| For The Quarterly Period Ended | Commission File |
| September 30, 2004 | 1-08019-01 |
| Incorporated Under | IRS Employer I.D. |
| The Laws of Maryland | No. 04-3659419 |
1900 East Ninth Street, Cleveland,
Ohio 44114
Phone: (800)622-4204
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 October 31, 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 | 23 |
| ITEM 4. CONTROLS AND PROCEDURES | 24 |
| PART II. OTHER INFORMATION | |
| ITEM 1. LEGAL PROCEEDINGS | 24 |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 24 |
| ITEM 5. OTHER INFORMATION | 25 |
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K | 25 |
| SIGNATURE | 26 |
2
ITEM 1. FINANCIAL STATEMENTS
| September 30, 2004 |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars In Thousands) |
(unaudited) |
|||||||
| ASSETS | ||||||||
| Commercial Mortgage Loan Participations | $ | 301,388 | $ | 325,362 | ||||
| Commercial Loan Participations | 23,465 | -- | ||||||
| Reserve for Loan Participation Losses | (1,624 | ) | (1,600 | ) | ||||
| Net Loan Participations | 323,229 | 323,762 | ||||||
| Cash and Due From Banks | 9,509 | 8,088 | ||||||
| Interest Receivable | 1,063 | 1,019 | ||||||
| Accounts Receivable - The Provident Bank | 312 | -- | ||||||
| Other Assets | 11 | 41 | ||||||
| TOTAL ASSETS | $ | 334,124 | $ | 332,910 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Liabilities: | ||||||||
| Accounts Payable - The Provident Bank | $ | -- | $ | 314 | ||||
| Other Liabilities | 28 | -- | ||||||
| Total Liabilities | 28 | 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 | 4,597 | 3,097 | ||||||
| Total Shareholders' Equity | 334,096 | 332,596 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 334,124 | $ | 332,910 | ||||
See notes to financial statements.
3
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands, Except Per Share Data) |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Interest Income: | ||||||||||||||
| Interest on Loan Participations | $ | 4,118 | $ | 3,867 | $ | 11,612 | $ | 12,151 | ||||||
| Interest on Cash Deposit | 43 | 34 | 134 | 97 | ||||||||||
| Total Interest Income | 4,161 | 3,901 | 11,746 | 12,248 | ||||||||||
| Provision for Loan Participation Losses | -- | -- | -- | -- | ||||||||||
| Net Interest Income After Provision | ||||||||||||||
| for Loan Participation Losses | 4,161 | 3,901 | 11,746 | 12,248 | ||||||||||
| Noninterest Expense: | ||||||||||||||
| Loan Servicing Fees | 100 | 100 | 296 | 301 | ||||||||||
| Management Fees | 80 | 80 | 237 | 240 | ||||||||||
| Other Noninterest Expense | 45 | 30 | 122 | 106 | ||||||||||
| 225 | 210 | 655 | 647 | |||||||||||
| Income Before Income Taxes | 3,936 | 3,691 | 11,091 | 11,601 | ||||||||||
| Income Taxes | -- | -- | -- | -- | ||||||||||
| Net Income / Comprehensive Income | $ | 3,936 | $ | 3,691 | $ | 11,091 | $ | 11,601 | ||||||
| Preferred Stock Dividends | $ | 3,197 | $ | 3,197 | $ | 9,591 | $ | 9,591 | ||||||
| Net Income Available to Common Shares | $ | 739 | $ | 494 | $ | 1,500 | $ | 2,010 | ||||||
| Per Common Share: | ||||||||||||||
| Basic | $ | 0.12 | $ | 0.08 | $ | 0.25 | $ | 0.34 | ||||||
| Diluted | $ | 0.12 | $ | 0.08 | $ | 0.25 | $ | 0.34 | ||||||
| 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 | |||||||
| Dividends Paid on Preferred Stock | (9,591 | ) | (9,591 | ) | |||||||||||||
| Net Income | 11,601 | 11,601 | |||||||||||||||
| Balance at September 30, 2003 | $ | 165,000 | $ | 59 | $ | 162,013 | $ | 3,453 | $ | 330,525 | |||||||
| Balance at January 1, 2004 | $ | 165,000 | $ | 59 | $ | 164,440 | $ | 3,097 | $ | 332,596 | |||||||
| Dividends Paid on Preferred Stock | (9,591 | ) | (9,591 | ) | |||||||||||||
| Net Income | 11,091 | 11,091 | |||||||||||||||
| Balance at September 30, 2003 | $ | 165,000 | $ | 59 | $ | 164,440 | $ | 4,597 | $ | 334,096 | |||||||
See notes to financial statements.
5
| Nine Months Ended September 30, |
||||||||
|---|---|---|---|---|---|---|---|---|
| (In Thousands) |
2004 |
2003 | ||||||
| Operating Activities: | ||||||||
| Net Income | $ | 11,091 | $ | 11,601 | ||||
| Adjustments to Reconcile Net Income to | ||||||||
| Net Cash Provided by Operating Activities: | ||||||||
| (Increase) Decrease in Interest Receivable | (44 | ) | 51 | |||||
| Increase in Accounts Receivable | ||||||||
| and Other Assets | (282 | ) | (510 | ) | ||||
| Increase (Decrease) in Accounts Payable | ||||||||
| and Other Liabilities | (286 | ) | 3 | |||||
| Net Cash Provided By | ||||||||
| Operating Activities | 10,479 | 11,145 | ||||||
| Investing Activities: | ||||||||
| Net Decrease in Loan Participations | 533 | 2,690 | ||||||
| Financing Activities: | ||||||||
| Dividends Paid to Preferred Shareholders | (9,591 | ) | (9,591 | ) | ||||
| Increase in Cash and Cash Equivalents | 1,421 | 4,244 | ||||||
| Cash at Beginning of Period | 8,088 | 5,357 | ||||||
| Cash and Cash Equivalents at End of Period | $ | 9,509 | $ | 9,601 | ||||
| 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. 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.
All of PFGI Capital’s common stock is owned by The Provident Bank (the Bank). Prior to July 1, 2004, the Bank was a wholly-owned subsidiary of Provident Financial Group, Inc. (Provident). Effective July 1, 2004, National City Corporation (National City) acquired Provident pursuant to an Agreement and Plan of Merger under which The Bank became a wholly-owned subsidiary of National City. National City is a financial holding company headquartered in Cleveland, Ohio. Under terms of the merger, Provident’s shareholders received 1.135 shares of National City common stock for each share of Provident common stock. National City has assumed Provident’s obligations under the PRIDES Forward Purchase Contracts. Holders of PRIDES Forward Purchase Contracts (as described in Note 5) will be required to purchase shares of National City common stock and the settlement rate has been adjusted to reflect the exchange ratio.
The Bank, an Ohio state-chartered member bank of the Federal Reserve System, provides full-service retail and commercial banking services. The Bank’s executive offices are located at One East Fourth Street, Cincinnati, Ohio 45202. PFGI Capital’s executive offices are located at 1900 East Ninth Street, Cleveland, Ohio 44114, and its Investors Relations telephone number is (800)622-4204.
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 U.S. generally accepted accounting principles (GAAP) have been omitted.
7
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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 nine 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Balance at Beginning of Period | $ | 1,625 | $ | 3,249 | $ | 1,600 | $ | 3,250 | ||||||
| Transferred Reserves, Net | (1 | ) | (26 | ) | 24 | (27 | ) | |||||||
| Provision for Loan Losses | -- | -- | -- | -- | ||||||||||
| Loans Charged Off | -- | -- | -- | -- | ||||||||||
| Recoveries | -- | -- | -- | -- | ||||||||||
| Balance at End of Period | $ | 1,624 | $ | 3,223 | $ | 1,624 | $ | 3,223 | ||||||
8
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 PFGI Capital Common Stock (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 Stock 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.
The following table sets forth the computation of basic and diluted earnings per common share for the periods indicated:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands, Except Per Share Data) |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Net Income | $ | 3,936 | $ | 3,691 | $ | 11,091 | $ | 11,601 | ||||||
| Less Preferred Stock Dividends | (3,197 | ) | (3,197 | ) | (9,591 | ) | (9,591 | ) | ||||||
| Income Available to Common Shareholder | $ | 739 | $ | 494 | $ | 1,500 | $ | 2,010 | ||||||
| Weighted-Average Common Shares Outstanding | 5,940 | 5,940 | 5,940 | 5,940 | ||||||||||
| Basic and Diluted Earnings Per Share | $ | 0.12 | $ | 0.08 | $ | 0.25 | $ | 0.34 | ||||||
NOTE 5. 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 National City common stock equal to the settlement rate. Pursuant to the terms of the merger (see Note 1), National City has assumed Provident’s obligations under the Forward Purchase Contracts and certain related agreements. Holders of Forward Purchase Contracts will be required to purchase shares of National City common stock and the settlement rate has been adjusted to reflect the exchange ratio. The settlement rate will be calculated as follows:
| o | if the applicable 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 applicable market value of National City common stock is between $25.6033 and $21.5154, 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 $21.5154, the settlement rate will be 1.1620. |
“Applicable market value” is defined as the average of the closing price per share of National City common stock on each of the twenty consecutive trading days ending on the fifth trading day immediately preceding August 17, 2005.
9
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Under the Forward Purchase Contract, National City 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, National City 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