| For The Quarterly Period Ended | Commission File | ||||
| March 31, 2004 | 1-08019-01 | ||||
| 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 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
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 April 30, 2004)
1
PFGI CAPITAL CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
| PART 1 FINANCIAL INFORMATION | |||||
| ITEM 1 FINANCIAL STATEMENTS | |||||
| Balance Sheets | 3 | ||||
| Statements of Income | 4 | ||||
| Statements of Changes in Shareholders' Equity | 5 | ||||
| Statements 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 | 21 | ||||
| ITEM 4 CONTROLS AND PROCEDURES | 22 | ||||
| PART II OTHER INFORMATION | |||||
| ITEM 1 LEGAL PROCEEDINGS | 23 | ||||
| ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K | 23 | ||||
| SIGNATURE | 24 | ||||
2
ITEM 1. FINANCIAL STATEMENTS
| (Dollars In Thousands) |
March 31, 2004 (unaudited) |
December 31, 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Commercial Mortgage Loan Participations | $ | 324,891 | $ | 325,362 | ||||
| Reserve for Loan Participation Losses | (1,624 | ) | (1,600 | ) | ||||
| Net Commercial Mortgage Loan Participations | 323,267 | 323,762 | ||||||
| Cash and Due From Banks | 11,420 | 8,088 | ||||||
| Interest Receivable | 980 | 1,019 | ||||||
| Other Assets | 25 | 41 | ||||||
| TOTAL ASSETS | $ | 335,692 | $ | 332,910 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts Payable - The Provident Bank | $ | 2,764 | $ | 314 | ||||
| Other Liabilities | 8 | -- | ||||||
| Total Liabilities | 2,772 | 314 | ||||||
| Shareholders' Equity: | ||||||||
| Series A Preferred Stock, $25 Stated Value, | ||||||||
| 6,600,000 Shares Authorized, Issued and Outstanding | 165,000 | 165,000 | ||||||
| Common Stock, $.01 Par Value, 5,940,000 Shares | ||||||||
| Authorized, Issued and Outstanding | 59 | 59 | ||||||
| Capital Surplus | 164,440 | 164,440 | ||||||
| Retained Earnings | 3,421 | 3,097 | ||||||
| Total Shareholders' Equity | 332,920 | 332,596 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 335,692 | $ | 332,910 | ||||
| See notes to financial statements | ||||||||
3
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands, Except Per Share Data) |
2004 |
2003 | ||||||
| Interest Income: | ||||||||
| Interest on Loan Participations | $ | 3,681 | $ | 4,233 | ||||
| Interest on Cash Deposit | 48 | 22 | ||||||
| Total Interest Income | 3,729 | 4,255 | ||||||
| Provision for Loan Participation Losses | -- | -- | ||||||
| Net Interest Income After Provision | ||||||||
| for Loan Participation Losses | 3,729 | 4,255 | ||||||
| Noninterest Expense: | ||||||||
| Loan Servicing Fees | 98 | 101 | ||||||
| Management Fees | 78 | 81 | ||||||
| Other Noninterest Expense | 32 | 26 | ||||||
| 208 | 208 | |||||||
| Income Before Income Taxes | 3,521 | 4,047 | ||||||
| Income Taxes | -- | -- | ||||||
| Net Income | $ | 3,521 | $ | 4,047 | ||||
| Preferred Stock Dividends | $ | 3,197 | $ | 3,197 | ||||
| Net Income Available to Common Shares | $ | 324 | $ | 850 | ||||
| Per Common Share: | ||||||||
| Basic | $ | 0.05 | $ | 0.14 | ||||
| Diluted | $ | 0.05 | $ | 0.14 | ||||
| Dividends | $ | -- | $ | -- | ||||
| See notes to financial statements | ||||||||
4
| (In Thousands) |
Preferred Stock |
Common Stock |
Capital Surplus |
Retained Earnings |
Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2003 | $ | 165,000 | $ | 59 | $ | 162,013 | $ | 1,443 | $ | 328,515 | |||||||
| Net Income | 4,047 | 4,047 | |||||||||||||||
| Dividends Paid on Preferred Stock | (3,197 | ) | (3,197 | ) | |||||||||||||
| Balance at March 31, 2003 | $ | 165,000 | $ | 59 | $ | 162,013 | $ | 2,293 | $ | 329,365 | |||||||
| Balance at January 1, 2004 | $ | 165,000 | $ | 59 | $ | 164,440 | $ | 3,097 | $ | 332,596 | |||||||
| Net Income | 3,521 | 3,521 | |||||||||||||||
| Dividends Paid on Preferred Stock | (3,197 | ) | (3,197 | ) | |||||||||||||
| Balance at March 31, 2004 | $ | 165,000 | $ | 59 | $ | 164,440 | $ | 3,421 | $ | 332,920 | |||||||
| See notes to financial statements | |||||||||||||||||
5
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands) |
2004 |
2003 | ||||||
| Operating Activities: | ||||||||
| Net Income | $ | 3,521 | $ | 4,047 | ||||
| Adjustments to Reconcile Net Income to | ||||||||
| Net Cash Provided by Operating Activities: | ||||||||
| Decrease in Interest Receivable | 39 | 2 | ||||||
| Decrease in Accounts Receivable and Other Assets | 16 | 64 | ||||||
| Increase in Accounts Payable and Other Liabilities | 2,458 | 8 | ||||||
| Net Cash Provided By Operating Activities | 6,034 | 4,121 | ||||||
| Investing Activities: | ||||||||
| Net Decrease in Loan Participations | 495 | 258 | ||||||
| Financing Activities: | ||||||||
| Dividends Paid to Preferred Shareholders | (3,197 | ) | (3,197 | ) | ||||
| Increase in Cash and Cash Equivalents | 3,332 | 1,182 | ||||||
| Cash at Beginning of Period | 8,088 | 5,357 | ||||||
| Cash and Cash Equivalents at End of Period | $ | 11,420 | $ | 6,539 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash Paid for: | ||||||||
| Interest | $ | -- | $ | -- | ||||
| Income Taxes | -- | -- | ||||||
| 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 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. As such, management views its financial condition and results of operations as one business segment. 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.
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 services. 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.
On February 17, 2004, Provident announced that it had signed a definitive agreement to merge with National City Corporation. National City Corporation is a financial holding company headquartered in Cleveland, Ohio. Under terms of the agreement, Provident shareholders will receive 1.135 shares of National City Corporation common stock for each share of Provident common stock in a tax-free exchange. Subject to regulatory and stockholder approvals, the transaction is expected to close near the end of the second quarter or beginning of the third quarter of 2004.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited financial statements include accounts of PFGI Capital. PFGI Capital has no equity ownership in any other entities or interest in “variable interest entities”. These 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, changes in shareholders’ equity and cash flows for the periods presented. These financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission pertaining to Form 10-Q 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 results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to conform to the current year presentation.
7
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
The financial statements and notes thereto appearing in PFGI Capital’s 2003 annual report on Form 10-K, which include descriptions of significant accounting policies and critical accounting policies, should be read in conjunction with these interim 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 approximates fair value. Carrying value 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. PFGI Capital did not have any nonperforming assets or impaired loans during the first three months of 2004 or 2003.
The following table sets forth an analysis of the reserve for loan participation losses for the periods indicated:
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands) |
2004 |
2003 | ||||||
| Balance at Beginning of Period | $ | 1,600 | $ | 3,250 | ||||
| Transferred Reserves, Net | 24 | (3 | ) | |||||
| Provision for Loan Losses | -- | -- | ||||||
| Loans Charged Off | -- | -- | ||||||
| Recoveries | -- | -- | ||||||
| Balance at End of Period | $ | 1,624 | $ | 3,247 | ||||
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 been reduced by any Series A Preferred Stock dividend. 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.
8
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated:
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands, Except Per Share Data) |
2004 |
2003 | ||||||
| Net Income | $ | 3,521 | $ | 4,047 | ||||
| Less Preferred Stock Dividends | (3,197 | ) | (3,197 | ) | ||||
| Income Available to Common Shareholder | $ | 324 | $ | 850 | ||||
| Weighted-Average Common Shares Outstanding | 5,940 | 5,940 | ||||||
| Basic and Diluted Earnings Per Share | $ | 0.05 | $ | 0.14 | ||||
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 and Exchange Commission which was declared effective on June 6, 2002. In addition, the managing underwriter, Merrill Lynch & 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.
Gross proceeds from the sale of PRIDES were $165 million. The underwriting discount and expenses incurred from the issuance of the PRIDES totaled $6,542,000 of which 85%, or $5,561,000, was allocated to PFGI Capital. The remaining 15% was allocated to Provident as its share of the PRIDES transaction.
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 contract and PFGI Capital Series A Preferred Stock.
Each forward 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:
9
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
| 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 forward 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 $25.00 per share initial liquidation preference ($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 of PFGI Capital as to dividend rights and rights upon liquidation, winding up or dissolution.
In connection with the settlement of the forward 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 forward purchase contract. Once the forward 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 forward 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.
10
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 the 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%. |
As discussed in Note 1 of the “Notes to Financial Statements,” Provident will merge with National City Corporation (National City) subject to regulatory and stockholder approvals. National City will be required to expressly assume Provident’s obligations under the forward purchase contract and certain related agreements. As Provident shareholders will be receiving 1.135 shares of National City Common Stock for each share of Provident Common Stock, the settlement rate of the forward purchase contract will be calculated as follows:
| o | if the market value of National City Common Stock is equal to or greater than $25.6033, the settlement rate will be 0.9764; |
| o | if the market value of National City Common Stock is between $25.6033 and $21.5154, the settlement rate will be equal to the $25 stated amount divided by the applicable market value; and |
| o | if the applicable market value is less than or equal to $21.5154, the settlement rate will be 1.1620. |
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.
11
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 balance of the commercial mortgage loans underlying the participation interests. Loan servicing costs incurred by PFGI Capital totaled $98,000 and $101,000 for the first three months of 2004 and 2003, respectively.
A summary of loan participation activity between the Bank and PFGI Capital for the periods indicated follows:
| Three Months Ended March 31, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands) |
2004 |
2003 | ||||||
| Principal Balance at January 1 | $ | 325,362 | $ | 325,005 | ||||
| Transfers of Loan Participations from Bank to PFGI Capital | 65,299 | 4,626 | ||||||
| Loan Participation Advances | ||||||||