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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended Commission File
September 30, 2002 1-08019-01
PFGI CAPITAL CORPORATION
Incorporated Under IRS Employer I.D.
The Laws of Maryland No. 04-3659419
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value = 5,940,000
Series A Preferred Stock, $25.00 Stated Value = 6,600,000
(As of October 31, 2002)
-1-
PFGI CAPITAL CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Changes in Shareholders' Equity . . . . . . . . . . . . 5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 20
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 21
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-2-
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PFGI CAPITAL CORPORATION
BALANCE SHEET
September 30, 2002
(Dollars In Thousands)
(Unaudited)
ASSETS
Commercial Mortgage Loan Participations $ 330,672
Reserve for Loan Participation Losses (3,698)
---------
Net Commercial Mortgage Loan Participations 326,974
Cash and Due From Banks 1,754
Interest Receivable 1,114
Accounts Receivable - The Provident Bank 89
Other Assets 5
---------
Total Assets $ 329,936
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other Liabilities $ 7
Shareholders' Equity:
Series A Preferred Stock, $25 Stated Value,
6,600,000 Shares Authorized, Issued and Outstanding 165,000
Common Stock, $.01 Par Value, 5,940,000 Shares
Authorized, Issued and Outstanding 59
Capital Surplus 159,389
Retained Earnings 5,481
---------
Total Shareholders' Equity 329,929
---------
Total Liabilities and Shareholders' Equity $ 329,936
=========
See notes to financial statements.
-3-
PFGI CAPITAL CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Period From
June 12, 2002
(Commencement of
Three Months Ended Operations) to
(In Thousands, Except Per Share Data) September 30, 2002 September 30, 2002
- -----------------------------------------------------------------------------------
Interest Income:
Interest on Loan Participations $4,802 $5,690
Interest on Cash Deposit 44 44
------ ------
Total Interest Income 4,846 5,734
Provision for Loan Participation Losses - -
------ ------
Net Interest Income After Provision
for Loan Participation Losses 4,846 5,734
Noninterest Expense:
Loan Servicing Fees 91 122
Management Fees 73 98
Other Noninterest Expense 33 33
------ ------
197 253
------ ------
Income Before Income Taxes 4,649 5,481
Income Taxes - -
------ ------
Net Income $4,649 $5,481
====== ======
Preferred Stock Dividends $ - $ -
====== ======
Net Income Available to Common Shares $4,649 $5,481
====== ======
Per Common Share:
Basic $ 0.78 $ 0.92
Diluted $ 0.78 $ 0.92
Dividends $ - $ -
See notes to financial statements.
-4-
PFGI CAPITAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Preferred Common Capital Retained
Stock Stock Surplus Earnings Total
- ---------------------------------------------------------------------------------------
Balance at June 12, 2002 $ - $ - $ - $ - $ -
Issuance of Common Stock 59 164,941 165,000
Issuance of Preferred Stock 165,000 165,000
Offering Costs of Preferred Stock (5,552) (5,552)
Net Income 5,481 5,481
-------- --- -------- ------ --------
Balance at September 30, 2002 $165,000 $59 $159,389 $5,481 $329,929
======== === ======== ====== ========
See notes to financial statements.
-5-
PFGI CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 12, 2002 TO SEPTEMBER 30, 2002
(In Thousands)
(Unaudited)
Operating Activities:
Net Income $ 5,481
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Increase in Interest Receivable (1,114)
Increase in Accounts Receivable and Other Assets (94)
Increase in Other Liabilities 7
---------
Net Cash Used in Operating Activities 4,280
Investing Activities:
Net Increase in Loan Participations (161,974)
Financing Activities:
Proceeds from Issuance of Preferred Stock 165,000
Offering Costs of Preferred Stock (5,552)
---------
Net Cash Provided By Financing Activities 159,448
---------
Increase in Cash and Cash Equivalents 1,754
Cash at Beginning of Period -
---------
Cash and Cash Equivalents at End of Period $ 1,754
=========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ -
Income Taxes -
Non-Cash Activity:
Exchange of Common Stock for Loan Participations 165,000
See notes to financial statements.
-6-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
- --------------------
PFGI Capital Corporation (PFGI Capital) is a Maryland corporation that was
incorporated on May 9, 2002. All of PFGI Capital's Common Stock is owned by
The Provident Bank (the Bank). The principal business objective of PFGI
Capital is to acquire, hold, and manage commercial mortgage loan assets and
other authorized investments that will generate net income for distribution
to PFGI Capital's stockholders. PFGI Capital has elected to be treated as a
real estate investment trust (REIT) for federal income tax purposes. As a
REIT, PFGI Capital generally is not liable for federal income tax to the
extent that it distributes its income to its stockholders and continues to
meet a number of other requirements. Management views its financial
condition and results of operations as one operating segment.
The Bank, an Ohio state-chartered member bank of the Federal Reserve System,
is the main subsidiary of Provident Financial Group, Inc. (Provident) and
provides full-service retail and commercial banking operations. PFGI
Capital, the Bank and Provident's executive offices are located at One East
Fourth Street, Cincinnati, Ohio 45202, and its Investors Relations telephone
number is (513)345-7102 or (800)851-9521.
NOTE 2. ACCOUNTING POLICIES
- ----------------------------
The following is a summary of significant accounting policies for PFGI
Capital:
BASIS OF PRESENTATION: The accompanying unaudited financial statements
reflect all adjustments, consisting of normal recurring accruals, which are,
in the opinion of management, necessary for a fair presentation of the
financial position, the results of operations, and cash flows for the period
presented. These financial statements have been prepared according to the
rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States (GAAP) have been omitted.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect amounts reported in
the financial statements. Actual results could differ from those estimates.
-7-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
COMMERCIAL MORTGAGE LOAN PARTICIPATIONS: Commercial mortgage loan
participations are generally stated at the principal amount outstanding.
Interest on loans is computed on the outstanding principal balance. Late
charges and other loan fees are not transferred to PFGI Capital, but rather,
kept by the Bank as part of its loan servicing fees. Any premium or discount
applicable to specific loans purchased is amortized over the remaining lives
of such loans using the interest method. Loans are generally placed on
nonaccrual status when the payment of principal or interest is past due 90
days or more. However, loans that are well secured and in the process of
collection may not be placed on nonaccrual status. When a loan is placed on
nonaccrual status, any interest income previously recognized that has not
been received is reversed. Future interest income is recorded only when a
payment is received and collection of principal is considered reasonably
assured.
PFGI Capital considers a loan to be an impaired loan when it is probable
that all amounts due will not be collected according to the contractual
terms of the loan agreement. PFGI Capital measures the value of an impaired
loan based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, if more practical, at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Income on impaired loans is generally recognized on a
cash basis.
RESERVE FOR LOAN PARTICIPATION LOSSES: The reserve for loan participation
losses is maintained at a level necessary to absorb losses inherent in the
loan participation portfolio. When PFGI Capital purchases loan
participations from the Bank, a reserve for loan participation losses is
transferred from the Bank to PFGI Capital. The reserve is increased by
provisions for loan participation losses whenever further deterioration of
the credit quality of the portfolio occurs. Loans deemed uncollectible are
charged off and deducted from the reserve and recoveries on loans previously
charged off are added back to the reserve. Loans sold back to the Bank are
accompanied by a transfer of the reserve for those loans from PFGI Capital
to the Bank.
Management's determination of the adequacy of the reserve is based on an
assessment of the losses given the conditions at the time. This assessment
consists of certain loans being evaluated on an individual basis, as well as
all loans being categorized based on common credit risk attributes and being
evaluated as a group. Loans reviewed on an individual basis include large
non-homogeneous credits where their internal credit rating is at or below a
predetermined classification. Loans not individually reviewed are segmented
by their internal risk rating. Analyses are performed on each segment of the
portfolio based upon trends in delinquencies, charge-offs, economic factors
and business strategies. Adequacy factors are adjusted based on any changes
in expected losses in the segment.
OFFERING COSTS: Costs incurred in connection with the raising of capital
through the sale of Preferred Stock were taken as an adjustment to the
capital surplus account of PFGI Capital.
-8-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DIVIDENDS: Dividends on the Series A Preferred Stock are non-cumulative.
Upon authorization of the Board of Directors, dividends will be payable in
arrears beginning November 17, 2002 and then quarterly on February 17, May
17, August 17 and November 17 of each year, or if any such day is not a
business day, on the next business day. Dividends will be paid at a rate of
7.75% per annum of the initial liquidation preference which is $25.00 per
share.
Common stockholders are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds available after the
preferred dividends have been paid.
LOAN FORECLOSURES: Prior to foreclosure of any commercial mortgage loan,
PFGI Capital intends to sell the participation interest in the underlying
loan back to the Bank at fair value less estimated selling costs of the
property. The Bank will then bear all expenses related to the foreclosure
after that time.
INCOME TAXES: PFGI Capital has elected to be treated as a REIT for Federal
income tax purposes and intends to comply with the provisions of the
Internal Revenue Code and therefore is not subject to income taxes. No
provision for income taxes is included in the accompanying financial
statements.
Note 3. LOAN PARTICIPATIONS AND RESERVE FOR LOAN PARTICIPATION LOSSES
- ---------------------------------------------------------------------
Participations in loans are generally purchased from the Bank at the Bank's
carrying value, which is the principal amount outstanding plus accrued
interest. A reserve for loan participation losses is transferred from the
Bank to PFGI Capital at the time participations are transferred. Loans sold
back to the Bank are accompanied by a transfer of the reserve for those
loans from PFGI Capital to the Bank. The reserve for loan participation
losses reflects management's judgment as to the level considered appropriate
to absorb inherent losses in the loan participation portfolio. As of
September 30, 2002, PFGI did not have any nonperforming assets or impaired
loans.
The following table sets forth an analysis of the reserve for loan
participation losses for the period from June 12 to September 30, 2002:
(In Thousands)
- ----------------------------------------------------------------------------
Balance at Beginning of Period $ -
Transferred Reserves, Net 3,698
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
------
Balance at End of Period $3,698
======
-9-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 4. EARNINGS PER COMMON SHARE
- ---------------------------------
Basic earnings per common share is the amount of earnings for the period
available to each share of Common Stock outstanding during the reporting
period. Diluted earnings per common share is the amount of earnings
available to each share of Common Stock outstanding during the reporting
period adjusted for the potential issuance of common shares for stock
options, convertible debt, etc. The earnings available to each share of
Common Stock has not been reduced by any Series A Preferred Stock dividend
as the Board of Directors had not declared any such dividend as of September
30, 2002. On October 22, 2002, the Board of Directors approved a dividend of
$5,541,360 payable to preferred shareholders as of November 17, 2002. PFGI
Capital has no stock options or convertible debt or other potential equity
instruments and therefore basic and diluted earnings per share are
calculated on the same basis. The Bank owns all of the issued and
outstanding Common Stock of PFGI Capital.
The following table sets forth the computation of basic and diluted earnings
per common share for the third quarter of 2002, and for the period from June
12 (commencement of operations) to September 30, 2002:
Period From
June 12, 2002
(Commencement of
Three Months Ended Operations) to
(In Thousands, Except Per Share Data) September 30, 2002 September 30, 2002
- ------------------------------------------------------------------------------------
Net Income $ 4,649 $ 5,481
Weighted-Average Common Shares Outstanding 5,940 5,940
------- -------
Basic and Diluted Earnings Per Share $ 0.78 $ 0.92
======= =======
In addition to the dividend to be paid by PFGI Capital, Provident will make
a contract adjustment payment of $893,750 to the PRIDES holders. This
payment is based on an annualized rate of 1.25% of the stated amount.
NOTE 5. REGISTRATION AND ISSUANCE OF PRIDES
- -------------------------------------------
Provident and PFGI Capital registered 6,000,000 PRIDES pursuant to a
Registration Statement filed with the Securities Exchange Commission
(Commission File No. 333-88446 and No. 333-88446-01), which was declared
effective on June 6, 2002. In addition, the managing underwriter, Merrill
Lynch and Co., was permitted to purchase up to an additional 600,000 PRIDES
to cover over-allotments. Provident and PFGI Capital sold the 6,000,000
original PRIDES effective June 12, 2002 and the 600,000 over-allotment
PRIDES effective July 2, 2002. The offering was subsequently terminated as
all registered PRIDES had been sold.
-10-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Gross proceeds from the sale of PRIDES were $165 million. The underwriting
discount and expenses incurred from the issuance of the PRIDES totaled
$6,529,000 of which 85%, or $5,552,000, was allocated to PFGI Capital. The
remaining 15% was allocated to Provident as its share of the PRIDES
transaction. The transaction costs may increase for any additional invoices
received subsequent to September 30, 2002.
PFGI Capital used all of the net proceeds it received from the sale of the
PRIDES for the purchase of participation interests in commercial mortgage
loans from the Bank. The Bank used the proceeds from the sale of the
participation interests for general corporate purposes, including working
capital and funding of asset growth.
NOTE 6. DESCRIPTION OF PRIDES
- -----------------------------
Each PRIDES has a stated amount of $25.00 per unit and is comprised of two
components - a 3-year forward purchase commitment (the Purchase Contract)
and PFGI Capital Series A Preferred Stock.
Each Purchase Contract obligates the holder to buy, on August 17, 2005, for
$25.00, a number of newly issued shares of Provident Common Stock equal to
the settlement rate. The settlement rate will be calculated as follows:
o if the applicable market value of Provident Common Stock is equal to or
greater than $29.0598, the settlement rate will be .8603;
o if the applicable market value of Provident Common Stock is between
$29.0598 and $24.42, the settlement rate will be equal to the $25.00
stated amount divided by the applicable market value; and
o if the applicable market value is less than or equal to $24.42, the
settlement rate will be 1.0238.
"Applicable market value" is defined as the average of the closing price per
share of Provident Common Stock on each of the twenty consecutive trading
days ending on the fifth trading day immediately preceding August 17, 2005.
Under the Purchase Contract, Provident will also make quarterly contract
adjustment payments to the PRIDES holders at an annualized rate of 1.25% of
the stated amount ($0.3125 per share).
Holders of PFGI Capital's Series A Preferred Stock are entitled to one-tenth
of one vote per share on all matters submitted to a vote of the
shareholders, voting as a single class with the holders of Common Stock. The
holders of Preferred Stock will be entitled to receive, if, when, and as
authorized and declared by the board of directors out of legally available
assets, non-cumulative cash dividends at the rate of 7.75% per annum of the
initial liquidation preference which is $25.00 per share ($1.9375 per
share). Dividends on the Preferred Stock will be payable, if authorized and
declared, quarterly in arrears on February 17, May 17, August 17 and
November 17 of each year, or if any such day is not a business day, on the
next business day. The Preferred Stock will rank senior to the Common Stock
-11-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
of PFGI Capital as to dividend rights and rights upon liquidation, winding
up or dissolution.
In connection with the settlement of the Purchase Contract, Provident has
engaged a remarketing agent to remarket the PFGI Capital Preferred Stock on
behalf of the holders, at which time the PFGI Preferred Stock will be
permanently detached from the Purchase Contract. Once the Purchase Contract
is settled, there will be two separate and distinct securities outstanding:
PFGI Capital Preferred Stock and Provident Common Stock. The proceeds
received from the remarketing will be used by the holders of Preferred Stock
to fulfill their commitment under the terms of the Purchase Contract.
Upon a successful remarketing of shares of the PFGI Capital's Preferred
Stock, the applicable dividend rate on the shares of Preferred Stock that
have been purchased in the remarketing will be reset to the reset rate
described below. The dividend rate of shares of Preferred Stock that are not
remarketed will not be reset and will continue to be 7.75%.
The reset rate will be determined by the reset agent as the dividend rate
the Preferred Stock should bear for the Preferred Stock to have a market
value on the fifth business day immediately preceding August 17, 2005 of
100.5% of the aggregate liquidation preference of the Preferred Stock, plus
declared and unpaid dividends, if any.
Each share of PFGI Capital's Preferred Stock will be automatically exchanged
for one newly issued share of Bank Series A Preferred Stock upon the
occurrence of an exchange event. An exchange event occurs when:
o the Bank becomes less than "adequately capitalized" according to
regulations established by the Federal Reserve Board pursuant to the
Federal Deposit Insurance Corporation Investment Act or as determined by
the Ohio Division of Financial Institutions pursuant to the Ohio Banking
Code and regulations thereunder;
o the Bank is placed into conservatorship or receivership;
o the Federal Reserve Board, in its sole discretion, directs such exchange
in writing, and, even if Provident Bank is not less than "adequately
capitalized," the Federal Reserve Board or the Ohio Division of Financial
Institutions, as the case may be, anticipates the Bank becoming less than
"adequately capitalized" in the near term; or
o the Federal Reserve Board, in its sole discretion, or the Ohio Division
of Financial Institutions, in its sole discretion, directs such exchange
in writing in the event that the Bank has a Tier 1 risk-based capital
ratio of less than 5.0%.
Additional information concerning the PFGI Capital's Series A Preferred
Stock may be found in its Registration Statement on Form S-3, as amended,
(Commission File No. 333-88446 and No. 333-88446-01) effective June 6, 2002.
-12-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS
- ----------------------------------
PFGI Capital holds a 95% participation interest through a participation
agreement with the Bank in certain loans originated by the Bank and its
subsidiaries. Generally, the participation interests are in commercial
mortgage loans secured by real property that were either directly
underwritten by the Bank and its subsidiaries or acquired by the Bank. PFGI
Capital expects to continue to purchase such interests in the future from
the Bank under the terms of the participation agreement.
The participation agreement also provides for the Bank to service the
commercial mortgage loans underlying the participations held by PFGI Capital
in a manner substantially the same for similar work performed by the Bank
for transactions on its own behalf. The servicing fee that the Bank charges
is .125% per year of the average daily outstanding principal balances of the
commercial mortgage loans underlying the participation interests. Loan
servicing costs incurred by PFGI Capital totaled $122,000 for the period
from June 12 to September 30, 2002.
The day-to-day operations of PFGI Capital are managed pursuant to the terms
of a management agreement between the Bank and PFGI Capital. The Bank, in
its role as manager under the terms of the management agreement, receives a
management fee designed as a reimbursement for costs incurred to manage PFGI
Capital. The Bank is required to pay all expenses related to the performance
of its duties under the management agreement, including any payment to its
affiliates for managing PFGI Capital. The management fee that the Bank
charges is .10% per year of the average daily balance of assets. Management
fees incurred by PFGI Capital total $98,000 for the period from June 12 to
September 30, 2002.
The Bank owns 100% of the Common Stock of PFGI Capital. Accordingly, the
Bank will receive all common dividends paid by PFGI Capital.
As of September 30, 2002, PFGI Capital had an interest-bearing deposit
account of $1,754,000 at the Bank and a net receivable of $89,000 from the
Bank.
NOTE 8. LEGAL CONTINGENCIES
- ---------------------------
As of September 30, 2002, there was no litigation involving PFGI Capital.
-13-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
INTRODUCTION
PFGI Capital is a Maryland corporation that was incorporated on May 9, 2002.
PFGI Capital's principal business objective is to acquire, hold, and manage
mortgage assets and other authorized investments that will generate net
income for distribution to its shareholders. Since operations commenced in
June 2002, PFGI Capital has been operating as a REIT for federal income tax
purposes.
PFGI Capital is a subsidiary of the Bank, which is owned by Provident. All
of PFGI Capital's day-to-day activities and the servicing of the loans
underlying its participation interests are administered by the Bank.
The participation agreement between the Bank and PFGI Capital requires the
Bank to service PFGI Capital's loan portfolio in a manner substantially the
same as for similar work performed by the Bank for transactions on its own
behalf. The Bank collects and remits principal and interests payments,
maintains perfected collateral positions, and submits and pursues insurance
claims. The Bank also provides to PFGI Capital accounting and reporting
services as required. The Bank is required to pay all expenses related to
the performance of its duties under the participation agreement.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that are subject
to numerous assumptions, risks or uncertainties. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Actual results could differ materially from those contained in
or implied by such forward-looking statements for a variety of factors
including: sharp and/or rapid changes in interest rates; prepayments of
loans with fixed interest rates, resulting in reinvestment of the proceeds
in loans with lower interest rates; significant changes in the anticipated
economic scenario which could materially change anticipated credit quality
trends; adverse economic and other developments in states where loans are
concentrated; the possible exchange of Series A Preferred Stock for
preferred shares of the Bank at the direction of the Federal Reserve Board
or the Ohio Division of Financial Institutions if the Bank becomes
undercapitalized; the failure of PFGI Capital to maintain its status as a
REIT for federal income tax purposes; and significant changes in accounting,
tax, or regulatory practices or requirements and factors noted in connection
with forward-looking statements. Additionally, borrowers of loan
participations could suffer unanticipated losses without regard to general
economic conditions. The result of these and other factors could cause
differences from expectations in the level of defaults, changes in risk
characteristics of the loan participation portfolio, and changes in the
provision for loan participation losses. Forward-looking statements speak
only as of the date made. PFGI Capital undertakes no obligations to update
any forward-looking statements to reflect events or circumstances arising
after the date on which they are made.
-14-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
PFGI Capital began its operations on June 12, 2002. PFGI Capital issued
5,940,000 shares of Common Stock to the Bank in exchange for $165 million of
commercial mortgage loan participations. As part of the PRIDES issuance,
PFGI Capital also issued 6,600,000 shares of Series A Preferred Stock for
$165 million. Such proceeds were used to purchase an additional $165 million
of commercial mortgage loan participations from the Bank.
PFGI Capital reported net income of $4,649,000, or $.78 earnings per common
share, for the three months ended September 30, 2002. For the period from
June 12, 2002 to September 30, 2002, PFGI recorded net income of $5,481,000,
or $.92 earnings per common share.
At September 30, 2002, PFGI Capital had total assets of $330 million. These
assets were primarily comprised of net commercial mortgage loan
participations totaling $327 million. These loan participations were all
acquired from the Bank. Equity for PFGI Capital was $330 million as of
September 30, 2002. Equity consisted of $330 million from the issuance of
Common and Preferred Stock, and net income of $5.5 million, net of $5.6
million for the cost of issuing the Preferred Stock.
RESULTS OF OPERATIONS
Interest Income
Interest income was $4,846,000 and $5,734,000 for the quarter ended
September 30, 2002 and for the period from June 12 to September 30, 2002,
respectively. The yield on the loan participation portfolio as of September
30, 2002 was 6.06%.
Provision For Loan Participation Losses
The provision for loan participation losses is the charge to earnings
necessary to maintain the allowance for loan losses at a level adequate to
absorb management's estimate of inherent losses in the loan portfolio. There
was no provision for loan participation losses from June 12 to September 30,
2002.
Noninterest Expense
Noninterest expense was $197,000 and $253,000 for the three months ended
September 30, 2002 and for the period from June 12 to September 30, 2002,
respectively. Noninterest expense is comprised primarily of compensation
paid to the Bank for loan servicing and management fees. On an annual basis,
loan servicing fees are assessed at a rate of .125% of the average daily
outstanding principal balance of the loan participations and management fees
are assessed at a rate of .10% of the average daily outstanding balance of
assets.
-15-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Commercial Mortgage Loan Participations
As of September 30, 2002, PFGI Capital had $327 million of commercial
mortgage loan participations net of reserves. The participation portfolio
was acquired from the Bank. In order to qualify as a REIT, at least 75% of
PFGI Capital's assets must consist of real estate assets. As of the end of
the quarter, PFGI Capital's real estate assets to total assets ratio was
99%.
The following table shows the geographic distribution of the loans
underlying the commercial mortgage loan participations as of September 30,
2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
State of Loans (In Thousands) Balance
- ---------------------------------------------------------------------------
Ohio 153 $ 260,853 78.89%
Florida 10 13,548 4.09
Kentucky 11 12,160 3.68
All Others 20 44,111 13.34
--- --------- ------
Total 194 $ 330,672 100.00%
=== ========= ======
The following table shows the composition of the commercial mortgage loan
participations based on the size of its current principal balance at
September 30, 2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
Principal Balance of Loans (In Thousands) Balance
- -------------------------------------------------------------------------------------
Less than $50,000 1 $ 43 0.01%
Greater than $ 50,000 to $ 100,000 0 0 -
Greater than $ 100,000 to $ 250,000 39 6,521 1.97
Greater than $ 250,000 to $ 500,000 33 12,164 3.68
Greater than $ 500,000 to $ 1,000,000 40 29,292 8.86
Greater than $ 1,000,000 to $ 2,000,000 36 50,690 15.33
Greater than $ 2,000,000 to $ 3,000,000 20 47,270 14.30
Greater than $ 3,000,000 to $ 4,000,000 5 16,799 5.08
Greater than $ 4,000,000 to $ 5,000,000 6 26,527 8.02
Greater than $ 5,000,000 to $ 6,000,000 3 16,241 4.91
Greater than $ 6,000,000 to $10,000,000 7 57,595 17.42
Greater than $10,000,000 4 67,530 20.42
--- --------- ------
Total 194 $ 330,672 100.00%
=== ========= ======
-16-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some of the loans underlying the commercial mortgage loan participations
bear interest at fixed rates, and some bear interest at variable rates based
on indices such as LIBOR and the prime rate. The following tables show data
with respect to interest rates of the loans underlying the commercial
mortgage loan participations at September 30, 2002:
Fixed Rate Variable Rate
---------------------------------------- ----------------------------------------
Aggregate Percentage Aggregate Percentage
Number Principal by Aggregate Number Principal by Aggregate
of Balance Principal of Balance Principal
Interest Rate Loans (In Thousands) Balance Loans (In Thousands) Balance
- ------------------------------------------------------------------------------------------------------
Under 5.00% 2 $ 10,741 30.67% 54 $ 138,875 46.97%
5.00% to 5.99% 2 7,096 20.26 29 41,418 14.01
6.00% to 6.99% 2 848 2.42 30 36,340 12.29
7.00% to 7.99% 5 8,692 24.82 40 29,529 9.99
8.00% to 8.99% 3 7,647 21.83 27 49,486 16.74
-- -------- ------ --- --------- ------
14 $ 35,024 100.00% 180 $ 295,648 100.00%
== ======== ====== === ========= ======
Aggregate Percentage
Number Principal by Aggregate Average
of Balance Principal Interest
Interest Type Loans (In Thousands) Balance Rate
- ----------------------------------------------------------------------------
Fixed Rate Loans 14 $ 35,024 10.59% 6.20%
Variable Rate Loans 180 295,648 89.41 5.71
--- --------- ------ ----
Total 194 $ 330,672 100.00% 6.06%
=== ========= ====== ====
Other Assets
As of September 30, 2002, PFGI Capital had cash of $1.8 million in an
interest bearing deposit account at the Bank. As of this date, the account
was yielding a rate of 1.80%.
Additionally, PFGI Capital had interest receivable of $1.1 million, accounts
receivable of $89,000 and prepaid expenses of $5,000.
INTEREST RATE RISK MANAGEMENT
PFGI Capital's income consists primarily of interest income on participation
interests in commercial mortgage loans. PFGI Capital does not intend to use
any derivative products to manage its interest rate risk. If there is a
decline in market interest rates, PFGI Capital may experience a reduction in
interest income on its participation interests and a corresponding decrease
in funds available to be distributed to shareholders. The reduction in
interest income may result from downward adjustments of the indices upon
which the interest rates on loans are based and from prepayments of loans
with fixed interest rates, resulting in reinvestment of the proceeds in
lower-yielding participation interests. Further information regarding market
risk can be found under Item 3 of this report.
-17-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CREDIT QUALITY
PFGI Capital's exposure to credit risk is managed by personnel of the Bank
through its use of consistent underwriting standards that emphasize
"in-market" lending while avoiding excessive industry and business activity
concentrations. The Bank's credit administration function employs extensive
risk management techniques, including forecasting, to ensure that loans
adhere to corporate policy and problem loans are promptly identified. These
procedures provide executive management of the Bank and PFGI Capital with
the information necessary to implement policy adjustments where necessary,
and take corrective actions on a proactive basis. These procedures also
include evaluating the adequacy of the reserve for loan participation
losses, which includes an analysis of specific credits and the application
of relevant reserve factors that represent relative risk, based on portfolio
trends, current and historic loss experience, and prevailing economic
conditions, to specific portfolio segments.
Concentration of credit risk generally arises with respect to participation
interests when a number of underlying loans have borrowers engaged in
similar business activities or activities in the same geographical region.
Concentration of credit risk indicates the relative sensitivity of
performance to both positive and negative developments affecting a
particular industry or region. PFGI Capital's balance sheet exposure to
geographic concentrations directly affects the credit risk of the underlying
loans within the participation interests. Approximately 87% of the loans
underlying the participation interests are located in Ohio, Florida and
Kentucky. Borrowers obligated in loans underlying PFGI Capital's
participation interests, however, do not represent a particular
concentration of similar business activity. Consequently, the portfolio may
experience a higher default rate in the event of adverse economic,
political, or business developments or natural hazards in these states and
may affect the ability of borrowers to make payments of principal and
interest on the underlying loans.
Non-performing assets consist of underlying loans that are no longer
accruing interest and property acquired through foreclosure. Commercial
mortgage loans are placed on non-accrual status and stop accruing interest
when collection of principal or interest is in doubt or generally when the
underlying loans are 90 days past due. When interest accruals are suspended,
accrued interest income is reversed with prior period accruals charged to
earnings. As of September 30, 2002, no loans had been placed on non-accrual
status nor had any property been acquired through foreclosure. As of
September 30, 2002, the reserve for loan participation losses to total loans
was 1.12%.
-18-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The objective of maintaining liquidity within PFGI Capital is to ensure the
availability of sufficient cash flows to meet all of PFGI Capital's
financial and dividend commitments. In managing liquidity, PFGI Capital
takes into account various legal limitations placed on a REIT.
PFGI Capital's principal liquidity needs are to maintain the loan
participation portfolio size through the acquisition of additional
commercial mortgages as loans currently in the portfolio mature, or prepay,
and to pay dividends to the holders of Preferred Stock and Common Stock. The
acquisition of additional commercial mortgage loan participations is
intended to be funded with the proceeds obtained from the repayment of
principal balances by individual borrowers. PFGI Capital does not anticipate
any material capital expenditures.
-19-
PFGI CAPITAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management is concerned with the timing and magnitude of the repricing of
assets and liabilities. It is management's objective to attempt to control
risks associated with interest rate movements. Market risk is the risk of
loss from adverse changes in market prices and interest rates. Market risk
arises primarily from interest rate risk inherent in lending and other
related activities. Management actively monitors interest rate risk
exposure. Management reviews, among other things, the sensitivity of assets
and liabilities, as applicable, to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, maturities of investments and anticipated loan
participation pay-offs. PFGI Capital's interest-rate-sensitive assets
consisted largely of participation interests in commercial mortgage loans.
At September 30, 2002, 11% of PFGI Capital's loan participation portfolio
had fixed interest rates. Such loans tend to increase interest rate risk. At
September 30, 2002, PFGI Capital did not have any interest-rate-sensitive
liabilities.
As indicated earlier, PFGI Capital's income consists primarily of interest
income from participation interests. If there is a decline in market
interest rates resulting from downward adjustments in the indices upon which
the interest rates on loans are based, PFGI Capital may experience a
reduction in interest income and a corresponding decrease in funds available
for distribution to holders of Preferred Stock. A decline in interest income
can also be realized from prepayments, including pay-offs, of loans with
fixed interest rates, resulting in reinvestment of proceeds in
lower-yielding participation interests. The borrower has the ability to
prepay a loan with or without premium or penalty depending on the provisions
found in the underlying loan agreements. The level of underlying loan
prepayments is influenced by several factors, including the interest rate
environment, the real estate market in particular geographic areas, the
timing of transactions, and circumstances related to individual borrowers
and loans.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation
of management, including the principal executive and financial officers, of
the effectiveness of the design and operation of PFGI Capital's disclosure
controls and procedures as of September 30, 2002. Based on that evaluation,
management, including the principal executive and financial officers,
concluded that PFGI Capital's disclosure controls and procedures were
effective with no significant weaknesses noted. There have been no
significant changes in PFGI Capital's internal controls or in other factors
that could significantly affect these internal controls after the date of
their evaluation.
-20-
PFGI CAPITAL CORPORATION
PART II. OTHER INFORMATION
All items required in Part II of this form have been omitted since they are
not applicable or not required.
-21-
PFGI CAPITAL CORPORATION
SIGNATURE
Pursuant to the requirements of 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.
PFGI Capital Corporation
------------------------
(Registrant)
Date: November 13, 2002 /s/Anthony M. Stollings
------------------------
Anthony M. Stollings
Controller
(Principal Financial Officer)
-22-
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Christopher J. Carey, the principal executive officer of PFGI Capital
Corporation ("PFGI Capital"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFGI Capital;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002 /s/Christopher J. Carey
-----------------------
Christopher J. Carey
President (Principal Executive Officer)
-23-
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Anthony M. Stollings, the principal financial officer of PFGI Capital
Corporation ("PFGI Capital"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFGI Capital;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 13, 2002 /s/Anthony M. Stollings
-----------------------
Anthony M. Stollings
Controller (Principal Financial Officer)
-24-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of
the Quarterly Report of PFGI Capital Corporation ("PFGI Capital") on Form
10-Q for the period ending September 30, 2002 (the "Report"), I, Christopher
J. Carey, President (Chief Executive Officer) of PFGI Capital, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of PFGI
Capital.
/s/Christopher J. Carey
- -----------------------
Christopher J. Carey
President (Chief Executive Officer)
November 13, 2002
-25-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of
the Quarterly Report of PFGI Capital Corporation ("PFGI Capital") on Form
10-Q for the period ending September 30, 2002 (the "Report"), I, Anthony M.
Stollings, Controller (Chief Financial Officer) of PFGI Capital, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of PFGI
Capital.
/s/Anthony M. Stollings
- -----------------------
Anthony M. Stollings
Controller (Chief Financial Officer)
November 13, 2002
-26-