ITEM 1. BUSINESS ----------------
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
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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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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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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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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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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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
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;
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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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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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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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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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.
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.
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
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
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
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
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
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.
ITEM 2. PROPERTIES ------------------
None
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -------------------------
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -----------------------------------------------------------
None in the fourth quarter
PFGI CAPITAL CORPORATION
ITEM II
ITEM 5.
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.
-------------------------------------- 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."
PFGI CAPITAL CORPORATION
ITEM 6.
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
PFGI CAPITAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.
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.
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.
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% === ========= ======
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------
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
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
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.
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 ------- ------- 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.
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.
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.
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.
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
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
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 ======
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.
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:
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 ========
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.
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.
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.
PFGI CAPITAL CORPORATION
ITEM 9.
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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -----------------------------------------------------------
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION -------------------------------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND ----------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS ---------------------------
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------
ITEM 14.
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.
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.
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.
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
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)
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)
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
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