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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended Commission File
June 30, 2003 1-08019-01
PFGI CAPITAL CORPORATION
Incorporated Under IRS Employer I.D.
The Laws of Maryland No. 04-3659419
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value = 5,940,000
Series A Preferred Stock, $25.00 Stated Value = 6,600,000
(As of July 31, 2003)
-1-
PFGI CAPITAL CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Shareholders' Equity . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 22
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
PFGI CAPITAL CORPORATION
BALANCE SHEETS
June 30, December 31,
2003 2002
(Dollars In Thousands) (unaudited)
- ---------------------------------------------------------------------------------
ASSETS
Commercial Mortgage Loan Participations $ 324,930 $ 325,005
Reserve for Loan Participation Losses (3,249) (3,250)
--------- ---------
Net Commercial Mortgage Loan Participations 321,681 321,755
Cash and Due From Banks 7,021 5,357
Interest Receivable 1,198 1,107
Accounts Receivable - The Provident Bank 126 279
Other Assets 20 17
--------- ---------
TOTAL ASSETS $ 330,046 $ 328,515
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other Liabilities $ 15 $ -
Shareholders' Equity:
Series A Preferred Stock, $25 Stated Value,
6,600,000 Shares Authorized, Issued and Outstanding 165,000 165,000
Common Stock, $.01 Par Value, 5,940,000 Shares
Authorized, Issued and Outstanding 59 59
Capital Surplus 159,380 159,380
Retained Earnings 5,592 4,076
--------- ---------
Total Shareholders' Equity 330,031 328,515
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 330,046 $ 328,515
========= =========
See notes to financial statements.
-3-
PFGI CAPITAL CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Six Period From
Months Ended Months Ended June 12, 2002 to
(In Thousands, Except Per Share Data) June 30, 2003 June 30, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------
Interest Income:
Interest on Loan Participations $ 4,051 $ 8,284 $ 888
Interest on Cash Deposit 41 63 -
------- ------- -----
Total Interest Income 4,092 8,347 888
Provision for Loan Participation Losses - - -
------- ------- -----
Net Interest Income After Provision
for Loan Participation Losses 4,092 8,347 888
Noninterest Expense:
Loan Servicing Fees 100 201 31
Management Fees 79 160 25
Other Noninterest Expense 50 76 -
------- ------- -----
229 437 56
------- ------- -----
Income Before Income Taxes 3,863 7,910 832
Income Taxes - - -
------- ------- -----
Net Income / Comprehensive Income $ 3,863 $ 7,910 $ 832
======= ======= =====
Preferred Stock Dividends $ 3,197 $ 6,394 $ -
======= ======= =====
Net Income Available to Common Shares $ 666 $ 1,516 $ 832
======= ======= =====
Per Common Share:
Basic $ 0.11 $ 0.26 $ 0.14
Diluted $ 0.11 $ 0.26 $ 0.14
Dividends $ - $ - $ -
See notes to financial statements.
-4-
PFGI CAPITAL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Preferred Common Capital Retained
(In Thousands) Stock Stock Surplus Earnings Total
- -------------------------------------------------------------------------------------------
Balance at June 12, 2002 $ - $ - $ - $ - $ -
Issuance of Common Stock 59 164,941 165,000
Issuance of Preferred Stock 165,000 165,000
Offering Costs of Preferred Stock (4,453) (4,453)
Net Income 832 832
-------- ------ --------- --------- ---------
Balance at June 30, 2002 $165,000 $ 59 $ 160,488 $ 832 $ 326,379
======== ====== ========= ========= =========
Balance at January 1, 2003 $165,000 $ 59 $ 159,380 $ 4,076 $ 328,515
Dividends Paid on Preferred Stock (6,394) (6,394)
Net Income 7,910 7,910
-------- ------ --------- --------- ---------
Balance at June 30, 2003 $165,000 $ 59 $ 159,380 $ 5,592 $ 330,031
======== ====== ========= ========= =========
See notes to financial statements.
-5-
PFGI CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Period From
Months Ended June 12, 2002 to
(In Thousands) June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------
Operating Activities:
Net Income $ 7,910 $ 832
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Increase in Interest Receivable (91) (1,252)
(Increase) Decrease in Accounts Receivable
and Other Assets 150 (29,942)
Increase in Other Liabilities 15 450
--------- ---------
Net Cash Provided By (Used In)
Operating Activities 7,984 (29,912)
Investing Activities:
Net (Increase) Decrease in Loan Participations 74 (130,635)
Financing Activities:
Proceeds from Issuance of Preferred Stock - 165,000
Offering Costs of Preferred Stock - (4,453)
Dividends Paid to Preferred Shareholders (6,394) -
--------- ---------
Net Cash Provided By (Used In)
Financing Activities (6,394) 160,547
Increase in Cash and Cash Equivalents 1,664 -
Cash at Beginning of Period 5,357 -
--------- ---------
Cash and Cash Equivalents at End of Period $ 7,021 $ -
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ - $ -
Income Taxes - -
Non-Cash Activity:
Exchange of Common Stock for Loan Participations - 165,000
See notes to financial statements.
-6-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
- --------------------
PFGI Capital Corporation (PFGI Capital) is a Maryland corporation
incorporated on May 9, 2002. All of PFGI Capital's Common Stock is owned by
The Provident Bank (the Bank). The principal business objective of PFGI
Capital is to acquire, hold, and manage commercial mortgage loan assets and
other authorized investments that will generate net income for distribution
to PFGI Capital's stockholders. As such, management views its financial
condition and results of operations as one business segment. PFGI Capital
has elected to be treated as a real estate investment trust (REIT) for
federal income tax purposes. As a REIT, PFGI Capital generally is not liable
for federal income tax to the extent that it distributes its income to its
stockholders and continues to meet a number of other requirements.
The Bank, an Ohio state-chartered member bank of the Federal Reserve System,
is the main subsidiary of Provident Financial Group, Inc. (Provident) and
provides full-service retail and commercial banking operations. PFGI
Capital, the Bank and Provident's executive offices are located at One East
Fourth Street, Cincinnati, Ohio 45202, and its Investors Relations telephone
number is (513)345-7102 or (800)851-9521.
NOTE 2. BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited financial statements reflect all adjustments,
consisting of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position, the
results of operations, changes in shareholders' equity and cash flows for
the periods presented. These financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission and, therefore, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States (GAAP) have
been omitted. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect amounts reported in
the financial statements. Actual results could differ from those estimates.
The financial statements and notes thereto appearing in PFGI Capital's 2002
annual report on Form 10-K, which include descriptions of significant
accounting policies, should be read in conjunction with these interim
financial statements.
NOTE 3. LOAN PARTICIPATIONS AND RESERVE FOR LOAN PARTICIPATION LOSSES
- ---------------------------------------------------------------------
Participations in loans are generally purchased from the Bank at the Bank's
carrying value, which approximates fair value. Carrying value is the
principal amount outstanding plus accrued interest. A reserve for loan
participation losses is transferred from the Bank to PFGI Capital at the
-7-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
time participations are transferred. Loans sold back to the Bank are
accompanied by a transfer of the reserve for those loans from PFGI Capital
to the Bank. The reserve for loan participation losses reflects management's
judgment as to the level considered appropriate to absorb inherent losses in
the loan participation portfolio. PFGI Capital did not have any
nonperforming assets or impaired loans during the first six months of 2003
or for the period from June 12, 2002 to June 30, 2002.
The following table sets forth an analysis of the reserve for loan
participation losses for the periods indicated:
Three Six Period From
Months Ended Months Ended June 12, 2002 to
(In Thousands) June 30, 2003 June 30, 2003 June 30, 2002
- -------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,247 $ 3,250 $ -
Transferred Reserves, Net 2 (1) 2,992
Provision for Loan Losses - - -
Loans Charged Off - - -
Recoveries - - -
------- ------- -------
Balance at End of Period $ 3,249 $ 3,249 $ 2,992
======= ======= =======
NOTE 4. EARNINGS PER COMMON SHARE
- ---------------------------------
Basic earnings per common share is the amount of earnings for the period
available to each share of Common Stock outstanding during the reporting
period. Diluted earnings per common share is the amount of earnings
available to each share of Common Stock outstanding during the reporting
period adjusted for the potential issuance of common shares for stock
options, convertible debt, etc. The earnings available to each share of
Common Stock has been reduced by any Series A Preferred Stock dividend. PFGI
Capital has no stock options or convertible debt or other potential equity
instruments and therefore basic and diluted earnings per share are
calculated on the same basis. The Bank owns all of the issued and
outstanding Common Stock of PFGI Capital.
The following table sets forth the computation of basic and diluted earnings
per common share for the periods indicated:
Three Six Period From
Months Ended Months Ended June 12, 2002 to
(In Thousands, Except Per Share Data) June 30, 2003 June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------------------
Net Income $ 3,863 $ 7,910 $ 832
Less Preferred Stock Dividends (3,197) (6,394) -
------- ------- -------
Income Available to Common Shareholder $ 666 $ 1,516 $ 832
======= ======= =======
Weighted-Average Common Shares Outstanding 5,940 5,940 5,940
======= ======= =======
Basic and Diluted Earnings Per Share $ 0.11 $ 0.26 $ 0.14
======= ======= =======
-8-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 5. REGISTRATION AND ISSUANCE OF PRIDES
- -------------------------------------------
Provident and PFGI Capital registered 6,000,000 PRIDES pursuant to a
Registration Statement filed with the Securities Exchange Commission which
was declared effective on June 6, 2002. In addition, the managing
underwriter, Merrill Lynch & Co., was permitted to purchase up to an
additional 600,000 PRIDES to cover over-allotments. Provident and PFGI
Capital sold the 6,000,000 original PRIDES effective June 12, 2002 and the
600,000 over-allotment PRIDES effective July 2, 2002. The offering was
subsequently terminated as all registered PRIDES had been sold.
Gross proceeds from the sale of PRIDES were $165 million. The underwriting
discount and expenses incurred from the issuance of the PRIDES totaled
$6,542,000 of which 85%, or $5,561,000, was allocated to PFGI Capital. The
remaining 15% was allocated to Provident as its share of the PRIDES
transaction.
PFGI Capital used all of the net proceeds it received from the sale of the
PRIDES for the purchase of participation interests in commercial mortgage
loans from the Bank. The Bank used the proceeds from the sale of the
participation interests for general corporate purposes, including working
capital and funding of asset growth.
NOTE 6. DESCRIPTION OF PRIDES
- -----------------------------
Each PRIDES has a stated amount of $25.00 per unit and is comprised of two
components - a 3-year forward purchase commitment (the Purchase Contract)
and PFGI Capital Series A Preferred Stock.
Each Purchase Contract obligates the holder to buy, on August 17, 2005, for
$25.00, a number of newly issued shares of Provident Common Stock equal to
the settlement rate. The settlement rate will be calculated as follows:
o if the applicable market value of Provident Common Stock is equal to or
greater than $29.0598, the settlement rate will be .8603;
o if the applicable market value of Provident Common Stock is between
$29.0598 and $24.42, the settlement rate will be equal to the $25.00
stated amount divided by the applicable market value; and
o if the applicable market value is less than or equal to $24.42, the
settlement rate will be 1.0238.
"Applicable market value" is defined as the average of the closing price per
share of Provident Common Stock on each of the twenty consecutive trading
days ending on the fifth trading day immediately preceding August 17, 2005.
Under the Purchase Contract, Provident will also make quarterly contract
adjustment payments to the PRIDES holders at an annualized rate of 1.25% of
the stated amount ($0.3125 per share).
-9-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
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:
o the Bank becomes less than "adequately capitalized" according to
regulations established by the Federal Reserve Board pursuant to the
Federal Deposit Insurance Corporation Investment Act or as determined by
the Ohio Division of Financial Institutions pursuant to the Ohio Banking
Code and regulations thereunder;
o the Bank is placed into conservatorship or receivership;
o the Federal Reserve Board, in its sole discretion, directs such exchange
in writing, and, even if Provident Bank is not less than "adequately
capitalized," the Federal Reserve Board or the Ohio Division of Financial
Institutions, as the case may be, anticipates the Bank becoming less than
"adequately capitalized" in the near term; or
-10-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
o the Federal Reserve Board, in its sole discretion, or the Ohio Division
of Financial Institutions, in its sole discretion, directs such exchange
in writing in the event that the Bank has a Tier 1 risk-based capital
ratio of less than 5.0%.
Additional information concerning the PFGI Capital's Series A Preferred
Stock may be found in its Registration Statement on Form S-3, as amended,
effective June 6, 2002.
NOTE 7. RELATED PARTY TRANSACTIONS
- ----------------------------------
PFGI Capital holds a 95% participation interest through a participation
agreement with the Bank in certain loans originated by the Bank and its
subsidiaries. Generally, the participation interests are in commercial
mortgage loans secured by real property that were either directly
underwritten by the Bank and its subsidiaries or acquired by the Bank. PFGI
Capital expects to continue to purchase such interests in the future from
the Bank under the terms of the participation agreement.
The participation agreement also provides for the Bank to service the
commercial mortgage loans underlying the participations held by PFGI Capital
in a manner substantially the same for similar work performed by the Bank
for transactions on its own behalf. The servicing fee that the Bank charges
is .125% per year of the average daily outstanding principal balance of the
commercial mortgage loans underlying the participation interests. Loan
servicing costs incurred by PFGI Capital totaled $201,000 and $31,000 for
the first six months of 2003 and for the period from June 12, 2002 to June
30, 2002, respectively.
A summary of loan participation activity between the Bank and PFGI Capital
for the periods indicated follows:
Three Six Period From
Months Ended Months Ended June 12, 2002 to
(In Thousands) June 30, 2003 June 30, 2003 June 30, 2002
- ---------------------------------------------------------------------------------------------
Principal Balance at Beginning of Period $ 324,744 $ 325,005 $ -
Transfers of Loan Participations
From Bank to PFGI Capital 38,121 42,747 298,627
Loan Participation Advances 4,897 9,725 -
Transfer of Loan Participations
From PFGI Capital to the Bank (6,054) (11,126) -
Loan Participation Payments (36,778) (41,421) -
--------- --------- ---------
Principal Balance at End of Period $ 324,930 $ 324,930 $ 298,627
========= ========= =========
-11-
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 balance
of the commercial mortgage loans underlying the participation interests.
Management fees incurred by PFGI Capital total $160,000 and $25,000 for the
first six months of 2003 and for the period from June 12, 2002 to June 30,
2002, respectively.
The Bank owns 100% of the Common Stock of PFGI Capital. Accordingly, the
Bank will receive all common dividends paid, if any, by PFGI Capital.
As of June 30, 2003 and December 31, 2002, PFGI Capital had an
interest-bearing deposit account of $7,021,000 and $5,357,000, respectively,
at the Bank and a net receivable of $126,000 and $279,000, respectively,
from the Bank.
NOTE 8. LEGAL CONTINGENCIES
- ---------------------------
On May 3, 2003, a purported class action was filed in the U.S. District
Court for the Southern District of Ohio by shareholder Silverback Master
Ltd. against Provident, PFGI Capital, Provident's President, Robert L.
Hoverson, Provident's Chief Financial Officer, Christopher J. Carey, and
Allen L. Davis and John R. Farrenkopf, former officers of Provident, on
behalf of all purchasers of PRIDES in or traceable to a June 6, 2002
offering of those securities registered with the Securities and Exchange
Commission and extending to March 5, 2003. This action is based upon
circumstances involved in a restatement of earnings announced by Provident
on March 5, 2003. It alleges violations of securities laws by the defendants
in Provident's financial disclosures during the period from March 30, 1998
through March 5, 2003 and in the June 2002 offering. The suit seeks an
unspecified amount of compensatory damages and/or rescission of purchases of
those securities.
NOTE 9. ACCOUNTING PRONOUNCEMENTS EFFECTIVE FOR FUTURE PERIODS
- --------------------------------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities". This
Interpretation of Accounting Research Bulletin No. 51 (ARB 51),
"Consolidated Financial Statements," addresses consolidation by business
enterprises where ownership interests in an entity may vary over time or, in
many cases, consolidation of special-purpose entities (SPEs). To be
consolidated for financial reporting, these entities must have certain
characteristics. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. This Interpretation requires existing unconsolidated
-12-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
variable interest entities to be consolidated by their primary beneficiaries
if the entities do not effectively disperse risks among parties involved. An
enterprise that holds significant variable interests in such an entity, but
is not the primary beneficiary, is required to disclose certain information
regarding its interests in that entity. This Interpretation applies in the
first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds an interest that it
acquired before February 1, 2003. It also applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. The
adoption of this Interpretation is not expected to have a material impact on
PFGI Capital's results of operations or financial condition.
In April 2003, FASB issued Statement of Financial Accounting Standards No.
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." Statement 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement 133 "Accounting for Derivative Instruments and Hedging
Activities." Statement 149 amends Statement 133 for decisions made (1) as
part of the Derivatives Implementation Group process that effectively
required amendments to Statement 133, (2) in connection with other FASB
projects dealing with financial instruments, and (3) in connection with
implementation issues raised in relation to the application of the
definition of a derivative. Statement 149 is effective for contracts entered
into or modified after June 30, 2003, and hedging relationships designated
after June 30, 2003. However, the provisions of Statement 149 that merely
represent the codification of previous Derivatives Implementation Group
decisions, are already effective and should continue to be applied in
accordance with their prior respective effective dates. The adoption of
Statement 149 is not expected to have a material impact on PFGI Capital's
results of operations or financial condition.
In May 2003, FASB issued Statement 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." Statement
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability. Many of those instruments were previously
classified as equity. Statement 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
Restatement is not permitted. The adoption of Statement 150 is not expected
to have a material impact on PFGI Capital's results of operations or
financial condition.
-13-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
PFGI Capital is a Maryland corporation that was incorporated on May 9, 2002.
PFGI Capital's principal business objective is to acquire, hold, and manage
mortgage assets and other authorized investments that will generate net
income for distribution to its shareholders. Since operations commenced in
June 2002, PFGI Capital has been operating as a REIT for federal income tax
purposes.
PFGI Capital is a subsidiary of the Bank, which is owned by Provident. All
of PFGI Capital's day-to-day activities and the servicing of the loans
underlying its participation interests are administered by the Bank.
The participation agreement between the Bank and PFGI Capital requires the
Bank to service PFGI Capital's loan portfolio in a manner substantially the
same as for similar work performed by the Bank for transactions on its own
behalf. The Bank collects and remits principal and interests payments,
maintains perfected collateral positions, and submits and pursues insurance
claims. The Bank also provides to PFGI Capital accounting and reporting
services as required. The Bank is required to pay all expenses related to
the performance of its duties under the participation agreement.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that are subject
to numerous assumptions, risks or uncertainties. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Forward-looking statements may be identified by words such as
estimates, anticipates, projects, plans, expects, intends, believes, should
and similar expressions and by the context in which they are used. Such
statements are based upon current expectations of the company and speak only
as of the date made. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and/or rapid changes in interest rates; prepayments
of loans with fixed interest rates, resulting in reinvestment of the
proceeds in loans with lower interest rates; significant changes in the
anticipated economic scenario which could materially change anticipated
credit quality trends; adverse economic and other developments in states
where loans are concentrated; the possible exchange of Series A Preferred
Stock for preferred shares of the Bank at the direction of the Federal
Reserve Board or the Ohio Division of Financial Institutions if the Bank
becomes undercapitalized; the failure of PFGI Capital to maintain its status
as a REIT for federal income tax purposes; and significant changes in
accounting, tax, or regulatory practices or requirements and factors noted
in connection with forward-looking statements. Additionally, borrowers of
loan participations could suffer unanticipated losses without regard to
general economic conditions. The result of these and other factors could
cause differences from expectations in the level of defaults, changes in
risk characteristics of the loan participation portfolio, and changes in the
-14-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
provision for loan participation losses. PFGI Capital undertakes no
obligations to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
SUMMARY
PFGI Capital reported net income available to common shareholders of
$666,000, or $0.11 per common share, and $832,000, or $0.14 per common
share, for the second quarter of 2003 and for the period from June 12, 2002
to June 30, 2002, respectively. Cash dividends of $3,197,000, or $0.4844 per
share, were paid to the Series A Preferred shareholders during the second
quarter of 2003. No dividends were paid to the Series A Preferred
shareholders during the period from June 12, 2002 to June 30, 2003.
For the first six months of 2003, net income available to common
shareholders was $1,516,000, or $0.26 per common share. Cash dividends of
$6,394,000, or $0.9688 per share, were paid to the Series A Preferred
shareholders during this six month period. No dividends have been paid to
the common shareholders since the inception of PFGI Capital.
At June 30, 2003 and December 31, 2002, PFGI Capital had total assets of
$330,046,000 and $328,515,000, respectively. These assets were primarily
comprised of net commercial mortgage loan participations totaling
$321,681,000 and $321,755,000 as of the same dates. These loan
participations were all acquired from the Bank. Equity for PFGI Capital was
$330,031,000 and $328,515,000 as of June 30, 2003 and December 31, 2002,
respectively.
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 $4,092,000 and $8,347,000 for the three-month and
six-month periods ended June 30, 2003, respectively. For the period from
June 12, 2002 to June 30, 2002, total interest income was $888,000. The
yield on the loan participation portfolio as of June 30, 2003 was 4.97%.
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PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 during the first six months
of 2003 or during the period from June 12, 2002 to June 30, 2002 as all loan
participations were transferred to PFGI Capital with a reserve and there
were no charge-offs.
Noninterest Income and Expense
PFGI Capital did not record any noninterest income during the first two
quarters of 2003 or for the period from June 12, 2002 to June 30, 2002.
Noninterest expense of $229,000 and $437,000 was recognized during the
three-month and six-month periods ended June 30, 2003, respectively, and
$56,000 was recognized for the period from June 12, 2002 to June 30, 2002.
Noninterest expense is comprised primarily of compensation paid to the Bank
for loan servicing and management fees which totaled $179,000 during the
second quarter of 2003, $361,000 during the first six months of 2003, and
$56,000 for the period from June 12, 2002 to June 30, 2002. On an annual
basis, loan servicing fees are assessed at a rate of 0.125% of the average
daily outstanding principal balance of the loan participations and
management fees are assessed at a rate of 0.10% of the average daily
outstanding principal balance of loan participations.
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 June 30, 2003 and December 31, 2002, PFGI Capital had $321,681,000 and
$321,755,000, respectively, 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.
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PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows the geographic distribution of the loans
underlying the commercial mortgage loan participations as of June 30, 2003:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
State of Loans (In Thousands) Balance
- ----------------------------------------------------------------------------
Ohio 159 $ 270,604 83.28%
Florida 12 17,425 5.36
Kentucky 6 5,006 1.54
All Others 13 31,895 9.82
--- --------- ------
Total 190 $ 324,930 100.00%
=== ========= ======
The following table shows the composition of the commercial mortgage loan
participations by property type at June 30, 2003:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
Property Type of Loans (In Thousands) Balance
- ---------------------------------------------------------------------------
Shopping / Retail 44 $ 105,647 32.51%
Office / Warehouse 61 105,334 32.42
Apartments 32 43,839 13.49
Hotel / Motel 10 33,322 10.26
Residential Development 14 10,649 3.28
Healthcare Facilities 3 8,009 2.46
Other Commercial Properties 26 18,130 5.58
--- --------- ------
Total 190 $ 324,930 100.00%
=== ========= ======
Some of the loans underlying the commercial mortgage loan participations
bear interest at fixed rates, and some bear interest at variable rates based
on indices such as LIBOR and the prime rate. The following tables show data
with respect to interest rates of the loans underlying the commercial
mortgage loan participations at June 30, 2003:
Fixed Rate Variable Rate
------------------------------------- -------------------------------------
Aggregate Percentage Aggregate Percentage
Number Principal by Aggregate Number Principal by Aggregate
of Balance Principal of Balance Principal
Interest Rate Loans (In Thousands) Balance Loans (In Thousands) Balance
- ------------------------------------------------------------------------------------------------
Under 5.00% 2 $ 827 3.17% 100 $ 219,229 73.35%
5.00% to 5.99% 1 6,734 25.84 13 10,521 3.52
6.00% to 6.99% 2 789 3.03 22 28,743 9.62
7.00% to 7.99% 3 7,273 27.91 27 20,469 6.85
Over 8.00% 6 10,436 40.05 14 19,909 6.66
-- -------- ------ --- --------- ------
14 $ 26,059 100.00% 176 $ 298,871 100.00%
== ======== ====== === ========= ======
Aggregate Percentage Weighted
Number Principal by Aggregate Average
of Balance Principal Interest
Interest Type Loans (In Thousands) Balance Rate
---------------------------------------------------------------------------
Fixed Rate Loans 14 $ 26,059 8.02% 7.46%
Variable Rate Loans 176 298,871 91.98 4.75
--- --------- ------ ----
Total 190 $ 324,930 100.00% 4.97%
=== ========= ====== ====
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PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Assets
As of June 30, 2003 and December 31, 2002, PFGI Capital had cash of
$7,021,000 and $5,357,000, respectively, in an interest bearing deposit
account at the Bank. As of June 30, 2003, the account was yielding a rate of
1.10%.
Additionally, PFGI Capital had interest receivable of $1,198,000 and
$1,107,000, accounts receivable of $126,000 and $279,000, and prepaid
expenses of $20,000 and $17,000 as of June 30, 2003 and December 31, 2002,
respectively.
INTEREST RATE RISK MANAGEMENT
PFGI Capital's income consists primarily of interest income on participation
interests in commercial mortgage loans. PFGI Capital does not intend to use
any derivative products to manage its interest rate risk. If there is a
decline in market interest rates, PFGI Capital may experience a reduction in
interest income on its participation interests and a corresponding decrease
in funds available to be distributed to shareholders. The reduction in
interest income may result from downward adjustments of the indices upon
which the interest rates on loans are based and from prepayments of loans
with fixed interest rates, resulting in reinvestment of the proceeds in
lower-yielding participation interests. Further information regarding market
risk can be found under Item 3 of this report.
CREDIT QUALITY
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 and risk management 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
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
-18-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
affects the credit risk of the underlying loans within the participation
interests. Approximately 90% 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 /
Warehouse" property types represent approximately 33% and 32% 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 for the periods indicated:
Three Six Period From
Months Ended Months Ended June 12, 2002 to
(In Thousands) June 30, 2003 June 30, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,247 $ 3,250 $ -
Transferred Reserves, Net 2 (1) 2,992
Provision for Loan Losses - - -
Loans Charged Off - - -
Recoveries - - -
------- ------- ---------
Balance at End of Period $ 3,249 $ 3,249 $ 2,992
======= ======= =========
Net Charge-Offs to Average Commercial
Mortgage Loan Participations 0.00% 0.00% 0.00%
======= ======= =========
Reserve for Loan Participation Losses to
Commercial Mortgage Loan Participations 1.00% 1.00% 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 June 30, 2003, 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 June 30,
2003.
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.
-19-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 $3,197,000 are expected to
be paid each quarter.
As an alternative to distributing a cash dividend to its common shareholder,
PFGI Capital has the option of distributing 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. PFGI Capital and its common
shareholder used the consent dividend procedure in 2002. As a result, PFGI
Capital will have additional funds available for investment purposes and/or
for distribution to its preferred shareholders.
-20-
PFGI CAPITAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Management is concerned with the timing and magnitude of the repricing of
assets and liabilities. It is management's objective to attempt to control
risks associated with interest rate movements. Market risk is the risk of
loss from adverse changes in market prices and interest rates. Market risk
arises primarily from interest rate risk inherent in lending and other
related activities. Management actively monitors interest rate risk
exposure. Management reviews, among other things, the sensitivity of assets
and liabilities, as applicable, to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, maturities of investments and anticipated loan
participation pay-offs. PFGI Capital's interest-rate-sensitive assets
consisted largely of participation interests in commercial mortgage loans.
At June 30, 2003, 8% of PFGI Capital's loan participation portfolio had
fixed interest rates. Such loans tend to increase interest rate risk. At
June 30, 2003, 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.
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 June 30, 2003, the average weighted yield on loan participations was
4.97%. Assuming that the investment in participation interests remains
level, yields on loan participations would have to decrease by more than 75
basis points before cash flows would be insufficient to cover the regular
dividend payments to holders of Preferred Stock.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was performed under the supervision and with the participation
of management, including the principal executive and financial officers, of
the effectiveness of the design and operation of PFGI Capital's disclosure
controls and procedures as of June 30, 2003. Based on that evaluation,
management, including the principal executive and financial officers,
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PFGI CAPITAL CORPORATION
concluded that PFGI Capital's disclosure controls and procedures were
effective with no significant weaknesses noted. There has been no change in
PFGI Capital's internal control over financial reporting that occurred
during PFGI Capital's quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, PFGI Capital's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Registrant's annual meeting of shareholders was held on May 27, 2003. The
following matters were voted upon and approved by the shareholders as
indicated below:
Votes Votes Votes
For Against Abstained
- -----------------------------------------------------------------------------------
Election of the following directors:
(a) T. James Berry 5,940,000 0 0
(b) Christopher J. Carey 5,940,000 0 0
(c) Dett P. Hunter 5,940,000 0 0
(d) Mark E. Magee 5,940,000 0 0
(e) Robert W. Pompey 5,940,000 0 0
(f) J. David Rosenberg 5,940,000 0 0
(g) John E. Rubenbauer 5,940,000 0 0
(h) Anthony M. Stollings 5,940,000 0 0
(i) Tayfun Tuzun 5,940,000 0 0
Approval of Ernst & Young LLP as PFGI Capital's
independent public accountants for 2003 5,940,000 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 31.1 - Section 302 of the Sarbanes-Oxley Act of 2002,
Certification of Principal Executive Officer
Exhibit 31.2 - Section 302 of the Sarbanes-Oxley Act of 2002,
Certification of Principal Financial Officer
Exhibit 32.1 - Section 906 of the Sarbanes-Oxley Act of 2002,
Certification of Principal Executive Officer
Exhibit 32.2 - Section 906 of the Sarbanes-Oxley Act of 2002,
Certification of Principal Financial Officer
(b) Reports on Form 8-K:
Form 8-K (Items 7 and 9) filed on July 22, 2003
All other items required in Part II of this form have been omitted since
they are not applicable or not required.
-22-
PFGI CAPITAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PFGI Capital Corporation
(Registrant)
Date: August 14, 2003 /s/Anthony M. Stollings
-----------------------
Anthony M. Stollings
Chief Financial Officer and Treasurer
-23-