agrees that it will, from time to time, execute, acknowledge and deliver, or
cause to be executed, acknowledged and delivered, such further instruments as
the Trustee may reasonably request to effectuate the intention of or facilitate
the performance of this Agreement.

[Remainder of page intentionally left blank]

SERVICING AGREEMENT - PAGE 32
<PAGE> 37
IN WITNESS WHEREOF, the Issuer, the Servicer, the Supervisory Servicer
and the Trustee have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the day and year first above written.

PMC CAPITAL, INC., as Servicer

By: \s\
----------------------------------------------
Name: Jan F. Salit
---------------------------------------
Title: Executive Vice President
--------------------------------------

SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION,
as Trustee

By: \s\
----------------------------------------------
Jonathan W. Fox, Senior Vice President

SUNTRUST BANK, CENTRAL FLORIDA
NATIONAL ASSOCIATION,
as Supervisory Servicer

By: \s\
----------------------------------------------
Jonathan W. Fox, Senior Vice President

PMC CAPITAL LIMITED PARTNERSHIP,
as Issuer

By: PMC Trust 1996-A,
Its General Partner

By: PMC Capital Corp. 1996-A,
Its Independent Trustee

By: \s\
----------------------------------
Name: Jan F. Salit
----------------------------
Title: Executive Vice President
---------------------------

SERVICING AGREEMENT - PAGE 33
<PAGE> 38
EXHIBIT A
TO
SERVICING AGREEMENT

FORM OF TRUST RECEIPT

Loan Information

Name of Obligor:
---------------------------------------------------------

Servicer Loan No.:
-------------------------------------------------------

Trustee Loan No.:
--------------------------------------------------------

Trustee

Name:
--------------------------------------------------------------------

Address:
-----------------------------------------------------------------

The undersigned Servicer hereby acknowledges that it has received from the
Trustee the documents referred to below (the "Documents"). All capitalized
terms not otherwise defined in this Trust Receipt shall have the meanings given
them in the Servicing Agreement.

( ) Deed of Trust Note dated in the original principal sum
of $ made by , payable to, or endorsed to the order
of, the Trustee.

( ) Mortgage recorded on as instrument no. in
the County Recorder's Office of the County of , State of
in book/reel/docket of official records at page/image .

( ) Deed of Trust recorded on as instrument no. in the
County Recorder's Office of the County of , State of
in book/reel/docket of official records at page/image .

( ) Assignment of Mortgage or Deed of Trust to the Trustee, recorded on
as instrument no. in the County Recorder's Office of the County
of , State of in book/reel/docket of
official records at page/image .

( ) Power of Attorney to other instrument authorizing to sign
on behalf of the Obligor.

( ) Other documents as follows (describe by date, names of parties and title
of documents):

A-1
<PAGE> 39
( )
-----------------------------------------

( )
-----------------------------------------

1. The Servicer shall hold and retain possession of the Documents
in trust for the benefit of the Trustee, solely for the purposes provided in
the Servicing Agreement.

2. The Servicer shall not cause or permit the Documents to become
subject to, or encumbered by, any claim, liens, security interest, charges,
writs of attachment or other impositions nor shall the Servicer assert or seek
to assert any claims or rights of setoff to or against the Documents or any
proceeds thereof.

3. The Servicer shall not retain possession or custody of the
Documents for more than 30 days following the date such Documents are released
by the Trustee, and the Servicer shall return the Documents to the Trustee
within such time, unless (i) the Loan relating to the Documents has been
liquidated and paid in full and the proceeds thereof have been remitted to the
Lockbox Account prior to the expiration of the 30-day period, or (ii) the
Documents have been delivered to an attorney, or to a public trustee or other
public official as required by law, for purposes of initiating or pursuing
legal action or other proceedings for the foreclosure of the Mortgaged
Property, either judicially or nonjudicially, and the Servicer has delivered to
the Trustee an Officer's Certificate certifying as to name and address of the
Person to which the Documents were delivered and the purpose of such delivery.

4. The Documents and any proceeds thereof, and any proceeds of
proceeds, coming into the possession or control of the Servicer, shall at all
times be earmarked for the account of the Trustee and the Servicer shall keep
the Documents and any proceeds separate and distinct from all other property in
the Servicer's possession, custody or control.

PMC CAPITAL, INC., Servicer

By:
------------------------------------------
Name:
-----------------------------------
Title:
----------------------------------

Dated:

A-2
<PAGE> 40
EXHIBIT B
TO
SERVICING AGREEMENT

FORM OF LOCKBOX AGREEMENT

B-1
<PAGE> 41
EXHIBIT C
TO
SERVICING AGREEMENT

FORM OF LOCKBOX NOTICE LETTER

C-1
<PAGE> 42
EXHIBIT D
TO
SERVICING AGREEMENT

DETERMINATION DATE REPORT

D-1
<PAGE> 43
EXHIBIT E
TO
SERVICING AGREEMENT

FORM OF ANNUAL STATEMENT

PMC CAPITAL LIMITED PARTNERSHIP

LOAN-BACKED FIXED RATE NOTES, SERIES 1996-A

ANNUAL STATEMENT FROM SERVICER REQUIRED BY SECTION 5.1(b) OF THE SERVICING
AGREEMENT

YEAR XX/XX/96 THRU XX/XX/96

<TABLE>
<CAPTION>
NOTEHOLDER INFORMATION Total
<S> <C> <C>
Beginning Noteholder Balance XXX,XXX.XX
Less: Principal Paid XXX,XXX.XX
(Due but not paid XXX,XXX.XX)
Ending Noteholder Balance XXX,XXX.XX

Interest Paid XXX,XXX.XX
Interest Accrued XXX,XXX.XX

Total
Beginning Loan Balance XXX,XXX.XX
Less: Principal Paid XXX,XXX.XX
Ending Loan Balance XXX,XXX.XX
</TABLE>

E-1
<PAGE> 44
EXHIBIT F
TO
SERVICING AGREEMENT

QUARTERLY OFFICER'S CERTIFICATE

____________, 199__

I, ______________________, ________________________, of [PMC Capital,
Inc.] (the "Servicer"), pursuant to the provisions of Section 5.3 of the
Servicing Agreement dated as of November 1, 1996 (the "Agreement"), by and
among SunTrust Bank, Central Florida, National Association, in its capacity as
Trustee and Supervisory Servicer, PMC Capital Limited Partnership and the
Servicer, do hereby certify as follows:

(i) the Servicer has fully complied with the provisions of the
Agreement;

(ii) a review of the activities of the Servicer during the
preceding quarter and of the Servicer's performance under the
Agreement has been made under my supervision; and

(iii) to the best of my knowledge, based on the review referred to
in (ii) above, the Servicer has fulfilled all of its
obligations, duties and responsibilities under the Agreement
throughout the preceding quarterly period, and unless
otherwise described on Schedule I hereto, no Servicer Default
exists.

Capitalized terms used but not otherwise defined herein shall have the
same meanings ascribed to such terms in the Agreement.

IN WITNESS WHEREOF, I have executed this certificate this ____ day of
_________, 199__.

PMC CAPITAL, INC., Servicer

By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------

F-1
<PAGE> 45
Schedule I
to
Quarterly Officer's Certificate

SERVICER DEFAULTS

[Describe any Servicer Defaults and the status thereof and the
action being taken by the Servicer to cure any such Servicer
Default.]
<PAGE> 46
EXHIBIT G
TO
SERVICING AGREEMENT

OFFICER'S CERTIFICATE

____________, 199__

I, ______________________, ________________________, of [PMC Capital,
Inc.] (the "Servicer"), pursuant to the provisions of Section 5.5 of the
Servicing Agreement dated as of November 1, 1996 (the "Agreement"), by and
among SunTrust Bank, Central Florida, National Association, in its capacity as
Trustee and Supervisory Servicer, PMC Capital Limited Partnership and the
Servicer, do hereby certify as follows:

(iv) I have confirmed that the Fidelity Bond, the Errors and
Omissions Insurance Policy and any other bonds required by
Section 2.4 of the Agreement are in full force and effect; and

(v) The representations and warranties of the Servicer set forth
in Section 2.1 of the Agreement are true and correct in all
material respects as if made on the date hereof.

Capitalized terms used but not otherwise defined herein shall have the
same meanings ascribed to such terms in the Agreement.

IN WITNESS WHEREOF, I have executed this certificate this ____ day of
_________, 199__.

PMC CAPITAL, INC., Servicer

By:
---------------------------------------
Name:
----------------------------------
Title:
---------------------------------

G-1
<PAGE> 47
EXHIBIT H
TO
SERVICING AGREEMENT

FORM OF OBLIGOR LETTER

[Date]

VIA CERTIFIED MAIL

[Obligor]
[Address]
[Address]
[Address]

Re: PMC Capital, Inc. (PMC)
Loan Number
------------------

Dear [Obligor]:

Your loan serviced by PMC is part of a pool of loans for which SunTrust
Bank, Central Florida, National Association serves as trustee. As part of our
servicing responsibility we are required to verify certain information with
respect to your loan.

Our records indicate your loan was previously delinquent by more than 90
days and has recently been brought current. We are required to demonstrate
that you did in fact make the delinquent payments.

If these facts are correct, please indicate your acknowledgment by signing
and returning a copy of this letter to our attention, in the envelope provided.
If these facts are not correct, please indicate your disagreement by signing
this letter and indicating your disagreement beneath your signature and
returning a copy of this letter to our attention, in the envelope provided.

If we do not hear from you within 30 days of the date of this letter we
will assume that these facts are true.

H-1
<PAGE> 48
If you have any questions, please contact the undersigned at (XXX) XXX-XXXX.

Sincerely,

[Officer]
[Title]

Acknowledged by:

- -------------------------------------
Mortgagor Name Date

H-2

<PAGE> 1

EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State
of
Company Incorporation
------- -------------
<S> <C>
PMC Investment Corporation Florida
Western Financial Capital Corporation Florida
First Western SBLC, Inc. Florida
PMC Funding Corp. Florida
PMC Advisers, LTD Texas
PMC Capital Corp. 1996-A Texas
PMC Trust 1996-A Delaware
PMC Capital Limited Partnership Delaware
Asset Investments Holding Series A, L.L.C. Delaware
First Western Series 1994-1 L.L.C. Delaware

</TABLE>

E-4

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K OF PMC CAPITAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 340
<SECURITIES> 49,677
<RECEIVABLES> 96,673<F1>
<ALLOWANCES> (435)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 482
<DEPRECIATION> (301)
<TOTAL-ASSETS> 164,964<F2>
<CURRENT-LIABILITIES> 12,093<F3>
<BONDS> 79,570
4,000<F4>
3,000<F4>
<COMMON> 62,237
<OTHER-SE> 666
<TOTAL-LIABILITY-AND-EQUITY> 164,964<F5>
<SALES> 0
<TOTAL-REVENUES> 23,821<F6>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,746
<LOSS-PROVISION> 147
<INTEREST-EXPENSE> 5,708
<INCOME-PRETAX> 13,220
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,220
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<FN>
<F1>INCLUDES CURRENT AND LONG TERM PORTION OF ALL LOANS RECEIVABLE - BEFORE
RESERVE, INTEREST RECEIVABLE ON LOANS AND RECEIVABLE FOR LOANS SOLD. DOES NOT
INCLUDE RECEIVABLE FROM AFFILIATE.
<F2>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE
(i) EXCESS SERVICING ASSET $ 6,429
(ii) RESTRICTED INVESTMENTS 1,229
(iii) REAL PROPERTY OWNED 303
(iv) DUE FROM AFFILIATES 1,097
(v) DEFERRED CHARGES, DEPOSITS AND
OTHER ASSETS, NET 885
(vi) INVESTMENT IN SUBSIDIARIES 8,585
---------
$ 18,528
=========
<F3>INCLUDES THE FOLLOWING:
(i) ACCRUED INTEREST PAYABLE $ 1,442
(ii) BORROWER ADVANCES 1,795
(iii) DIVIDENDS PAYABLE 3,635
(iv) ACCOUNTS PAYABLE 4,145
(v) DUE TO UNCONSOLIDATED SUBSIDIARIES 1,076
-------
$12,093
=======
<F4>PREFERRED STOCK OF SUBSIDIARY HELD BY SBA. SEE FOOTNOTES TO FINANCIAL
STATEMENTS.
<F5>INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE
(i) DEFERRED FEE REVENUE $ 419
(ii) OTHER LIABILITIES 1,446
(iii) ALLOWANCE FOR CREDIT
LOSSES ON LOANS SOLD 1,533
------
$3,398
======
<F6>RESERVES CONSIST PRIMARILY OF INTEREST AND OTHER YIELD ON INVESTMENTS.
</FN>

</TABLE>