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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 2002 1-8019-01
PFGI CAPITAL CORPORATION
Incorporated Under IRS Employer I.D.
the Laws of Maryland No. 04-3659419
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 1-800-851-9521 or 513-345-7102
Securities Registered Pursuant to Section 12(b) of the Act:
Income PRIDES, $25 Stated Value
Securities Registered Pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and need not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [x]
All common stock is held by affiliates of the registrant as of December 31,
2002. As of February 28, 2003, 5,940,000 shares of common stock at $.01 per
share par value were outstanding. The aggregate market value of the common
stock held by non-affiliates of the registrant as of the close of business on
June 30, 2002 is 0.
Documents Incorporated by Reference:
Information Statement for the 2003 Annual Meeting of Shareholders (portions
which are incorporated by reference into Part III hereof).
Please address all correspondence to:
Anthony M. Stollings
Controller
PFGI Capital Corporation
One East Fourth Street
Cincinnati, Ohio 45202
PFGI CAPITAL CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
PART I
ITEM 1. BUSINESS .................................................... 1
ITEM 2. PROPERTIES .................................................. 20
ITEM 3. LEGAL PROCEEDINGS ........................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ......................................... 21
ITEM 6. SELECTED FINANCIAL DATA ..................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................. 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ......................... 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 46
ITEM 11. EXECUTIVE COMPENSATION ...................................... 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS .............. 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 46
ITEM 14. CONTROLS AND PROCEDURES ..................................... 46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ................................................. 46
SIGNATURES ............................................................... 48
CERTIFICATIONS ........................................................... 49
FORWARD-LOOKING STATEMENTS
This Form 10-K 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 Provident Bank at the direction of the Federal Reserve Board or
the Ohio Division of Financial Institutions if The Provident Bank becomes
undercapitalized; the failure of PFGI Capital Corporation to maintain its
status as a REIT for federal income tax purposes; 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 Corporation undertakes no obligation
to update any forward-looking statements to reflect events or circumstances
arising after the date on which they are made.
PFGI CAPITAL CORPORATION
PART I
ITEM 1. BUSINESS
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PFGI CAPITAL CORPORATION
General
PFGI Capital Corporation (PFGI Capital), is a Maryland corporation
incorporated on May 9, 2002. The principal business objective of PFGI Capital
is to acquire, hold and manage commercial mortgage loan assets and other
authorized investments that will generate net income for distribution to PFGI
Capital's stockholders. As such, management views its financial condition and
results of operations as one business segment. PFGI Capital has elected to be
treated as a real estate investment trust (REIT) for federal income tax
purposes. As a REIT, PFGI Capital generally will not be 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.
In general, the information in this document relative to The Provident Bank
(the Bank) and Provident Financial Group, Inc. (Provident) is provided by the
Bank and Provident.
PFGI Capital is consolidated as a direct subsidiary of the Bank, as all of
PFGI Capital's common stock is owned by the Bank. The Bank, an Ohio
state-chartered member bank of the Federal Reserve System, is the primary
subsidiary and only banking subsidiary of Provident. The Bank's financial
statements and those of Provident's are substantially the same. Copies of
Provident's Form 10-K and all other SEC filings by Provident may be obtained,
without charge, by contacting Investor Relations at (513) 345-7102 or (800)
851-9521. These reports may also be obtained via the Internet at the web
sites of the Bank at http://www.providentbank.com, or the Securities and
Exchange Commission (SEC) at http://www.sec.gov.
PFGI Capital, the Bank and Provident's executive offices are located at One
East Fourth Street, Cincinnati, Ohio 45202. Directors and officers of PFGI
Capital are:
Christopher J. Carey - Director and President (Member of Executive Committee)
James Berry - Director (Member of Audit and Compensation Committees)
Dett Hunter - Director (Member of Audit and Compensation Committees)
Mark E. Magee - Director and Secretary (Member of Executive Committee)
Robert Pompey - Director
J. David Rosenberg - Director (Member of Executive, Audit and Compensation
Committees)
John E. Rubenbauer - Director
Anthony M. Stollings - Director and Controller
Tayfun Tuzun - Director and Treasurer (Member of Compensation Committee)
The Registrar and Transfer Agent of PFGI Capital is:
The Provident Bank
One East Fourth Street
Cincinnati, OH 45202
Phone: 513-579-2384
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PFGI CAPITAL CORPORATION
In connection with the startup of business, PFGI Capital acquired mortgage
assets from the Bank in an aggregate amount of approximately $330 million
pursuant to a participation agreement. These assets were comprised of
participation interests in commercial mortgage loans, before the allowance
for loan losses. Since acquiring these assets, PFGI Capital has met all of
the REIT qualification tests for federal income tax purposes.
Although PFGI Capital has the authority to acquire interests in an unlimited
number of mortgage assets from unaffiliated third parties, all of PFGI
Capital's interests in mortgage and other assets held was acquired from the
Bank, pursuant to the participation agreement between the Bank and PFGI
Capital. The Bank either originated the mortgage assets or acquired them as
part of the acquisition of other financial institutions. PFGI Capital may
also acquire from time to time a limited amount of additional
non-mortgage-related securities. PFGI Capital has no present plans or
expectations to purchase mortgage assets or other assets from unaffiliated
third parties.
PFGI Capital's participation interests do not entitle PFGI Capital to retain
any portion of any late payment charges or penalties, assumption fees or
conversion fees collected and retained by the Bank in connection with the
loans underlying PFGI Capital's participation interests serviced by the Bank.
General Description of Mortgage Assets and Other Authorized Investments;
Investment Policy
In order to qualify as a REIT under the Internal Revenue Code, at least 75%
of the total value of PFGI Capital's assets must, broadly speaking, consist
of real estate assets, which includes residential mortgage loans and
commercial mortgage loans, including participation interests in residential
or commercial or residential mortgage loans; mortgage-backed securities
eligible to be held by REITs; cash; cash equivalents which includes
receivables and government securities; and other real estate assets. PFGI
Capital refers to these types of assets as REIT qualifying assets. PFGI
Capital may invest up to 25% of the value of its total assets in other types
of securities (within the meaning of the Investment Company Act). Under the
Investment Company Act, the term "security" is defined broadly to include,
among other things, any note, stock, treasury stock, debenture, evidence of
indebtedness, or certificate of interest or participation in any profit
sharing agreement or a group or index of securities. The Internal Revenue
Code also generally requires that the value of any one issuer's securities,
other than those securities included in the 75% test, may not exceed 5% by
value of the total assets of PFGI Capital. In addition, under the Internal
Revenue Code, PFGI Capital generally may not own more than 10% of the voting
securities nor more than 10% of the value of the outstanding securities of
any one issuer, other than those securities included in the 75% test.
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PFGI CAPITAL CORPORATION
As of December 31, 2002, nearly 100% of PFGI Capital's assets were invested
in REIT Qualifying Assets. PFGI Capital does not hold any securities nor does
PFGI Capital intend to hold securities in any one issuer that exceed 5% of
PFGI Capital's total assets or more than 10% of the voting securities of any
one issuer. PFGI Capital's assets consisted of the following at December 31,
2002:
Percentage
Amount of Total
Type of Asset (In Thousands) Assets
- -----------------------------------------------------------------------------
Commercial Loan Participations $ 325,005 99.0%
Reserve for Participation Losses (3,250) (1.0)
Interest Bearing Deposit with Provident Bank 5,357 1.6
Interest Receivable on Loan Participations 1,107 0.3
Other Assets 296 0.1
--------- -----
Total Assets $ 328,515 100.0%
========= =====
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that would be qualifying
income for purposes of the 75% gross income test, less deductible expenses
directly connected with the production of such income. Therefore, prior to
foreclosure of any underlying loan acquired by PFGI Capital from the Bank,
PFGI Capital currently intends to try to sell the participation interest in
the underlying loan back to the Bank. The Bank will then bear all expenses
related to the foreclosure after that time.
Commercial Mortgage Loans: PFGI Capital holds participation interests in
commercial mortgage loans that are secured by real property such as office
buildings; multi-family properties of five units or more; industrial,
warehouse and self-storage properties; office and industrial condominiums;
retail space; strip shopping centers; mixed use commercial properties; mobile
home parks; nursing homes; hotels and motels; churches and farms. Commercial
mortgage loans may not be fully amortizing. This means that the loans may
have a significant principal balance or "balloon" payment due on maturity.
Additionally, apart from the Bank's commercial mortgage loan origination
guidelines, there is no requirement regarding the percentage of any
commercial real estate property that must be leased at the time PFGI Capital
acquires a participation interest in a commercial mortgage loan secured by
such property nor are commercial mortgage loans required to have third party
guarantees. Commercial properties, particularly industrial and warehouse
properties, generally are subject to relatively greater environmental risks
than non-commercial properties. This gives rise to increased costs of
compliance with environmental laws and regulations. The Bank may be affected
by environmental liabilities related to the underlying real property, which
could exceed the value of the real property. Although the Bank has exercised,
and will continue to exercise, due diligence to discover potential
environmental liabilities prior to PFGI Capital's acquisition of any
participation interests in loans secured by such property, hazardous
substances or wastes, contaminants, pollutants, or their sources may be
discovered on properties during PFGI Capital's ownership of the participation
interests. There can be no assurance that the Bank would not incur full
recourse liability for the entire cost of any removal and clean-up on a
property it acquired in foreclosure, that the cost of removal and clean-up
would not exceed the value of the property, or that the Bank could recoup any
of the costs from any third party. Even though PFGI Capital intends to sell
back to the Bank the participation interest in any loan prior to foreclosure,
the discovery of these liabilities and any associated costs could have a
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PFGI CAPITAL CORPORATION
material adverse effect on the fair value of that loan, and therefore PFGI
Capital may not recover any or all of its investment in the underlying loan.
The credit quality of a commercial mortgage loan may depend on, among other
factors:
o the existence and structure of underlying leases;
o the physical condition of the property, including whether any maintenance
has been deferred;
o the creditworthiness of tenants;
o the historical and anticipated level of vacancies;
o rents on the property and on other comparable properties located in the
same region; o potential or existing environmental risks;
o the availability of credit to refinance the loan at or prior to maturity;
and
o the local and regional economic climate in general.
Foreclosures of defaulted commercial mortgage loans generally are subject to
a number of complicating factors, including environmental considerations,
which are not generally present in foreclosures of residential mortgage
loans.
Other Assets: Cash and Due From Banks represent cash received by the Bank
from borrowers for the payment of principal and interest on the underlying
loans deposited in a demand deposit account of the Bank for PFGI Capital.
These funds are available for the purchase of additional participation
interests, payment of dividends and other operating expenses of PFGI Capital.
Other assets also include accrued interest on the loans underlying PFGI
Capital's participation interests, which is calculated by the Bank's loan
accounting systems.
Dividend Policy
PFGI Capital expects to distribute annually an aggregate amount of dividends
with respect to its outstanding capital shares equal to approximately 100% of
its REIT taxable income (as determined before any deduction for dividends
paid and excluding any net capital gain). In order to remain qualified as a
REIT, PFGI Capital is required to distribute annually at least 90% of such
REIT taxable income to its stockholders.
Dividends will be authorized and declared at the discretion of PFGI Capital's
board of directors. Factors that would generally be considered by PFGI
Capital's board of directors in making this determination are PFGI Capital's
distributable funds, financial condition and capital needs, the impact of
current and pending legislation and regulations, economic conditions, tax
considerations, and PFGI Capital's continued qualification as a REIT. PFGI
Capital currently expects that both PFGI Capital's cash available for
distribution and its REIT taxable income will be in excess of the amounts
needed to pay dividends on all outstanding shares of preferred stock, even in
the event of a significant drop in interest rate levels because:
o substantially all of PFGI Capital's mortgage assets and other authorized
investments are interest-earning;
o all outstanding shares of PFGI Capital's preferred stock represent in the
aggregate only approximately 50% of PFGI Capital's capitalization and, as
a result, the scheduled distributions to be paid to PFGI Capital with
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PFGI CAPITAL CORPORATION
respect to its participation interests will exceed the aggregate dividends
to be paid on PFGI Capital Series A preferred stock;
o with the prior approval of PFGI Capital's independent directors, PFGI
Capital may incur indebtedness in an aggregate amount of no more than 20%
of PFGI Capital's stockholder's equity as determined in accordance with
generally accepted accounting principles: provided that PFGI Capital may
incur indebtedness in an aggregate amount not to exceed $10.0 million
without such prior approval so long as, at the time of incurrence of such
indebtedness, PFGI Capital's outstanding common stockholder's equity as
determined in accordance with generally accepted accounting principles is
at least $150.0 million; and
o PFGI Capital anticipates that it will have cash flows from principal
payments on its commercial mortgage loan portfolio.
Accordingly, PFGI Capital expects that it will, after paying the dividends on
all series and classes of preferred stock, pay dividends to the holder of its
common stock in an amount sufficient to comply with applicable requirements
regarding qualification as a REIT and to ensure that there will be no federal
taxable income at the PFGI Capital level.
As an alternative to distributing a cash dividend, PFGI Capital has the
option of distributing to its common shareholder, a dividend using a
procedure known as a "consent dividend", as authorized by Section 565 of the
Internal Revenue Code. A consent dividend procedure is where a shareholder,
on the last day of a REIT's tax year, agrees to treat as a dividend the
amount that the REIT so designates, without any distribution of cash or
property actually occurring. The effect of the consent dividend is that the
REIT is considered to have paid a dividend on the last day of its tax year,
and the shareholder is treated as having received that amount and contributed
it back to the REIT. The dollar amount of the consent dividend is included,
as if it were distributed, in the calculation to determine that at least 90%
of a REIT's taxable income has been distributed to its shareholders. PFGI
Capital, as a REIT, receives a deduction for dividends paid, reducing its
taxable income by the amount of the consent dividend, but without the need to
have cash available to distribute. For the year ending December 31, 2002,
PFGI Capital and its common shareholder have agreed to use the consent
dividend procedure. As a result, PFGI Capital will have additional funds
available for investment purposes and/or for distribution to its preferred
shareholders than if PFGI Capital had paid a cash dividend to the common
shareholder.
Under certain circumstances, including any determination that the Bank's
relationship with PFGI Capital results in an unsafe and unsound banking
practice, the Federal Reserve Board and the Ohio Division of Financial
Institutions will have the authority to issue an order that restricts PFGI
Capital's ability to make dividend payments to PFGI Capital's stockholders,
including holders of PFGI Capital Series A preferred stock. The exercise of
these powers to restrict dividends on PFGI Capital Series A preferred stock
would also have the effect of restricting PFGI Capital's ability to pay
dividends on its common stock and affect its status as a REIT.
Conflict of Interests and Related Policies
The Bank controls 90% of the voting power of PFGI Capital's outstanding
securities. Accordingly, the Bank will continue to have the right to elect
all of PFGI Capital's directors, including PFGI Capital's independent
directors, other than the two additional independent directors to be elected
by the holders of PFGI Capital Series A preferred stock if PFGI Capital fails
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PFGI CAPITAL CORPORATION
to pay quarterly dividends of $.484375 per share on PFGI Capital Series A
preferred stock for at least six consecutive dividend periods. In addition,
PFGI Capital's officers and six of its directors are also officers of the
Bank or its affiliates. Because of the nature of PFGI Capital's relationship
with Provident and the Bank, it is likely that conflicts of interest will
arise with respect to certain transactions because Provident, the Bank and
their affiliates have interests which are not identical to those of PFGI
Capital.
The Bank administers PFGI Capital's day-to-day activities under the terms of
a management agreement between PFGI Capital and the Bank. Since the parties
to this agreement are affiliated, this agreement was not the result of
arms-length negotiations. Any future modification of the management agreement
will require the approval of a majority of PFGI Capital's independent
directors. However, since the Bank, through its ownership of all of PFGI
Capital's common stock, controls the election of all of PFGI Capital's
directors, including PFGI Capital's independent directors, any such
modification also would not be the result of arms-length negotiations. Thus,
there can be no guarantee that future modifications will be on terms as
favorable to PFGI Capital as those that could have been obtained from
unaffiliated third parties.
Under the terms of the management agreement between PFGI Capital and the
Bank, PFGI Capital pays the Bank a monthly management fee equal to (i) 1/12
multiplied by (ii) .10% multiplied by the average daily outstanding principal
balance of the loans of PFGI Capital during each such calendar month.
Similarly, PFGI Capital pays the Bank a monthly servicing fee under the term
of the participation agreement equal to (i) 1/12 multiplied by (ii) .125%
multiplied by the average daily outstanding principal balance of the loans of
PFGI Capital during each such calendar month. PFGI Capital and the Bank
believe the combined 22.5 annual basis point charge is below current market
rates that could be obtained for the management services and the servicing of
commercial mortgage loans from independent parties.
Provident, the owner of all the Bank's common shares, may have investment
goals and strategies that differ from those of the holders of shares of PFGI
Capital Series A preferred stock. Nevertheless, PFGI Capital's investment and
operating strategies will largely be directed by Provident and the Bank. In
addition, neither Provident nor the Bank has a policy addressing treatment of
new business opportunities. Thus, new business opportunities identified by
Provident or the Bank may be directed to affiliates other than PFGI Capital.
PFGI Capital is dependent on the diligence and skill of the officers and
employees of the Bank for the selection and structuring of the loans
underlying PFGI Capital's participation interests and PFGI Capital's other
authorized investments. The Bank will select the amount, type, and price of
loan participation interests and other assets which PFGI Capital will acquire
from the Bank and its affiliates. PFGI Capital anticipates that it will
continue to acquire all or substantially all of its assets from the Bank or
its affiliates. To date, all participation interests have been transferred at
the Bank's carrying value, which the parties believe approximates fair value.
Carrying value is the principal amount outstanding plus accrued interest.
Approximately 90% of the loan participations are adjustable rate loans. All
of the loans underlying both the fixed rate and adjustable rate
participations are current on principal and interest payments. Neither PFGI
Capital nor the Bank has obtained any third-party valuations, nor does PFGI
Capital intend to do so in the future. Although PFGI Capital has adopted
certain policies to guide the acquisition and disposition of assets, these
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PFGI CAPITAL CORPORATION
policies may be revised or exceptions may be approved from time to time at
the discretion of the board of directors without a vote of PFGI Capital's
stockholders. Changes in or exceptions made to these policies could permit
PFGI Capital to acquire lower quality assets.
PFGI Capital is also dependent on the Bank and others for monitoring and
servicing the loans underlying PFGI Capital's participation interests under
the terms of the participation agreement between the Bank and PFGI Capital.
Since the parties to this agreement are affiliated, this agreement is not the
result of arms-length negotiations. Any future modification of the
participation agreement will require the approval of a majority of PFGI
Capital's independent directors. However, since the Bank, through its
ownership of all of PFGI Capital's common stock, controls the election of all
of PFGI Capital's directors, including PFGI Capital's independent directors,
any such modification would not be the result of arms-length negotiation.
Conflicts may arise as part of such servicing, particularly with respect to
loans that are placed on nonaccrual status. While PFGI Capital believes that
the Bank will diligently pursue collection of any non-performing assets,
there can be no guarantee that this will be the case. Conflicts of interest
between PFGI Capital and the Bank may also arise in connection with making
decisions that bear upon the credit arrangements that the Bank may have with
a borrower under a loan. The Bank could also seek to exercise its influence
over PFGI Capital's affairs so as to cause the sale of PFGI Capital's assets
and their replacement by lesser quality assets purchased from the Bank or
elsewhere. Although these potential conflicts exist, PFGI Capital believes
that the Bank will service the assets with a view toward PFGI Capital's
interests.
The requirement in PFGI Capital's charter that certain of PFGI Capital's
actions be approved by a majority of PFGI Capital's independent directors is
intended to ensure fair dealings between PFGI Capital and the Bank. There can
be no assurance, however, that such agreement or transaction will be on terms
as favorable to PFGI Capital as could have been obtained from unaffiliated
third parties.
There are no provisions in PFGI Capital's charter limiting any of PFGI
Capital's officers, directors, stockholders, or affiliates from having any
direct or indirect pecuniary interest in any asset to be acquired or disposed
of by PFGI Capital or in any transaction in which PFGI Capital has an
interest or from engaging in acquiring, holding, and managing PFGI Capital's
assets. It is expected that the Bank and its affiliates will have direct
interests in transactions with PFGI Capital including, without limitation,
the sale of assets to PFGI Capital; however, it is not anticipated that any
of PFGI Capital's officers or directors will have any interests in such
assets, other than as borrowers or guarantors of loans underlying PFGI
Capital's participation interests, in which case such loans would be on
substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the time for comparable transactions with
others and would not involve more than the normal risk of collectibility or
present other unfavorable features.
Other Management Policies and Programs
General: In administering PFGI Capital's participation interests and other
authorized investments, the Bank has a high degree of autonomy. PFGI Capital,
however, adopted certain policies to guide PFGI Capital's administration with
respect to the acquisition and disposition of assets, use of capital and
leverage, credit risk management and certain other activities. These
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PFGI CAPITAL CORPORATION
policies, which are discussed below, may be amended or revised from time to
time at the discretion of PFGI Capital's board of directors and, in certain
circumstances subject to the approval of a majority of PFGI Capital's
independent directors, but without a vote of PFGI Capital's stockholders,
including holders of shares of PFGI Capital's Series A preferred stock.
Underwriting Standards: In connection with the acquisition of commercial
mortgage loan participations by PFGI Capital, the Bank represents to PFGI
Capital that substantially all of the mortgage loans underlying the
participation interests acquired by PFGI Capital were originated generally in
accordance with underwriting policies customarily employed by the Bank during
the period in which the commercial mortgage loans were originated. It is the
policy of the Bank to make commercial mortgage loans primarily in the
geographic areas in which the Bank is doing business, normally a l00-mile
radius of Cincinnati, Dayton, Columbus and Cleveland, Ohio; Indianapolis,
Indiana; Pittsburgh, Pennsylvania; and Sarasota, Florida. However, the Bank
may lend in geographic areas beyond these areas, provided the mortgage loans
otherwise comply with the Bank's investment policies. The Bank avoids
transactions perceived to have unacceptably high risk, as well as excessive
industry, type of collateral and other concentrations. It is the policy of
the Bank that no more than two-thirds of the Bank's commercial mortgage loans
cover properties that are not stabilized at any one time.
Some of the loans, however, were acquired by the Bank in connection with the
acquisition of other financial institutions. Prior to acquiring any financial
institution, the Bank performed due diligence procedures to, among other
things, assess the overall quality of the target institution's loan
portfolio. These procedures included the examination of underwriting
standards used in the origination of loan products by the target institution,
the review of loan documents and the contents of selected loan files, and the
verification of the past due status and payment histories of selected
borrowers. Through its due diligence procedures, the Bank obtained a
sufficient level of comfort pertaining to the underwriting standards used by
the target institution and their influence on the quality of the portfolio.
Even though the Bank did not and does not warrant those standards, the Bank
found them acceptable in comparison to its own underwriting standards in
cases where the Bank had made a favorable decision to acquire the institution
as a whole.
The underwriting standards imposed by the Bank in connection with the
origination of the commercial mortgage loans underlying the participation
interests acquired by PFGI Capital include careful consideration of the
borrower's overall creditworthiness and capacity to service debt independent
of the income generated from the underlying property. In most instances, cash
equity is required in each commercial mortgage loan transaction to reduce
debt to a level where the income of the property can comfortably service that
debt. In other instances where income from the underlying property does not
provide adequate debt service coverage margins, additional collateral is
required to offset any perceived deficiency. In the case of properties where
the stability of the income stream may be in question, such as construction
and development situations, the Bank requires the borrower to have met the
pre-leasing and pre-sale standard designated by the Bank for the type of
property.
The underwriting procedures and guidelines taken into account by the Bank
include such factors as:
o demographic factors, including population and employment trends;
o current and projected vacancy, construction and absorption rates;
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PFGI CAPITAL CORPORATION
o current and projected lease terms, rental rates and sales prices,
including concessions;
o economic indicators, including trends and diversification of the lending
area;
o valuation trends, including discount and direct capitalization rates;
o amount and credit rating of additional collateral;
o the net worth and credit rating of the borrower, as well as its operating
and liquidity ratios;
o the existence of a guarantee;
o the management ability of the borrower, including its business experience
and financial soundness;
o the characteristics of the specific project financed; and
o such other economic, demographic, or other factors as in the judgment of
the Bank might affect the value of the collateral and the ability of the
borrower to service the loan.
Asset Acquisition and Disposition Policies: PFGI Capital adopted the policy
of purchasing from the Bank or its affiliates participation interests
generally in mortgage loans that:
o are performing, meaning they have no more than two payments past due, if
any,
o are in accruing status,
o are secured by real property such that they are REIT qualifying, and
o have not been previously sold, securitized or charged-off either in whole
or in part.
PFGI Capital's policy also will allow for investment in assets which are not
REIT qualifying assets up to but not exceeding the statutory limitations
imposed on organizations that qualify as a REIT. PFGI Capital, under this
policy, will have the discretion to purchase other assets to maximize its
return to stockholders.
From time to time PFGI Capital acquires participation interests in additional
commercial mortgage loans from the Bank or its affiliates on a basis
consistent with secondary market standards pursuant to the participation
agreement. These acquisitions are made out of proceeds received by PFGI
Capital in connection with the repayment or disposition of loan participation
interests in PFGI Capital's portfolio. Although PFGI Capital is permitted to
do so, PFGI Capital has no present plans or intentions to purchase loans or
loan participation interests from unaffiliated third parties. PFGI Capital
currently anticipates that additional participation interests in mortgage
loans acquired by PFGI Capital will be of the types described above under the
heading "Business: General Description of Mortgage Assets and Other
Authorized Investments; Investment Policy," although PFGI Capital is not
precluded from purchasing additional types of loans or loan participation
interests.
PFGI Capital may acquire from time to time limited amounts of participation
interests in loans that are not commercial mortgage loans, such as
residential mortgage loans and equipment loans. PFGI Capital also may from
time to time acquire a limited amount of other authorized investments.
Although PFGI Capital currently does not intend to acquire any
mortgage-backed securities representing interests in or obligations backed by
pools of mortgage loans that will be secured by single-family residential or
multi-family real estate properties located throughout the United States,
PFGI Capital is not restricted from doing so. PFGI Capital does not intend to
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PFGI CAPITAL CORPORATION
acquire any interest-only or principal-only mortgage-backed securities. PFGI
Capital also will not be precluded from investing in mortgage-backed
securities when the Bank is the sponsor or issuer. PFGI Capital does not
intend to acquire any mortgage-backed securities that are not backed by pools
of commercial real estate properties.
PFGI Capital currently anticipates that it will not acquire the right to
service any loan underlying a participation interest that it acquires in the
future and that the Bank will act as servicer of any such additional loans.
PFGI Capital anticipates that any future servicing arrangement with the Bank
will contain fees and other terms that would be substantially equivalent to
or more favorable to PFGI Capital than those that would be contained in
servicing arrangements entered into with third parties unaffiliated with PFGI
Capital.
PFGI Capital has a policy of not acquiring any participation interest in any
mortgage loan that constitutes more than 9% of the total book value of PFGI
Capital's assets at the time of acquisition.
PFGI Capital has a policy of reinvesting the proceeds of PFGI Capital's
assets in other interest-earning assets so that PFGI Capital's funds from
operations over any period of four fiscal quarters will be anticipated to
equal or exceed 140% of the amount that would be required to pay full annual
dividends on PFGI Capital Series A preferred stock, except as may be
necessary to maintain PFGI Capital's status as a REIT. PFGI Capital's charter
provides that PFGI Capital cannot amend or change this policy with respect to
the reinvestment of proceeds without the consent or affirmative vote of the
holders of at least two thirds of PFGI Capital Series A preferred stock,
voting as a separate class.
Credit Risk Management Policies: The Bank represents to PFGI Capital that at
least 95% of the participation interests acquired in the future will
represent commercial mortgage loans in which the Bank has a first lien
position and will be originated by the Bank, one of its affiliates or an
unaffiliated third party in the ordinary course of its real estate lending
activities based on the underwriting standards generally applied by or
substantially similar to those applied by the Bank at the time of origination
for its own account. The Bank also represents to PFGI Capital that all loans
will be serviced by or through the Bank pursuant to the participation
agreement, which requires servicing in conformity with any loan servicing
guidelines promulgated by PFGI Capital.
Other Policies: PFGI Capital intends to operate in a manner that will not
subject PFGI Capital to regulation under the Investment Company Act. PFGI
Capital does not intend to:
o borrow money at any time other than indebtedness incurred by PFGI Capital
with the prior approval of PFGI Capital's independent directors in an
aggregate amount not to exceed 20% of PFGI Capital's stockholders' equity
as determined in accordance with generally accepted accounting principles;
provided, that PFGI Capital may incur indebtedness in an aggregate amount
not to exceed $10.0 million without such prior approval so long as, at the
time of incurrence of such indebtedness, PFGI Capital's outstanding common
stockholder's equity is at least $150.0 million;
o invest in the securities of other issuers for the purpose of exercising
control over such issuers;
o underwrite securities of other issuers;
o actively trade in loans or other investments;
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PFGI CAPITAL CORPORATION
o offer securities in exchange for property; or
o make loans to third parties, including its officers, directors, or other
affiliates.
The Investment Company Act exempts entities that, directly or through
majority-owned subsidiaries, are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests
in real estate." PFGI Capital refers to these interests as Qualifying
Interests. Under current interpretations by the staff of the SEC, in order to
qualify for this exemption, PFGI Capital, among other things, must maintain
at least 55% of its total assets in Qualifying Interests and also may be
required to maintain an additional 25% of its total assets in Qualifying
Interests or other real estate-related assets. The assets that PFGI Capital
may acquire, therefore, may be limited by the provisions of the Investment
Company Act. PFGI Capital established a policy of limiting authorized
investments which are not Qualifying Interests or real estate-related assets
to no more than 20% of the value of PFGI Capital's total assets.
PFGI Capital may, under certain circumstances, purchase PFGI Capital Series A
preferred stock and other stock in the open market or otherwise. Except to
the extent of any remarketed PFGI Capital Series A preferred stock, PFGI
Capital has no present intention of repurchasing any of PFGI Capital's stock,
and any such action would be taken only in conformity with applicable federal
and state laws and regulations and the requirements for qualifying as a REIT.
PFGI Capital intends to distribute to its stockholders, in accordance with
the Exchange Act, annual reports containing financial statements prepared in
accordance with generally accepted accounting principles and certified by
PFGI Capital's independent auditors. PFGI Capital's charter provides that it
will maintain PFGI Capital's status as a reporting company under the Exchange
Act for so long as any of PFGI Capital Series A preferred stock is
outstanding and held by unaffiliated stockholders.
PFGI Capital intends to make investments and operate its business in such a
manner consistent with the requirements of the Internal Revenue Code to
qualify as a REIT and to elect to be treated as a REIT for federal income tax
purposes. However, future economic, market, legal, tax or other
considerations may cause PFGI Capital's board of directors, subject to
approval by a majority of PFGI Capital's independent directors, to determine
that it is in PFGI Capital's best interest and the best interest of PFGI
Capital's stockholders to revoke PFGI Capital's status as a REIT. The
Internal Revenue Code prohibits PFGI Capital from electing REIT status for
the four taxable years following the year of such revocation.
Servicing
The loans underlying PFGI Capital's participation interests are serviced by
the Bank pursuant to the terms of the participation agreement between the
Bank and PFGI Capital.
Under the participation agreement, the Bank has the right in its discretion
to give consents, waivers and modifications of the loan documents to the same
extent as if the loans were wholly owned by the Bank; provided, however, that
the Bank may not do the following without the written consent of PFGI
Capital:
o waive any payment default;
o extend the maturity of the loans;
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PFGI CAPITAL CORPORATION
o reduce the rate or rates of interest with respect to the loans;
o forgive or reduce the principal sum of the loans;
o increase the lending formula or advance rates; or
o amend or modify the financial covenants contained in the loan documents in
any way that would make such financial covenants less restrictive.
The Bank has the right to accept payment or prepayment of the whole principal
sum and accrued interest in accordance with the terms of the loans, waive
prepayment charges in accordance with the Bank's policy for loans in which no
participation interest has been granted and accept additional security for
the loans. No specific term is specified in the participation agreement. The
participation agreement may be terminated by mutual agreement of the parties
at any time, without penalty. Due to the relationship between the Bank and
PFGI Capital, PFGI Capital does not anticipate that the participation
agreement will be terminated by either party in the foreseeable future.
The Bank, in its role as servicer under the terms of the participation
agreement, receives a servicing fee designed as a reimbursement for costs
incurred to service the underlying loans. PFGI Capital will pay the Bank a
monthly servicing fee equal to (i) 1/12 multiplied by (ii) .125% multiplied
by the average daily outstanding principal balance of the loans of PFGI
Capital during each such calendar month. Based on these formulas, PFGI
Capital paid the Bank servicing compensation of $221,000 for the period from
June 12, 2002 (commencement of operations) to December 31, 2002. The
participation agreement does not limit or cap the servicing fees payable to
the Bank. Other than the compensation referred to in this paragraph, the
management fee referred to in "Business: Other Management Policies and
Programs - Management", PFGI Capital pays no other compensation to the Bank
or its affiliates. The Bank does, however, receive certain non-compensation
benefits from its relationship with PFGI Capital.
The participation agreement requires the Bank to service the loans underlying
PFGI Capital's participation interests in a manner substantially similar to
work performed by the Bank for transactions on its own behalf. The Bank or
its affiliates collect and remit principal and interest payments, maintain
perfected collateral positions and submit and pursue insurance claims. The
Bank and its affiliates also provide accounting and reporting services
required by PFGI Capital for PFGI Capital's participation interests. PFGI
Capital also may direct the Bank to dispose of any mortgage loans at the time
the real property securing the mortgage loan becomes classified as a OREO
property, the mortgage loan is in default or placed in a non-performing
status, or, when any other development occurs that adversely affects the
value of the mortgaged property, the borrower's financial condition or its
ability to repay the loan in accordance with its terms, including any
renegotiation of loan terms due to the financial deterioration of the
borrower. The Bank is required to pay all expenses related to the performance
of its duties under the participation agreement, including any payment to its
affiliates for servicing the loans. The Bank or its affiliates may institute
foreclosure proceedings at the direction of PFGI Capital, exercise any power
of sale contained in any mortgage or deed of trust, obtain a deed in lieu of
foreclosure or otherwise acquire title to a mortgaged property underlying a
mortgage loan by operation of law or otherwise in accordance with the terms
of the participation agreement.
Prior to foreclosure of any commercial mortgage loan underlying PFGI
Capital's participation interests acquired by it from the Bank or its
affiliates, PFGI Capital currently intends to try to sell the participation
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PFGI CAPITAL CORPORATION
interest in the underlying commercial mortgage loan back to the Bank. The
Bank will then bear all expenses related to the foreclosure after that time.
Management
The day-to-day operations of PFGI Capital will be managed pursuant to the
terms of the management agreement between the Bank and PFGI Capital. The
Bank, in its role as manager under the terms of the management agreement,
will receive 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. PFGI Capital will pay
the Bank a monthly management fee equal to (i) 1/12 multiplied by (ii) .10%
multiplied by the average daily outstanding principal balance of the loans of
PFGI Capital during each such calendar month. Based on these formulas, PFGI
Capital paid the Bank management compensation of approximately $177,000 for
the period from June 12, 2002 (commencement of operations) to December 31.
2002. No specific term is specified in the management agreement, and the
management agreement may be terminated by mutual agreement of the parties at
any time, without penalty. Due to the relationship between the Bank and PFGI
Capital, PFGI Capital does not anticipate that the management agreement will
be terminated by either party in the foreseeable future.
Employees
PFGI Capital has four executive officers. PFGI Capital does not anticipate
that PFGI Capital will require any employees because employees of the Bank
and its affiliates are servicing the loans and managing the day-to-day
operations and affairs of PFGI Capital under the participation and management
agreements. All of PFGI Capital's officers are also officers and/or employees
of Provident and/or the Bank. PFGI Capital intends to maintain corporate
records and audited financial statements that are separate from those of
Provident and the Bank.
Although there are no restrictions or limitations contained in PFGI Capital's
charter or bylaws, PFGI Capital does not anticipate that PFGI Capital's
officers or directors will have any direct or indirect pecuniary interest in
any asset to be acquired or disposed of by PFGI Capital or in any transaction
in which PFGI Capital has an interest or will engage in acquiring, holding
and managing assets, other than as borrowers or guarantors of commercial
mortgage loans underlying PFGI Capital's participation interests, in which
case such commercial mortgage loans would be on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transaction with others and would not involve more than the normal
risk of collectibility or present other unfavorable features.
Competition
In order to qualify as a REIT under the Internal Revenue Code, PFGI Capital
cannot engage in the business of originating loans. PFGI Capital anticipates
that it will continue to possess participation interests in mortgage and
other loans in addition to those in the current portfolio and that
substantially all of these loans will be owned by the Bank, although PFGI
Capital may purchase loans from unaffiliated third parties. Accordingly, PFGI
Capital does not expect to compete with mortgage conduit programs, investment
banking firms, savings and loan associations, banks, thrift and loan
associations, finance companies, mortgage bankers or insurance companies in
acquiring loans.
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PFGI CAPITAL CORPORATION
Regulatory Matters
The Bank, an Ohio state-chartered member bank of the Federal Reserve System,
and its subsidiaries, including PFGI Capital, are subject to supervision and
examination by applicable federal and state banking agencies, including the
Federal Reserve, FDIC and the Ohio Division of Financial Institutions. In
addition to the impact of federal and state regulation, the Bank is affected
significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the
economy.
Overview of the Prides
PFGI Capital and Provident issued 6,600,000 units of PRIDES to the public for
$165,000,000. The proceeds of this issuance were used to purchase commercial
mortgage loan participations from the Bank. Each PRIDES is comprised of a
unit consisting of:
(1) a forward purchase contract pursuant to which (a) the holder will agree
to purchase, and Provident will agree to sell, for $25, newly issued shares
of Provident common stock on August 17, 2005, the number or fraction of which
will be determined by the settlement rate described below, based on an
average trading price of Provident common stock for a period preceding that
date; and (b) Provident will make unsecured contract adjustment payments to
the holder at a rate of 1.25% of the stated amount per year, paid quarterly,
subject to Provident's right to defer these payments, and
(2) one share of PFGI Capital Series A preferred stock with a liquidation
preference of $25, on which PFGI Capital will pay dividends on a
non-cumulative basis at the rate of 7.75%.
Each forward purchase contract obligates the holder to buy, on August 17,
2005, for $25.00, a number of newly issued shares of Provident common stock
equal to the settlement rate. The settlement rate will be calculated as
follows:
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.
Holders of PFGI Capital's Series A preferred stock are 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.
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PFGI CAPITAL CORPORATION
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, or the Ohio Division of
Financial Institutions, 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%.
RISK FACTORS
CHANGE IN THE PRICE OF PROVIDENT COMMON STOCK.
The market value of the shares of Provident common stock that the holder will
receive on settlement of a forward purchase contract on August 17, 2005 may
be materially different from the effective price per share paid by the holder
on settlement as a result of a variety of factors. If the average trading
price of Provident common stock on the settlement date is less than $24.42
per share, the holder will, on settlement, be required to purchase shares of
common stock at a loss. Accordingly, a holder of PRIDES assumes the entire
risk that the market value of Provident common stock may decline.
The aggregate market value of the shares of Provident common stock that the
holder will receive upon settlement of a forward purchase contract generally
will exceed the stated amount of $25 only if the average closing price per
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PFGI CAPITAL CORPORATION
share of Provident common stock over the 20-trading day period preceding
settlement equals or exceeds $29.0598, which is referred to as the threshold
appreciation price. If the average closing price exceeds $24.42, which is
referred to as the reference price, but falls below the threshold
appreciation price, the holder will realize no equity appreciation on
Provident common stock for the period during which the holder owns the
forward purchase contract. Furthermore, if the applicable average closing
price exceeds the threshold appreciation price, the value of the shares the
holder will receive under the forward purchase contract will be approximately
84% of the value of the shares the holder could have purchased with $25.
U.S. FEDERAL INCOME TAX LAWS AND CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
treatment of PRIDES or instruments similar to PRIDES for United States
federal income tax purposes. As a result, the United States federal income
tax consequences of the purchase, ownership and disposition of the PRIDES
(including the timing and the character of a holder's gain, income or loss
with respect to the PRIDES) are unclear.
No assurance can be given that PFGI Capital will be able to operate in such a
manner so as to remain qualified as a REIT for United States federal income
tax purposes. Qualification as a REIT involves the application of highly
technical and complex tax law provisions for which there are only limited
judicial or administrative interpretations and involves the satisfaction of
various factual requirements not entirely within PFGI Capital's control. No
assurance can be given that new legislation, regulations, administrative
interpretations, or court decisions will not significantly change the tax
laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification in a way that would materially and
adversely affect PFGI Capital's ability to operate. Any such new legislation,
regulation, interpretation, or decision could be the basis of a Tax Event
that would, with the prior written approval of the Federal Reserve Board and
the Ohio Division of Financial Institutions, permit PFGI Capital to redeem
PFGI Capital Series A preferred stock.
If PFGI Capital were to fail to qualify as a REIT, the dividends on PFGI
Capital's stock, including PFGI Capital Series A preferred stock, would not
be deductible by PFGI Capital for federal income tax purposes and PFGI
Capital would be subject to federal income tax in the same manner as a
regular, domestic corporation. Thus PFGI Capital (or, in the likely event
that PFGI Capital also became part of the consolidated group of which
Provident is the parent, such consolidated group) likely would face a greater
tax liability and the amount of income available for distribution to holders
of PFGI Capital Series A preferred stock would be reduced.
If in any taxable year PFGI Capital fails to qualify as a REIT, unless PFGI
Capital is entitled to relief under certain statutory provisions, PFGI
Capital would also be disqualified from treatment as a REIT for the four
taxable years following the year PFGI Capital's qualification was lost.
To qualify as a REIT, PFGI Capital will, broadly speaking, be required each
year to distribute as dividends to PFGI Capital's stockholders at least 90%
of PFGI Capital's taxable income, excluding capital gains. Failure to comply
with this requirement would result in PFGI Capital being subject to tax at
regular corporate rates. In addition, PFGI Capital will be subject to a 4%
nondeductible excise tax on the amount by which certain distributions
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PFGI CAPITAL CORPORATION
considered as paid by PFGI Capital with respect to any calendar year are less
than the sum of:
o 85% of PFGI Capital's ordinary income for the calendar year,
o 95% of PFGI Capital's capital gains net income for the calendar year, and
o 100% of undistributed taxable income from prior periods.
Although PFGI Capital currently intends to operate in a manner designed to
qualify it as a REIT, future economic, market, legal, tax or other
considerations may cause PFGI Capital to determine that it is in its best
interests and the best interests of holders of PFGI Capital's common stock
and preferred stock to revoke the REIT election. Any such determination by
PFGI Capital may be made without stockholder approval but, as long as any
share of REIT Series A preferred stock are outstanding, will require the
approval of a majority of PFGI Capital's independent directors.
POTENTIAL DIVIDEND RESTRICTIONS BY BANK REGULATORS
Because PFGI Capital is a direct subsidiary of the Bank, regulatory
authorities will have the right to examine PFGI Capital and PFGI Capital's
activities and, under certain circumstances, to impose restrictions on the
Bank or PFGI Capital. Such restrictions could impact PFGI Capital's ability
to conduct business pursuant to PFGI Capital's business plan and could
adversely affect PFGI Capital's financial condition and results of
operations.
If the Federal Reserve Board or the Ohio Division of Financial Institutions
determines that the Bank's relationship with PFGI Capital results in an
unsafe and unsound banking practice, the Bank's regulators have the authority
to:
o restrict PFGI Capital's ability to transfer assets;
o restrict PFGI Capital's ability to make distributions to its stockholders,
including dividends to holders of shares of PFGI Capital Series A
preferred stock;
o restrict PFGI Capital's ability to redeem its preferred stock; or
o require the Bank to sever its relationship with PFGI Capital or divest its
ownership of PFGI Capital.
Some of these actions by the Federal Reserve Board or the Ohio Division of
Financial Institutions would likely result in a failure of PFGI Capital to
qualify as a REIT.
Payment of dividends of PFGI Capital' Series A preferred stock could also be
subject to regulatory limitations if the Bank becomes less than
"well-capitalized" for purposes of regulations issued by the Federal Reserve
Board. Under these regulations, the Bank will be deemed less than
"well-capitalized" if it has a total risk-based capital ratio of less than
10.0%; a Tier 1 risk-based capital ratio of less than 6.0%; and a leverage
ratio of less than 5.0%. At December 31, 2002, the Bank's total risk-based
capital ratio was 11.36%, its Tier 1 risk-based capital ratio was 8.19% and
its leverage ratio was 6.77%. While the Bank intends to maintain its capital
ratios in excess of the "well-capitalized" levels under these regulations,
there can be no assurance that the Bank will be able to do so. The exercise
of the Federal Reserve Board's power to restrict dividends on PFGI Capital
Series A preferred stock would, however, also have the effect of restricting
the payment of dividends on PFGI Capital's common stock and all series and
classes of preferred stock. The inability to pay dividends on PFGI Capital's
common stock would prevent PFGI Capital from meeting the statutory
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PFGI CAPITAL CORPORATION
requirement in effect for a REIT to distribute 90% of its taxable income and,
therefore, would cause PFGI Capital to fail to qualify for the favorable tax
treatment accorded to REITs.
If PFGI Capital had to be treated for tax purposes in the same manner as the
other consolidated subsidiaries of the Bank, rather than as a REIT, PFGI
Capital's loss of tax benefits would be directly and immediately felt by PFGI
Capital's stockholders.
Provident has restated its operating results for prior periods. The
restatement was a result of unintentional errors in the accounting for
certain leases. The results of the restatement are reflected for all periods
reported upon in Provident's Form 10-K for the year ended December 31, 2002.
Legal and regulatory limitations on the payment of dividends by the Bank
could also affect PFGI Capital's ability to pay dividends to unaffiliated
third parties, including the holders of shares of PFGI Capital Series A
preferred stock. Regulatory approval is required prior to the Bank's
declaration of any dividends in excess of available retained earnings. The
amount of dividends that may be declared without regulatory approval is
further limited to the sum of net income for the current year and retained
net income for the preceding two years, less any required transfers to
surplus or common stock. At December 31, 2002, the Bank could without prior
regulatory approval and absent contrary supervisory guidance declare
dividends in 2003 of approximately $30.2 million plus an additional amount
equal to its net income through the date of declaration in 2003. Since PFGI
Capital is a member of the Bank's consolidated group, payment of common and
preferred dividends by the Bank and/or any member of its consolidated group
to unaffiliated third parties, including PFGI Capital's payment of dividends
to the holders of shares of PFGI Capital Series A preferred stock, would
require regulatory approval if aggregate dividends on a consolidated basis
exceed these limitations.
CONFLICT OF INTERESTS
PFGI Capital has no employees. The Bank performs all of PFGI Capital's
business operations. All of PFGI Capital's officers and six of PFGI Capital's
directors are also officers of the Bank or its affiliates. PFGI Capital's
common officers with the Bank devote less than 5% of their time to managing
PFGI Capital's business. Three directors are independent directors who are
not employed by or otherwise affiliated with PFGI Capital, nor are they
officers, directors or other affiliates of Provident or the Bank. The Bank
controls 90% of the voting power of PFGI Capital's outstanding shares. As a
result, the Bank has the right to elect all of PFGI Capital's directors,
including PFGI Capital's independent directors, except for the two additional
independent directors to be elected by the holders of PFGI Capital Series A
preferred stock if PFGI Capital fails to pay dividends on PFGI Capital Series
A preferred stock for at least six consecutive dividend periods. The Bank and
its affiliates have interests that are not identical to PFGI Capital's and,
therefore, conflicts of interest may arise with respect to transactions
between or among Provident, the Bank and PFGI Capital.
PFGI Capital is dependent on the diligence and skill of the officers and
employees of the Bank for the selection and structuring of the loans
underlying PFGI Capital's participation interests and PFGI Capital's other
authorized investments. The Bank will select the amount, type, and price of
loan participation interests and other assets that PFGI Capital will acquire
from the Bank. Although these purchases are made within the investment
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PFGI CAPITAL CORPORATION
policies of PFGI Capital, which are described under the caption "Business -
Other Management Policies and Programs - Asset Acquisition and Disposition
Policies," neither PFGI Capital nor the Bank has obtained any third-party
valuations, nor does PFGI Capital intend to do so in the future. Although
PFGI Capital has adopted certain policies to guide the acquisition and
disposition of assets, these policies may be revised or exceptions may be
approved from time to time at the discretion of the board of directors
without a vote of PFGI Capital's stockholders. Changes in or exceptions made
to these policies could permit PFGI Capital to acquire lower quality assets.
The Bank may seek to exercise its influence over PFGI Capital's affairs so as
to cause the sale of PFGI Capital's assets and their replacement by lesser
quality assets purchased from the Bank or its affiliates or elsewhere. This
could adversely affect PFGI Capital's business and PFGI Capital's ability to
pay dividends on PFGI Capital Series A preferred stock.
CHANGES IN INTEREST RATES AND COLLATERAL VALUES
A substantial portion of PFGI Capital's income consists of interest payments
on the commercial mortgage loans underlying PFGI Capital's participation
interests. At December 31, 2002, 89% of the commercial mortgage loans
underlying PFGI Capital's participation interests, as measured by the
aggregate outstanding principal amount, bore interest at adjustable rates,
and the remainder bore interest at fixed rates. Adjustable rate loans
decrease the risks to a lender associated with changes in interest rates but
involve other risks. As interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan, and the increased
interest obligation increases the potential for default. At the same time,
the marketability of the underlying property may be adversely affected by
higher interest rates. In a declining interest rate environment, there may be
an increase in prepayments on the loans underlying PFGI Capital's
participation interests as the borrowers refinance their mortgages at lower
interest rates. Under these circumstances, PFGI Capital may find it more
difficult to purchase additional participation interests in mortgage loans
bearing interest at rates sufficient to support the payment of the dividends
on PFGI Capital Series A preferred stock. Because the rate at which dividends
are required to be paid on PFGI Capital Series A preferred stock is fixed,
there can be no assurance that a declining interest rate environment would
not adversely affect PFGI Capital's ability to pay full, or even partial,
dividends on PFGI Capital Series A preferred stock.
At December 31, 2002, 88% of the properties underlying the commercial
mortgage loan participation interests of PFGI Capital were located in Ohio,
Florida and Kentucky. Because of the concentration of PFGI Capital's
interests in those states, in the event of adverse economic, political or
business conditions or natural hazards in those states, PFGI Capital would
likely experience higher rates of loss and delinquency on PFGI Capital's
mortgage loan participation interests than if the underlying loans were more
geographically diversified.
As measured by aggregate outstanding principal amount, 100% of the assets
acquired from the Bank consisted of participation interests in commercial
mortgage loans. Commercial mortgage loans generally tend to have shorter
maturities than residential mortgage loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon"
payment due on maturity. Commercial real estate properties tend to be unique
and are more difficult to value than single-fami1y residential real estate
properties. They are also subject to relatively greater environmental risks
-19-
PFGI CAPITAL CORPORATION
and to the corresponding burdens and costs of compliance with environmental
laws and regulations. Due to these risks, PFGI Capital may experience higher
rates of default on PFGI Capital's participation interests in commercial
mortgage loans than PFGI Capital would if PFGI Capital's participation
interests were more diversified and included a greater number of underlying
residential and other loans.
In its capacity as servicer, the Bank, at the direction of PFGI Capital, may
be forced to foreclose on an underlying commercial mortgage loan where the
borrower has defaulted on its obligation to repay the loan. The Bank
classifies this type of foreclosed property as Other Real Estate Owned, or
OREO property. It is possible that the Bank and PFGI Capital may be subject
to environmental liabilities, particularly on industrial and warehouse
properties, which are generally subject to relatively greater environmental
risks than non-commercial properties. In addition, the Bank may find it
difficult or impossible to sell the property prior to or following an
environmental cleanup. Furthermore, in certain circumstances, the Bank, in
its capacity as servicer, or PFGI Capital may decide not to foreclose on
property as a result of environmental conditions. Even though PFGI Capital
intends to sell to the Bank PFGI Capital's participation interest in any loan
prior to foreclosure, the discovery of these types of liabilities, any
associated costs for remediation of hazardous substances, wastes,
contaminants, or pollutants, and difficulty in selling the underlying real
estate or a decision not to foreclose on the underlying loan, could have a
material adverse effect on the fair value of that loan and, therefore, PFGI
Capital may not recover any or all of its investment in the underlying loan.
Generally, neither PFGI Capital nor the Bank obtains credit enhancements such
as borrower bankruptcy insurance or obtains special hazard insurance for the
loans underlying PFGI Capital's participation interests, other than standard
hazard insurance typically required by Provident Bank, which will in each
case only relate to individual loans.
PFGI Capital is not required to limit its investments to assets of the types
presently in PFGI Capital's portfolio. Assets such as non-mortgage related
securities, equipment loans or real estate may involve different risks not
described in this report. PFGI Capital is not required to, and there can be
no assurance that PFGI Capital will, maintain the levels or asset coverage
that currently exist relative to the amount of PFGI Capital's preferred stock
and obligations senior to it.
ITEM 2. PROPERTIES
- ------------------
None
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None in the fourth quarter
-20-
PFGI CAPITAL CORPORATION
ITEM II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
There is no public trading market for PFGI Capital's common stock as the Bank
owns all of the 5,940,000 shares of its outstanding common stock. As an
alternative to distributing a common dividend in cash, PFGI Capital has the
option of distributing to the Bank, a dividend using a procedure known as a
"consent dividend", as authorized by Section 565 of the Internal Revenue
Code. A consent dividend procedure is where a shareholder, on the last day of
a REIT's tax year, agrees to treat as a dividend the amount that the REIT so
designates, without any distribution of cash or property actually occurring.
The effect of the consent dividend is that the REIT is considered to have
paid a dividend on the last day of its tax year, and the shareholder is
treated as having received that amount and contributed it back to the REIT.
PFGI Capital, as a REIT, receives a deduction for dividends paid, reducing
its taxable income by the amount of the consent dividend, but without the
need to have cash available to distribute. For the year ending December 31,
2002, PFGI Capital and the Bank have agreed to use the consent dividend
procedure. As a result, PFGI Capital will have additional funds available for
investment purposes and/or for distribution to its preferred shareholders
than if PFGI Capital had paid a cash dividend to the common shareholder.
PFGI Capital has 6,600,000 shares of Series A Preferred Stock issued and
outstanding. The proceeds of this issuance were used by PFGI Capital to
purchase commercial mortgage loan participations from the Bank. One share of
Series A Preferred Stock is included within each PRIDES and is not traded
separately from the PRIDES. For more information regarding the Series A
Preferred Stock and the Prides, see the section entitled "Overview of the
Prides" included in ITEM 1. During 2002, PFGI Capital paid dividends on the
Series A Preferred Stock of $5,541,000 and Provident paid contract adjustment
payments of $894,000. On February 18, 2003, dividends of $3,197,000 and a
contract adjustment payment of $516,000 were paid on the Series A Preferred
Stock. A discussion of limitations and restrictions on the payment of
dividends by PFGI Capital is contained under ITEM 1 "Business - Risk Factors"
and Note 8 included in "Notes to Financial Statements."
The PRIDES are traded on the New York Stock Exchange under the symbol "PCE
PrI". The following table sets forth, for the periods indicated, the high,
low and period end closing sales prices as reported on the New York Stock
Exchange.
2002
--------------------------------------
Fourth Third From June 12
Quarter Quarter to June 30, 2002
- -----------------------------------------------------------------------------
High Close $ 27.70 $ 29.40 $ 28.25
Low Close 23.05 24.55 25.00
Period End Close 26.30 25.65 28.25
At March 14, 2003, there were 558 holders of record of the PRIDES.
A discussion of limitations and restrictions on the payment of dividends is
provided in ITEM 1. "Business: Risk Factors" and Note 8 included in "Notes to
Financial Statements."
-21-
PFGI CAPITAL CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
The information presented below represents selected financial data relative
to PFGI Capital for the period from June 12, 2002 (commencement of
operations) to December 31, 2002 and as of December 31, 2002 (dollars in
thousands except per share data).
Statement of Income:
Interest Income $ 10,065
Noninterest Expense 448
Net Income Before Preferred Dividends 9,617
Net Income Available to Common Shares 4,076
Net Income Per Common Share 0.69
Preferred Stock Cash Dividends Paid 5,541
Common Stock Cash Dividends Paid -
Average Yield on Earning Assets 5.51%
Balance Sheet:
Commercial Mortgage Loan Participation Interests,
Net of Reserve for Loan Participation Losses $321,755
All Other Assets 6,760
Total Assets 328,515
Series A Preferred Stock 165,000
Common Stock and Other Equity Items 163,515
-22-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
INTRODUCTION
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.
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 $165,000,000 of
commercial mortgage loan participations. As part of the PRIDES issuance, PFGI
Capital also issued 6,600,000 shares of Series A Preferred Stock to the
public for $165,000,000. Such proceeds were used to purchase an additional
$165,000,000 of outstanding principal balance of commercial mortgage loan
participations from the Bank. Management views its financial condition and
results of operations as one operating segment.
PFGI Capital reported net income available to common shareholders of
$4,076,000, or $.69 earnings per common share, for the period from June 12,
2002 (commencement of operations) to December 31, 2002. Cash dividends of
$5,541,000, or $.8396 per share, were paid to the Series A Preferred
shareholders during this time period. No cash dividends were paid to the
common shareholders during 2002.
At December 31, 2002, PFGI Capital had total assets of $328,515,000. These
assets were primarily comprised of net commercial mortgage loan
participations totaling $321,755,000. These loan participations were all
acquired from the Bank. Equity for PFGI Capital was $328,515,000 as of
December 31, 2002. Equity consisted of $330,000,000 from the issuance of
Common and Preferred Stock, net income of $9,617,000, net of $5,541,000 of
dividends paid to preferred shareholders and $5,561,000 for the cost of
issuing the Preferred Stock.
-23-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
PFGI Capital's primary source of revenue is interest income on its commercial
mortgage loan participations. A secondary source of interest income is
interest earned on a deposit account held at the Bank. PFGI Capital has no
interest-bearing liabilities and no related interest expense. Total interest
income was $10,065,000 for the period from June 12 to December 31, 2002 and
its average yield on total earnings assets was 5.51%.
The following table provides an average balance sheet, along with its related
interest income and average rate earned for earning assets, for the period
from June 12 to December 31, 2002.
Average Interest Average
(Dollars in Thousands) Balance Earned Rate
- -------------------------------------------------------------------------------
ASSETS:
Interest Earning Assets:
Commercial Mortgage Loan Participations $ 317,668 $ 9,967 5.64%
Deposit Account at Provident Bank 11,045 98 1.60%
------- --------- ----
Total Interest Earning Assets 328,713 $ 10,065 5.51%
========= ====
Reserve for Loan Participation Losses (3,130)
Other Noninterest Earning Assets 1,760
---------
Total Assets $ 327,343
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Noninterest Bearing Liabilities $ 760
Shareholders' Equity 326,583
---------
Total Liabilities and Shareholders' Equity $ 327,343
=========
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 December 31,
2002 as all loan participations were transferred with a reserve and there
were no charge-offs.
Noninterest Income and Expense
PFGI Capital did not record any noninterest income from June 12 to December
31, 2002. Noninterest expense of $448,000 was recognized during this time
period. Noninterest expense was comprised primarily of compensation paid to
the Bank for loan servicing and management fees which totaled $221,000 and
$177,000, respectively. 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 loan participations.
-24-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Taxes
PFGI Capital has elected to be treated as a REIT for federal income tax
purposes and intends to maintain compliance with the provisions of the Code
and therefore is not subject to income taxes.
FINANCIAL CONDITION
Commercial Mortgage Loan Participations
As of December 31, 2002, PFGI Capital had $321,755,000 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.
The following table shows the geographic distribution of the loans underlying
the commercial mortgage loan participations as of December 31, 2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
State of Loans (In Thousands) Balance
- ----------------------------------------------------------------------------
Ohio 156 $ 258,582 79.56%
Florida 12 17,375 5.35
Kentucky 9 9,672 2.98
All Others 16 39,376 12.11
--- --------- ------
Total 193 $ 325,005 100.00%
=== ========= ======
The following table shows the composition of the commercial mortgage loan
participations by property type at December 31, 2002:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
Property Type of Loans (In Thousands) Balance
- -------------------------------------------------------------------------------
Shopping / Retail 42 $ 98,572 30.33%
Office / Warehouse 53 67,014 20.62
Hotel / Motel 9 44,268 13.62
Apartments 33 37,959 11.68
Residential Development 17 18,416 5.67
Healthcare Facilities 2 7,275 2.24
Auto Sales and Service Related 4 2,277 0.70
Churches 7 1,936 0.60
Other Commercial Properties 26 47,288 14.54
--- --------- ------
Total 193 $ 325,005 100.00%
=== ========= ======
-25-
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 adjustable 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 December 31, 2002:
Fixed Rate Adjustable 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% 1 $ 1,141 3.28% 75 $193,996 66.85%
5.00% to 5.99% 2 7,054 20.25 20 12,111 4.17
6.00% to 6.99% 2 826 2.37 25 30,721 10.59
7.00% to 7.99% 6 9,440 27.10 34 25,086 8.65
8.00% to 8.99% 5 16,369 47.00 23 28,261 9.74
-- -------- ------ --- -------- ------
16 $ 34,830 100.00% 177 $290,175 100.00%
== ======== ====== === ======== ======
Aggregate Percentage Weighted
Number Principal by Aggregate Average
of Balance Principal Interest
Interest Type Loans (In Thousands) Balance Rate
- ----------------------------------------------------------------------------
Fixed Rate Loans 16 $ 34,830 10.72% 7.23%
Adjustable Rate Loans 177 290,175 89.28 5.11
--- --------- ------ ----
Total 193 $ 325,005 100.00% 5.34%
=== ========= ====== ====
Other Assets
As of December 31, 2002, PFGI Capital had cash of $5,357,000 in an interest
bearing deposit account at the Bank. As of year-end, the account was yielding
a rate of 1.25%.
Additionally, PFGI Capital had interest receivable of $1,107,000, accounts
receivable of $279,000 and prepaid expenses of $17,000.
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 7A. Quantitative and Qualitative Disclosures
About Market Risk" of this report.
-26-
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.
Holders of PFGI Capital's Preferred Stock are entitled to receive, if
authorized and declared by the board of directors, non-cumulative dividends
at the rate of 7.75% per annum, or $1.9375 per share. As 6,600,000 shares of
Preferred Stock is outstanding, cash dividends of $12,788,000 are expected to
be paid during 2003.
As an alternative to distributing a common dividend in cash, PFGI Capital has
the option of distributing to the Bank, a dividend using a procedure known as
a "consent dividend", as authorized by Section 565 of the Internal Revenue
Code. For information regarding the consent dividend procedure, see ITEM 5.
For the year ending December 31, 2002, PFGI Capital and the Bank have agreed
to use the consent dividend procedure. As a result, PFGI Capital will have
additional funds available for investment purposes and/or for distribution to
its preferred shareholders than if PFGI Capital had paid a cash dividend to
the common shareholder.
A discussion of limitations and restrictions on the payment of dividends is
provided in ITEM 1. "Business: Risk Factors" and Note 8 included in "Notes to
Financial Statements."
CRITICAL ACCOUNTING POLICIES
Note 1 to the "Notes to Financial Statements" lists significant accounting
policies used in the development and presentation of its financial
statements. However, the "Reserve for Loan Participation Losses" policy is
considered to be critical due to the level of sensitivity and subjectivity of
its underlying accounting estimates.
PFGI Capital's exposure to credit risk is managed through its use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding excessive property type and business activity concentrations. The
Bank's credit administration function employs extensive risk management
techniques 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
-27-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 in the same
geographical region or with similar property types. Concentration of credit
risk may increase the relative sensitivity of performance to both positive
and negative developments affecting a particular region or property type.
PFGI Capital's balance sheet exposure to geographic concentrations directly
affects the credit risk of the underlying loans within the participation
interests. Approximately 88% of the loans underlying the participation
interests are located in Ohio, Florida and Kentucky. 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. "Shopping / Retail" and "Office"
property types represent approximately 30% and 21% of the total loan
participation balance, respectively. As a result, the portfolio may also
experience a higher default rate in the event of adverse business
developments related to these property types. Borrowers obligated in loans
underlying PFGI Capital's participation interests, however, do not represent
a particular concentration of similar business activity.
The following table shows a progression of the reserve for loan participation
losses from June 12, 2002 (commencement of operations) to December 31, 2002
(in thousands):
Balance at Beginning of Period $ -
Transferred Reserves, Net 3,250
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
---------
Balance at End of Period $ 3,250
=========
Net Charge-Offs to Average Commercial
Mortgage Loan Participations 0.00%
====
Reserve for Loan Participation Losses to
Commercial Mortgage Loan Participations 1.00%
====
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
December 31, 2002, no loans had been placed on non-accrual status nor had any
property been acquired through foreclosure. Additionally, no loan
participations were delinquent thirty or more days as of December 31, 2002.
-28-
PFGI CAPITAL CORPORATION
ITEM 7A. 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 December 31, 2002,
11% of PFGI Capital's loan participation portfolio had fixed interest rates.
Such loans tend to increase interest rate risk. At December 31, 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.
An earnings simulation model is provided by the Bank to analyze PFGI
Capital's net interest income sensitivity to movements in interest rates. The
model evaluates the effect on net interest income by running various interest
rate scenarios up and down from a flat rate scenario. Based on the results of
the simulation model, net interest income would change by the following over
the next 12-month period: increase 5.12% for each 100 basis point increase
and decrease 5.12% for each 100 basis point decrease.
In order for PFGI Capital to have sufficient cash flows to meet projected
expenses and scheduled dividend payments to holders of Preferred Stock, loan
participations of PFGI Capital cannot yield lower than approximately 4.20%.
As of December 31, 2002, the average weighted yield on loan participations
was 5.34%. Assuming that the investment in participation interests remain
level, yields on loan participations would have to decrease by over 100 basis
points before cash flows would be insufficient to cover the regular dividend
payments to holders of Preferred Stock.
-29-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Ernst $amp; Young LLP, Independent Auditors ........................ 31
Financial Statements:
PFGI Capital Corporation:
Balance Sheet ........................................................ 32
Statement of Income .................................................. 33
Statement of Changes in Shareholders' Equity ......................... 34
Statement of Cash Flows .............................................. 35
Notes to Financial Statements ........................................ 36
Supplementary Data:
Quarterly Results of Operations (unaudited) .............................. 45
-30-
REPORT OF ERNST $amp; YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
PFGI Capital Corporation
We have audited the accompanying balance sheet of PFGI Capital Corporation as
of December 31, 2002, and the related statement of income, changes in
shareholders' equity and cash flows for the period from June 12, 2002 to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PFGI Capital Corporation at
December 31, 2002, and the results of its operations and its cash flows for
the period from June 12, 2002 to December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST $amp; YOUNG LLP
Cincinnati, Ohio
April 11, 2003
-31-
PFGI CAPITAL CORPORATION
BALANCE SHEET
December 31, 2002
(Dollars In Thousands Except Per Share Data)
ASSETS
Commercial Mortgage Loan Participations $325,005
Reserve for Loan Participation Losses (3,250)
--------
Net Commercial Mortgage Loan Participations 321,755
Cash and Due From Banks 5,357
Interest Receivable 1,107
Accounts Receivable - The Provident Bank 279
Other Assets 17
--------
Total Assets $328,515
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Total Liabilities $ -
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 159,380
Retained Earnings 4,076
--------
Total Shareholders' Equity 328,515
--------
Total Liabilities and Shareholders' Equity $328,515
========
See notes to financial statements.
-32-
PFGI CAPITAL CORPORATION
STATEMENT OF INCOME
PERIOD FROM JUNE 12, 2002 TO DECEMBER 31, 2002
(In Thousands Except Per Share Data)
Interest Income:
Interest on Loan Participations $ 9,967
Interest on Cash Deposit 98
-------
Total Interest Income 10,065
Provision for Loan Participation Losses -
-------
Net Interest Income After Provision
for Loan Participation Losses 10,065
Noninterest Expense:
Loan Servicing Fees 221
Management Fees 177
Other Noninterest Expense 50
-------
448
-------
Income Before Income Taxes 9,617
Income Taxes -
-------
Net Income / Comprehensive Income $ 9,617
=======
Preferred Stock Dividends $ 5,541
=======
Net Income Available to Common Shares $ 4,076
=======
Per Common Share:
Basic $ 0.69
Diluted $ 0.69
Dividends $ -
See notes to financial statements.
-33-
PFGI CAPITAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands Except Per Share Data)
Preferred Common Capital Retained
Stock Stock Surplus Earnings Total
- -------------------------------------------------------------------------------------------
Balance at June 12, 2002 $ - $ - $ - $ - $ -
Issuance of Common Stock
(5,940,000 Shares) 59 164,941 165,000
Issuance of Preferred Stock
(6,600,000 Shares) 165,000 165,000
Offering Costs of Preferred Stock (5,561) (5,561)
Preferred Stock Dividends
($.8396 Per Share) (5,541) (5,541)
Net Income 9,617 9,617
-------- ---- --------- ------- ---------
Balance at December 31, 2002 $165,000 $ 59 $ 159,380 $ 4,076 $ 328,515
======== ==== ========= ======= =========
See notes to financial statements.
-34-
PFGI CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM JUNE 12, 2002 TO DECEMBER 31, 2002
(In Thousands)
Operating Activities:
Net Income $ 9,617
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Increase in Interest Receivable (1,107)
Increase in Accounts Receivable and Other Assets (296)
--------
Net Cash Provided by Operating Activities 8,214
Investing Activities:
Net Increase in Loan Participations (156,755)
Financing Activities:
Proceeds from Issuance of Preferred Stock 165,000
Offering Costs of Preferred Stock (5,561)
Cash Dividends Paid (5,541)
--------
Net Cash Provided by Financing Activities 153,898
--------
Increase in Cash and Cash Equivalents 5,357
Cash at Beginning of Period -
--------
Cash and Cash Equivalents at End of Period $ 5,357
========
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.
-35-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
- ---------------------------
The following is a summary of significant accounting policies for PFGI
Capital:
ORGANIZATION: PFGI Capital Corporation (PFGI Capital) is a Maryland
corporation that was incorporated on May 9, 2002 and began operations on June
12, 2002. All of PFGI Capital's Common Stock is owned by The Provident Bank
(the Bank) while its Series A Preferred Stock is owned by outside investors.
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). As a REIT, PFGI Capital generally is not liable for federal income
tax to the extent that it distributes its income to its stockholders and
continues to meet a number of other requirements.
The Bank, an Ohio state-chartered member bank of the Federal Reserve System,
is the main subsidiary of Provident Financial Group, Inc. (Provident) and
provides full-service retail and commercial banking operations.
BASIS OF PRESENTATION: The accompanying financial statements include the
accounts of PFGI Capital. PFGI Capital has no equity ownership in any other
entities or interest in "special purpose entities". Certain estimates are
required to be made by management in the preparation of the financial
statements. Actual results may differ from those estimates.
STATEMENT OF CASH FLOWS: For cash flow purposes, cash equivalents include
deposit accounts at banks.
BUSINESS SEGMENTS: As PFGI Capital's operations consist of acquiring, holding
and managing commercial mortgage loan participations, management views its
financial condition and results of operations as one business segment.
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. Income on impaired loans
is generally recognized on a cash basis.
-36-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 potential 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 characteristics
related to the reserve factors 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 characteristics related to the
reserve factors. Analyses are performed on segments of the portfolio based
upon trends in delinquencies, charge-offs, economic factors and business
strategies. Adequacy factors may be adjusted based on changes in expected
potential losses in a particular segment.
OFFERING COSTS: Costs incurred in connection with the raising of capital
through the sale of Series A Preferred Stock were taken as an adjustment to
the capital surplus account of PFGI Capital.
DIVIDENDS: Dividends on the Series A Preferred Stock are non-cumulative. Upon
authorization of the Board of Directors, dividends are payable in arrears and
paid 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 are 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. Both the Common and Preferred Stock dividends are
treated as ordinary income to the shareholders.
As an alternative to distributing a cash dividend, PFGI Capital has the
option of distributing to its common shareholder, a dividend using a
procedure known as a "consent dividend", as authorized by Section 565 of the
Internal Revenue Code. A consent dividend procedure is where a shareholder,
on the last day of a REIT's tax year, agrees to treat as a dividend the
amount that the REIT so designates, without any distribution of cash or
property actually occurring. The effect of the consent dividend is that the
REIT is considered to have paid a dividend on the last day of its tax year,
and the shareholder is treated as having received that amount and contributed
it back to the REIT. The dollar amount of the consent dividend is included,
as if it were distributed, in the calculation to determine that at least 90%
of a REIT's taxable income has been distributed to its shareholders. PFGI
Capital, as a REIT, receives a deduction for dividends paid, reducing its
taxable income by the amount of the consent dividend, but without the need to
have cash available to distribute. For the year ending December 31, 2002,
PFGI Capital and its common shareholder have agreed to use the consent
dividend procedure. As a result, PFGI Capital will have additional funds
-37-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
available for investment purposes and/or for distribution to its preferred
shareholders than if PFGI Capital had paid a cash dividend to the common
shareholder.
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. 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.
ACCOUNTING PRONOUNCEMENTS EFFECTIVE FOR FUTURE PERIODS: In April 2002, the
Financial Accounting Standards Board issued Statement No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment No. 13, and Technical
Corrections." Under Statement 4, all gains and losses from extinguishment of
debt were required to be aggregated and classified as an extraordinary item,
net of related income tax effect. As a result of the elimination of Statement
4, gains and losses from extinguishment of debt will be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30.
Applying the provisions of APB 30 will distinguish transactions that are part
of an entity's recurring operations from those that are unusual or infrequent
or that meet the criteria for classification of an extraordinary item.
Additionally, Statement 13 is amended to require sale-leaseback accounting
for certain lease modifications that have economic effects that are similar
to sale-leaseback transactions. Statement 145 becomes effective January 1,
2003.
In June 2002, Statement 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. Statement 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue 94-3. Statement 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. Statement 146 becomes effective January 1, 2003.
In October 2002, the Financial Accounting Standards Board issued Statement
No. 147, "Acquisitions of Certain Financial Institutions an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9." Statement 147
provides guidance on the accounting for the acquisition of a financial
institution and applies to all acquisitions except those between two or more
mutual enterprises. The excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as a
business combination represents goodwill and will no longer be amortized, but
rather, be subject to impairment tests as prescribed by Statement No. 142,
"Goodwill and Other Intangible Assets." Statement 147 became effective on
October 1, 2002.
In December 2002, Statement No. 148, Accounting for Stock-Based Compensation
- - Transition and Disclosure, was issued. Statement 148 amends Statement No.
123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition to Statement 123's fair value based method of
accounting for stock-based employee compensation. Statement 148 also amends
the disclosure provisions of Statement 123 and APB Opinion No. 28, "Interim
-38-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While the
Statement does not amend Statement 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions
of Statement 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using
the fair value method of Statement 123 or the intrinsic value method of APB
Opinion No. 25. PFGI Capital has not issued any stock-based compensation.
The adoption of Statements No. 145, 146, 147 and 148 are not expected to have
any impact on PFGI Capital's results of operations or financial condition.
Note 2. LOAN PARTICIPATIONS AND RESERVE FOR LOAN PARTICIPATION LOSSES
- ---------------------------------------------------------------------
Participations in loans are generally purchased from the Bank at the Bank's
carrying value, which approximates fair value. Carrying value is the
principal amount outstanding plus accrued interest. A reserve for loan
participation losses is transferred from the Bank to PFGI Capital at the time
participations are transferred. Loans sold back to the Bank are accompanied
by a transfer of the reserve for those loans from PFGI Capital to the Bank.
The reserve for loan participation losses reflects management's judgment as
to the level considered appropriate to absorb inherent losses in the loan
participation portfolio. PFGI did not have any nonperforming assets or
impaired loans during 2002.
At December 31, 2002, 88% of the properties underlying the commercial
mortgage loan participation interests of PFGI Capital were located in Ohio,
Florida and Kentucky. Because of the concentration of PFGI Capital's
interests in those states, in the event of adverse economic, political or
business conditions or natural hazards in those states, PFGI Capital would
likely experience higher rates of loss and delinquency on PFGI Capital's
mortgage loan participation interests than if the underlying loans were more
geographically diversified.
The following table sets forth an analysis of the reserve for loan
participation losses for the period from June 12, 2002 (commencement of
operations) to December 31, 2002 (in thousands):
Balance at Beginning of Period $ -
Transferred Reserves, Net 3,250
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
------
Balance at End of Period $3,250
======
-39-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 3. EARNINGS PER COMMON SHARE
- ---------------------------------
Basic earnings per common share is the amount of earnings for the period
available to each share of Common Stock outstanding during the reporting
period. Diluted earnings per common share is the amount of earnings available
to each share of Common Stock outstanding during the reporting period
adjusted for the potential issuance of common shares for stock options,
convertible debt, etc. The earnings available to each share of Common Stock
has been reduced by Series A Preferred Stock dividends. PFGI Capital has no
stock options or convertible debt or other potential dilutive 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, 2002 to December 31, 2002 (in
thousands, except per share data):
Net Income $9,617
Less Preferred Stock Dividends (5,541)
------
Income Available to Common Shareholder $4,076
======
Weighted-Average Common Shares Outstanding 5,940
Basic and Diluted Earnings Per Share $ 0.69
NOTE 4. 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, which
was declared effective on June 6, 2002. In addition, the managing
underwriter, Merrill Lynch $amp; Co., was permitted to purchase up to an
additional 600,000 PRIDES to cover over-allotments. Provident and PFGI
Capital sold the 6,000,000 original PRIDES effective June 12, 2002 and the
600,000 over-allotment PRIDES effective July 2, 2002. The offering was
subsequently terminated as all registered PRIDES had been sold.
Gross proceeds from the sale of PRIDES were $165 million. The underwriting
discount and expenses incurred from the issuance of the PRIDES totaled
$6,542,000 of which 85%, or $5,561,000, was allocated to PFGI Capital. The
remaining 15% was allocated to Provident as its share of the PRIDES
transaction.
PFGI Capital used all of the net proceeds it received from the sale of the
PRIDES for the purchase of participation interests in commercial mortgage
loans from the Bank. The Bank used the proceeds from the sale of the
participation interests for general corporate purposes, including working
capital and funding of asset growth.
NOTE 5. DESCRIPTION OF PRIDES
- -----------------------------
Each PRIDES has a stated amount of $25.00 per unit and is comprised of two
components - a 3-year forward purchase commitment (the Purchase Contract) and
PFGI Capital Series A Preferred Stock.
-40-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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:
-41-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, or the Ohio Division of
Financial Institutions, 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%.
NOTE 6. 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 $221,000 for the period from
June 12 to December 31, 2002.
A summary of loan participation activity between the Bank and PFGI Capital
for the period from June 12 to December 31, 2002 follows (in thousands):
Loan Participations Transferred at Issuance of PRIDES and Common Stock $328,558
Subsequent Transfers of Loan Participations from Bank to PFGI Capital 147,868
Loan Participation Advances 6,185
Transfer of Loan Participations from PFGI Capital to the Bank (87,082)
Loan Participation Payments (70,524)
--------
$325,005
========
-42-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 outstanding principal balances
of the commercial mortgage loans underlying the participation interests.
Management fees incurred by PFGI Capital total $177,000 for the period from
June 12 to December 31, 2002.
The Bank owns 100% of the Common Stock of PFGI Capital. Accordingly, the Bank
is entitled to all common dividends paid by PFGI Capital.
As of December 31, 2002, PFGI Capital had an interest-bearing deposit account
of $5,357,000 at the Bank and a net receivable of $279,000 from the Bank.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------
Carrying values and estimated fair values for certain financial instruments
as of December 31 are shown in the following table. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Because no secondary market exists for
most of PFGI Capital's assets, the derived fair values are calculated
estimates, and the fair values provided herein do not necessarily represent
the actual values which may be realized in the disposition of these
instruments. The aggregate fair value amounts presented do not represent the
underlying value of PFGI Capital. What is presented below is a point-in-time
valuation that is affected, in part, by unrealized gains and losses resulting
from management's implementation of its program to manage overall interest
rate risk. It is not management's intention to immediately dispose of a
significant portion of its financial instruments. As a result, the following
fair value information should not be interpreted as a forecast of future
earnings and cash flows.
Carrying Fair
(In Thousands) Value Value
- -----------------------------------------------------------------------------
Financial Assets:
Commercial Mortgage Loan Participations $325,005 $327,831
Less: Reserve for Loan Participation Losses (3,250) -
-------- --------
Net Commercial Mortgage Loan Participations 321,755 327,831
Cash and Due From Banks 5,357 5,357
The following methods and assumptions were used by Provident in estimating
its fair value disclosures for financial instruments:
o Commercial mortgage loan participations: For adjustable-rate loan
participations that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. The fair values for
other loan participations are estimated using discounted cash flow
analyses and interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
-43-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
o Cash and due from banks: The carrying amounts reported in the balance
sheet for cash and due from banks approximate those assets' fair values.
NOTE 8. DIVIDEND RESTRICTIONS
- -----------------------------
Because PFGI Capital is a direct subsidiary of the Bank, regulatory
authorities will have the right to examine PFGI Capital and PFGI Capital's
activities and, under certain circumstances, to impose restrictions on the
Bank or PFGI Capital. If the Federal Reserve Board or the Ohio Division of
Financial Institutions determines that the Bank's relationship with PFGI
Capital results in an unsafe and unsound banking practice, the Bank's
regulators have the authority to restrict PFGI Capital's ability to make
distributions to its stockholders, including dividends to holders of shares
of PFGI Capital Series A preferred stock.
Payment of dividends on PFGI Capital' Series A preferred stock could also be
subject to regulatory limitations if the Bank becomes less than
"well-capitalized" for purposes of regulations issued by the Federal Reserve
Board. Under these regulations, the Bank will be deemed less than
"well-capitalized" if it has a total risk-based capital ratio of less than
10.0%; a Tier 1 risk-based capital ratio of less than 6.0%; and a leverage
ratio of less than 5.0%. At December 31, 2002, the Bank's total risk-based
capital ratio was 11.36%, its Tier 1 risk-based capital ratio was 8.19% and
its leverage ratio was 6.77%. The exercise of the Federal Reserve Board's
power to restrict dividends on PFGI Capital Series A preferred stock would,
however, also have the effect of restricting the payment of dividends on PFGI
Capital's common stock and all series and classes of preferred stock. The
inability to pay dividends on PFGI Capital's common stock would prevent PFGI
Capital from meeting the statutory requirement for a REIT in effect to
distribute 90% of its taxable income and, therefore, would cause PFGI Capital
to fail to qualify for the favorable tax treatment accorded to REITs.
Legal and regulatory limitations on the payment of dividends by the Bank
could also affect PFGI Capital's ability to pay dividends to unaffiliated
third parties, including the holders of shares of PFGI Capital Series A
preferred stock. Regulatory approval is required prior to the Bank's
declaration of any dividends in excess of available retained earnings. The
amount of dividends that may be declared without regulatory approval is
further limited to the sum of net income for the current year and retained
net income for the preceding two years, less any required transfers to
surplus or common stock. At December 31, 2002, the Bank could, without prior
regulatory approval and absent contrary supervisory guidance, declare
dividends in 2003 of approximately $30.2 million plus an additional amount
equal to its net income through the date of declaration in 2003. Since PFGI
Capital is a member of the Bank's consolidated group, payment of common and
preferred dividends by the Bank and/or any member of its consolidated group
to unaffiliated third parties, including PFGI Capital's payment of dividends
to the holders of shares of PFGI Capital Series A preferred stock, would
require regulatory approval if aggregate dividends on a consolidated basis
exceed these limitations.
NOTE 9. LEGAL CONTINGENCIES
- ---------------------------
As of December 31, 2002, there was no litigation involving PFGI Capital.
-44-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 10. QUARTERLY RESULTS OF OPERATIONS - (Unaudited)
- ------------------------------------------------------
The following are quarterly results of operations for PFGI Capital for the
period from June 12, 2002 (commencement of operations) to December 31, 2002:
Fourth Third June 12 to
(In Thousands, Except Per Share Data) Quarter Quarter June 30, 2002
- -----------------------------------------------------------------------------
Interest Income $ 4,331 $ 4,846 $ 888
Provision for Loan Participation Losses - - -
------- ------- -------
Net Interest Income After Provision
for Loan Participation Losses 4,331 4,846 888
Noninterest Expense (195) (197) (56)
------- ------- -------
Income Before Income Taxes 4,136 4,649 832
Income Taxes - - -
------- ------- -------
Net Income $ 4,136 $ 4,649 $ 832
======= ======= =======
Preferred Stock Dividends $ 5,541 $ - $ -
======= ======= =======
Net Income Available to Common Shares $(1,405) $ 4,649 $ 832
======= ======= =======
Per Common Share:
Basic and Diluted $ (0.24) $ 0.78 $ 0.14
Dividends $ - $ - $ -
Quarterly earnings per share do not necessarily add to the year-to-date
amounts due to rounding.
-45-
PFGI CAPITAL CORPORATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
PART III
Items 10 through 13 are incorporated by reference to PFGI Capital's
definitive information statement to be filed with the Commission pursuant to
Regulation 14C within 120 days after the close of PFGI Capital's fiscal year
ending December 31, 2002:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
ITEM 14. 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 December 31, 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. See Index to Financial Statements on page 30 for a list of all
financial statements filed as a part of this report.
2. Schedules to the financial statements required by Article
9 of Regulation S-X have been omitted as they are not required, not
applicable or the information required thereby is set forth in the
related financial statements.
3. Exhibits:
1.0 Underwriting Agreement incorporated by reference to Exhibit 1 to
PFGI Capital's Amended Registration Statement on Form S-3/A
(Registration No. 333-88446) Filed June 6, 2002.
3.1 By-Laws incorporated by reference to Exhibit 3.2 to PFGI Capital's
Registration Statement on Form S-3 (Registration No. 333-88446)
Filed May 16, 2002.
-46-
PFGI CAPITAL CORPORATION
3.2 Amended and Restated Articles of Incorporation incorporated by
reference to Exhibit 3.5 to PFGI Capital's Amended Registration
Statement on Form S-3/A (Registration No. 333-88446) Filed June 6,
2002.
4.1 Forward Purchase Contract Agreement incorporated by reference to
Exhibit 4.2 to PFGI Capital's Amended Registration Statement on
Form S-3/A (Registration No. 333-88446) Filed June 6, 2002.
4.2 Income PRIDES incorporated by reference to Exhibit A to Exhibit 4.2
to PFGI Capital's Amended Registration Statement on Form S-3/A
(Registration No. 333-88446) Filed June 6, 2002.
4.3 Pledge Agreement incorporated by reference to Exhibit 4.4 to PFGI
Capital's Amended Registration Statement on Form S-3/A (Registration
No. 333-88446) Filed June 6, 2002.
4.4 Series A Preferred Stock Certificate incorporated by reference to
Exhibit 4.5 to PFGI Capital's Amended Registration Statement on Form
S-3/A (Registration No. 333-88446) Filed June 6, 2002.
4.5 Remarketing Agreement incorporated by reference to Exhibit 4.6 to
PFGI Capital's Amended Registration Statement on Form S-3/A
(Registration No. 333-88446) Filed June 6, 2002.
10.1 Master Participation and Servicing Agreement incorporated by
reference to Exhibit 10.1 to PFGI Capital's Amended Registration
Statement on Form S-3/A (Registration No. 333-88446) Filed June 6,
2002.
10.2 Management Agreement incorporated by reference to Exhibit 10.2 to
PFGI Capital's Amended Registration Statement on Form S-3/A
(Registration No. 333-88446) Filed June 6, 2002.
10.3 Exchange Agreement incorporated by reference to Exhibit 10.3 to
PFGI Capital's Amended Registration Statement on Form S-3/A
(Registration No. 333-88446) Filed June 6, 2002.
23.0 Consent of Independent Auditors attached to this report.
(b) Reports on Form 8-K:
None.
-47-
PFGI CAPITAL CORPORATION
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, PFGI Capital Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PFGI Capital Corporation
/s/Christopher J. Carey
-----------------------
Christopher J. Carey
President
April 10, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of PFGI
Capital Corporation and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/Christopher J. Carey Director and President April 10, 2003
- ----------------------- (Principal Executive Officer)
Christopher J. Carey
/s/James Berry Director April 10, 2003
- -----------------------
James Berry
/s/Dett Hunter Director April 10, 2003
- -----------------------
Dett Hunter
/s/Mark E. Magee Director and Secretary April 10, 2003
- -----------------------
Mark E. Magee
/s/Robert Pompey Director April 10, 2003
- -----------------------
Robert Pompey
/s/J. David Rosenberg Director April 10, 2003
- -----------------------
J. David Rosenberg
/s/John E. Rubenbauer Director April 10, 2003
- -----------------------
John E. Rubenbauer
/s/Anthony M. Stollings Director and Controller April 10, 2003
- ----------------------- (Chief Financial Officer)
Anthony M. Stollings
/s/Tayfun Tuzun Director and Treasurer April 10, 2003
- -----------------------
Tayfun Tuzun
-48-
PFGI CAPITAL CORPORATION
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 annual report on Form 10-K of PFGI Capital;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 function):
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
annual 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: April 10, 2003 /s/Christopher J. Carey
-----------------------------
Christopher J. Carey
President
(Principal Executive Officer)
-49-
PFGI CAPITAL CORPORATION
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 annual report on Form 10-K of PFGI Capital;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 function):
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
annual 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: April 10, 2003 /s/Anthony M. Stollings
-----------------------------
Anthony M. Stollings
Controller
(Principal Financial Officer)
-50-
PFGI CAPITAL CORPORATION
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 Annual Report of PFGI Capital Corporation ("PFGI Capital") on Form 10-K
for the period ending December 31, 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)
April 10, 2003
-51-
PFGI CAPITAL CORPORATION
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 Annual Report of PFGI Capital Corporation ("PFGI Capital") on Form 10-K
for the period ending December 31, 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)
April 10, 2003
-52-