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-