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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
June 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 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 July 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
Statement 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
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 20
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-2-
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
PFGI CAPITAL CORPORATION
BALANCE SHEET
June 30, 2002
(Dollars In Thousands)
(Unaudited)
ASSETS
Commercial Mortgage Loan Participations $298,627
Reserve for Loan Participation Losses (2,992)
--------
Net Commercial Mortgage Loan Participations 295,635
Accounts Receivable - The Provident Bank 14,156
Accounts Receivable - Other 15,786
Interest Receivable 1,252
--------
Total Assets $326,829
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other Liabilities $ 450
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 160,488
Retained Earnings 832
--------
Total Shareholders' Equity 326,379
--------
Total Liabilities and Shareholders' Equity $326,829
========
See notes to financial statements.
-3-
PFGI CAPITAL CORPORATION
STATEMENT OF INCOME
PERIOD FROM JUNE 12, 2002 TO JUNE 30, 2002
(In Thousands)
(Unaudited)
Interest on Loan Participations $ 888
Provision for Loan Participation Losses -
-----
Net Interest Income After Provision
for Loan Participation Losses 888
Noninterest Expense:
Loan Servicing Fees 31
Management Fees 25
-----
56
-----
Income Before Income Taxes 832
Income Taxes -
-----
Net Income $ 832
=====
Preferred Stock Dividends $ -
=====
Net Income Available to Common Shares $ 832
=====
Per Common Share:
Basic $0.14
Diluted $0.14
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 (4,453) (4,453)
Net Income 832 832
-------- ----- --------- ----- --------
Balance at June 30, 2002 $165,000 $ 59 $ 160,488 $ 832 $326,379
======== ===== ========= ===== ========
See notes to financial statements.
-5-
PFGI CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 12, 2002 TO JUNE 30, 2002
(In Thousands)
(Unaudited)
Operating Activities:
Net Income $ 832
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Increase in Accounts Receivable (29,942)
Increase in Interest Receivable (1,252)
Increase in Other Liabilities 450
---------
Net Cash Used in Operating Activities (29,912)
Investing Activities:
Net Increase in Loan Participations (130,635)
Financing Activities:
Proceeds from Issuance of Preferred Stock 165,000
Offering Costs of Preferred Stock (4,453)
---------
Net Cash Provided By Financing Activities 160,547
---------
Increase in Cash -
Cash at Beginning of Period -
---------
Cash at End of Period $ -
=========
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
generally accepted accounting principles (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 will be 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 was
transferred from the Bank to PFGI Capital at the time the
participations were purchased. 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 June 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 June 30, 2002:
(Dollars in Thousands)
- -----------------------------------------------------------------------
Balance at Beginning of Period $ -
Acquired Reserves, Net 2,992
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
-------
Balance at End of Period $ 2,992
=======
-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 June 30, 2002. The first scheduled dividend payment
date is 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 period from June 12 to June 30, 2002:
(In Thousands, Except Per Share Data) Basic Diluted
- -----------------------------------------------------------------------
Net Income $ 832 $ 832
Weighted-Average Common Shares Outstanding 5,940 5,940
----- -----
Earnings Per Share $0.14 $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 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.
Gross proceeds from the sale of PRIDES were $165 million. The
underwriting discount and expenses incurred from the issuance of the
PRIDES totaled $5,239,000 of which 85%, or $4,453,000, was allocated to
PFGI Capital. The remaining 15% was allocated to Provident as its share
of the PRIDES transaction. The transaction costs will be increased for
additional invoices received subsequent to June 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 expects to use the proceeds from
the sale of the participation interests for general corporate purposes,
including working capital and funding future asset growth and strategic
acquisitions as opportunities arise.
-10-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 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.
-11-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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.
-12-
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 balances of the commercial mortgage loans underlying the
participation interests. Loan servicing costs incurred by PFGI Capital
totaled $31,000 for the period from June 12 to June 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 $25,000 for the period from June 12 to June 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 June 30, 2002, PFGI Capital had a net receivable due from the
Bank totaling $14,156,000. This balance was comprised of commercial
mortgage loan participations due to PFGI Capital in exchange for Common
Stock and payments received by the Bank on loan participations. The
receivable was reduced by PFGI Capital's share for the cost of issuing
the PRIDES, accrued expenses for loan servicing and management fees,
and loan advances.
NOTE 8. LEGAL CONTINGENCIES
- ---------------------------
Provident and the Bank are subject to litigation in the ordinary course
of business. Management does not expect such litigation will have a
material adverse effect of PFGI Capital's financial position. PFGI
Capital is not subject to any litigation.
-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 $150
million of commercial mortgage loan participations and $15 million of
receivables. These receivables were exchanged for mortgage loan
participations in early July. 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 $150
million of commercial mortgage loan participations from the Bank. The
remaining $15 million was included within accounts receivable as of
June 30, 2002. Payment on this receivable was made, with the proceeds
used to purchase mortgage loan participations from the Bank, in early
July.
PFGI Capital reported net income of $832,000, or $.14 earnings per
common share, for the period from June 12 to June 30, 2002.
At June 30, 2002, PFGI Capital had total assets of $327 million. These
assets were primarily comprised of net commercial mortgage loan
participations totaling $296 million. These loan participations were
all acquired from the Bank. Equity for PFGI Capital was $326 million as
of June 30, 2002. Equity consisted primarily of the $330 million of
Common and Preferred Stock issued during the period net of $4 million
cost for issuing the Preferred Stock.
RESULTS OF OPERATIONS
Interest Income
Interest income was $888,000 for the period from June 12 to June 30,
2002. The average annualized yield on the loan participation portfolio
for this period was 5.70%.
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 June 30, 2002.
Noninterest Expense
Noninterest expense was $56,000 from July 12 to June 30, 2002.
Noninterest expense is comprised 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 June 30, 2002, PFGI Capital had $296 million of commercial
mortgage loan participations net of reserves. The participation
portfolio was acquired from the Bank in connection with the offering of
PFGI Capital's Common and Preferred Stock. 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 90%.
The following table shows the geographic distribution of the loans
underlying the commercial mortgage loan participations as of June 30,
2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
State of Loans (In Thousands) Balance
- -----------------------------------------------------------------------
Ohio 170 $ 248,604 83.25%
Florida 14 22,507 7.54
Kentucky 7 4,280 1.43
All Others 20 23,236 7.78
--- --------- ------
Total 211 $ 298,627 100.00%
=== ========= ======
The following table shows the composition of the commercial mortgage
loan participations based on the size of its current principal balance
at June 30, 2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
Principal Balance of Loans (In Thousands) Balance
- -------------------------------------------------------------------------------------
Less than $50,000 4 $ 61 0.02%
Greater than $ 50,000 to $ 100,000 1 65 0.02
Greater than $ 100,000 to $ 250,000 49 8,307 2.78
Greater than $ 250,000 to $ 500,000 39 14,198 4.75
Greater than $ 500,000 to $ 1,000,000 40 28,775 9.64
Greater than $ 1,000,000 to $ 2,000,000 41 59,476 19.92
Greater than $ 2,000,000 to $ 3,000,000 14 33,556 11.24
Greater than $ 3,000,000 to $ 4,000,000 6 19,948 6.68
Greater than $ 4,000,000 to $ 5,000,000 6 27,767 9.30
Greater than $ 5,000,000 to $ 6,000,000 3 16,345 5.47
Greater than $ 6,000,000 to $10,000,000 5 39,011 13.06
Greater than $10,000,000 3 51,118 17.12
--- --------- ------
Total 211 $ 298,627 100.00%
=== ========= ======
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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 table shows data with respect to interest rates of the loans
underlying the commercial mortgage loan participations at June 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% - $ - 0.00% 58 $ 146,429 49.24%
5.00% to 5.99% 1 264 21.04 41 36,539 12.29
6.00% to 6.99% 3 991 78.96 39 35,440 11.92
7.00% to 7.99% - - - 45 37,175 12.50
8.00% to 8.99% - - - 24 41,789 14.05
-- ------- ------ --- --------- ------
4 $ 1,255 100.00% 207 $ 297,372 100.00%
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Accounts Receivable - Provident Bank
As of June 30, 2002, PFGI Capital had $14.2 million of net receivables
due from the Bank. This balance was comprised of commercial mortgage
loan participations due to PFGI Capital in exchange for Common Stock
and payments received by the Bank on loan participations. The
receivable was reduced by PFGI Capital's share for the cost of issuing
the Preferred Stock, accrued expenses for loan servicing and management
fees, and loan advances.
Accounts Receivable - Other
Other accounts receivable was $15.8 million as of June 30, 2002.
Included within this balance is $15 million of proceeds for the
issuance of Preferred Stock that was received in July.
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.
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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. Over 90% 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. At
June 30, 2002, over 90% of the underlying loans in all participation
interests consisted of loans located in these three states.
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 June 30, 2002, no loans had
been placed on non-accrual status nor had any property been acquired
through foreclosure. As of June 30, 2002, the reserve for loan
participation losses to total loans was 1.00%.
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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.
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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 June 30, 2002, less than one
percent of PFGI Capital's loan participation portfolio had fixed
interest rates. Such loans tend to increase interest rate risk. At June
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits filed:
Exhibit 99.1 - Certification of Chief Executive Officer
Exhibit 99.2 - Certification of Chief Financial Officer
All other items required in Part II of this form have been omitted
since they are not applicable or not required.
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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: August 14, 2002 /s/ Anthony M. Stollings
------------------------
Anthony M. Stollings
Controller
(Principal Financial Officer)
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