UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
1-12897
-------
(Commission File Number)
PROVIDIAN FINANCIAL CORPORATION
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2933952
- ------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
201 Mission Street, San Francisco, California 94105
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 543-0404
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of October 31, 1997, there were 95,138,020 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
September 30, 1997
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial
Condition.......................................... 3
Condensed Consolidated Statements of Income......... 4
Condensed Consolidated Statements of Changes in
Shareholders' Equity............................... 5
Condensed Consolidated Statements of Cash Flows..... 6
Notes to Condensed Consolidated Financial
Statements......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 25
Item 5. Other Information..................................... 25
Item 6. Exhibits and Reports on Form 8-K...................... 25
Signatures................................................................ 26
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
September 30 December 31
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 128,415 $ 82,946
Federal funds sold 275,760 172,350
Investment securities at cost (which approximates market value) 171,303 7,173
Loans held for sale 95,425 739,706
Loans receivable, less allowance for possible credit losses of $143,089
in 1997 and $114,540 in 1996 2,859,913 2,835,388
Due from securitizations 375,451 252,899
Interest receivable 72,176 56,864
Premises and equipment, less accumulated depreciation and amortization 58,150 49,870
Other assets 161,772 154,546
----------------- -----------------
Total assets $ 4,198,365 $ 4,351,742
================= =================
LIABILITIES:
Deposits $ 3,078,849 $ 3,390,112
Term federal funds purchased 68,000 51,000
Notes payable to banks 109,000 115,000
Note payable to affiliates - 42,500
Long term notes payable - 50,000
Accrued expenses and other liabilities 236,353 219,986
----------------- -----------------
Total liabilities 3,492,202 3,868,598
Company obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated deferrable interest debentures
of the Company (Capital Securities) 160,000 -
SHAREHOLDERS' EQUITY:
Preferred Stock
1996- 7.25% Cumulative Preferred Stock, nonparticipating, nonvoting,
par value $1.00 per share--authorized 63,269 shares, issued and
outstanding 63,269 shares - 63
Common Stock,
1997-par value $.01 per share, authorized 400,000,000 shares, issued
and outstanding 95,231,251 shares as of September 30, 1997; 1996-par
value $1.00 per share, authorized 5,000 shares, issued and outstanding
5,000 shares 954 5
Additional paid-in capital 1,798 63,706
Retained earnings 550,603 419,370
Common stock held in treasury - at cost:
1997 - 194,069 shares (7,192) -
----------------- -----------------
Total shareholders' equity 546,163 483,144
----------------- -----------------
Total liabilities and shareholders' equity $ 4,198,365 $ 4,351,742
================= =================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- ----------------------------------
(Dollars in thousands) 1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 135,799 $ 145,852 $ 414,340 $ 417,386
Investment securities 6,888 2,023 20,209 7,499
--------------- --------------- --------------- ---------------
Total Interest Income 142,679 147,875 434,549 424,885
Interest expense:
Deposits 40,499 31,525 122,466 97,627
Borrowings 3,749 14,297 16,201 42,825
--------------- --------------- --------------- ---------------
Total Interest Expense 44,248 45,822 138,667 140,452
Net Interest Income 98,431 102,053 295,882 284,433
Provision for possible credit losses 43,071 37,510 115,823 89,692
--------------- --------------- --------------- ---------------
Net Interest Income After Provision
for Possible Credit Losses 55,360 64,543 180,059 194,741
Other income:
Loan servicing income 111,320 77,436 296,146 204,068
Credit product fee income 67,881 33,612 150,633 86,463
Other 201 536 702 7,059
--------------- --------------- --------------- ----------------
179,402 111,584 447,481 297,590
Other expenses:
Salaries and employee benefits 54,003 39,513 142,441 107,518
Solicitation 39,717 26,986 107,730 86,842
Occupancy, furniture and equipment 9,764 7,767 27,563 18,898
Data processing and communication 13,449 9,749 37,235 26,292
Other 38,868 27,842 92,747 68,989
--------------- --------------- --------------- ----------------
155,801 111,857 407,716 308,539
--------------- --------------- --------------- ----------------
Income Before Income Taxes 78,961 64,270 219,824 183,792
Income tax expense 30,397 24,353 82,374 69,583
--------------- --------------- --------------- ----------------
Net Income $ 48,564 $ 39,917 $ 137,450 $ 114,209
=============== =============== =============== ================
Earnings per share 0.51 N/A N/A N/A
=============== =============== =============== ================
Dividends paid per share 0.05 N/A N/A N/A
=============== =============== =============== ================
Weighted average common and common
equivalent shares outstanding 95,291,014 N/A N/A N/A
=============== =============== =============== ================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands) (unaudited )
<CAPTION>
Special 7.25% Cumulative
Preferred Stock Preferred Stock Common Stock
---------------- ---------------- -------------- Additional Common Total
Shares Shares Shares Paid-In Retained Stock Held Shareholders'
(000) Amount (000) Amount (000) Amount Capital Earnings in Treasury Equity
------- -------- -------- ------- ------- ------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,290 $ 1,290 63 $ 63 5 $ 5 $ 63,706 $ 284,191 $ - $ 349,255
Net Income 114,209 114,209
Cash dividend:
Common - $4 per share (20,000) (20,000)
Preferred (2,294) (2,294)
Redemption of preferred stock (1,290) (1,290) (1,290)
------- -------- -------- ------- ------- ------ ---------- ---------- ----------- -------------
Balance at September 30, 1996 - $ - 63 $ 63 5 $ 5 $ 63,706 $ 376,106 $ - $ 439,880
======= ======== ======== ======= ======= ====== ========== ========== =========== =============
Balance at December 31, 1996 - - 63 $ 63 5 $ 5 $ 63,706 $ 419,370 $ - $ 483,144
Net Income 137,450 137,450
Cash dividend:
Common - $.05 per share (4,762) (4,762)
Preferred (1,006) (1,006)
Redemption of preferred stock (63) (63) (63,207) (63,270)
Net issuance of shares pursuant
to the Distribution Agreement 95,248 948 (499) (449) -
Purchase of 400,000 common
shares for treasury (14,616) (14,616)
Exercise of stock options (1,352) 3,168 1,816
Reimbursement relating to the
conversion of stock options 6,846 6,846
Issuance of restricted and
unrestricted stock less
forfeited shares 173 1 5,443 4,256 9,700
Deferred compensation related to
grant of restricted and
unrestricted stock (9,701) (9,701)
Amortization of deferred compensation 562 562
------- -------- -------- ------- ------- ------ ---------- ---------- ----------- -------------
Balance at September 30, 1997 - $ - - $ - 95,426 $ 954 $ 1,798 $ 550,603 $ (7,192) $ 546,163
======= ======== ======== ======= ======= ====== ========== ========== =========== =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands) (unaudited)
<CAPTION>
Nine Months Ended
September 30
---------------------------------------------
1997 1996
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 137,450 $ 114,209
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible credit losses 115,823 89,692
Depreciation and leasehold amortization 10,969 7,366
Amortization of net loan acquisition costs 28,592 12,184
Decrease in deferred income tax benefit 10,920 1,400
Increase in interest receivable (15,312) (5,087)
Change in other operating activities (84,864) 13,229
-------------------- --------------------
Net Cash Provided by Operating Activities 203,578 232,993
INVESTING ACTIVITIES:
Adjustments to reconcile net income to net cash used by investing activities:
Net issuance and repayment of receivables (1,052,994) (2,326,136)
Net proceeds from sales of receivables 1,556,590 1,950,894
Increase in due from securitizations (66,309) (75,712)
Purchases of investment securities (471,549) (2,382)
Proceeds from sales/maturities of investment securities 307,419 90
Increase in federal funds sold (103,410) (6,900)
Net purchase of premises and equipment (19,340) (19,973)
-------------------- --------------------
Net Cash Provided (Used) by Investing Activities 150,407 (480,119)
FINANCING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by financing
activities:
Net (decrease) increase in deposits (311,262) 462,151
(Decrease) increase in net borrowings under line of credit agreements (6,000) 326,000
Decrease in note payable to affiliates (42,500) (53,300)
Decrease in short-term borrowing - (129,880)
Proceeds from issuance of term federal funds 304,000 257,000
Repayment of term federal funds (287,000) (593,000)
(Decrease) increase in long-term borrowing (50,000) 50,000
Redemption of preferred stock (63,270) (1,290)
Reimbursement relating to conversion of stock options 6,846 -
Purchase of common stock for treasury (14,616) -
Dividends on preferred and common stock (5,768) (22,294)
Proceeds from the issuance of trust capital securities 160,000 -
Proceeds from exercise of stock options 1,054 -
-------------------- --------------------
Net Cash (Used) Provided by Financing Activities (308,516) 295,387
-------------------- --------------------
Net Increase in Cash and Cash Equivalents 45,469 48,261
Cash and Cash Equivalents at beginning of year 82,946 104,083
-------------------- --------------------
Cash and Cash Equivalents at End of Period $ 128,415 $ 152,344
==================== ====================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 1997 (unaudited)
Note A - Basis of Presentation
The condensed consolidated financial statements include the accounts of
Providian Financial Corporation (formerly known as Providian Bancorp, Inc.) and
its wholly owned subsidiaries (collectively referred to as the "Company"). The
Company's subsidiaries offer a range of consumer lending products, deposit
products and fee-based products and services. The principal operating
subsidiaries of the Company are First Deposit National Bank, Providian National
Bank and Providian Bank (formerly known as Providian Credit Services, Inc.), all
of which are financial institutions principally engaged in consumer lending
activities. Providian Financial Corporation also has a subsidiary, Providian
Bancorp Services, which provides administrative and customer services to its
consumer lending affiliates.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results for the year ended December 31, 1997. The notes to the
financial statements contained in the Company's registration statement on Form
10 (filed with the Securities and Exchange Commission on April 17, 1997) should
be read in conjunction with these consolidated financial statements. All
significant intercompany balances and transactions have been eliminated. Certain
prior period amounts have been reclassified to conform to the 1997 presentation.
Note B - Significant Accounting Policies
Earnings per Common Share: Historical earnings per share have not been
presented because prior to June 10, 1997 all of the Company's shares of common
stock were held by its former parent, Providian Corporation, and such
information would not be meaningful. Pro forma earnings per share for the three
and nine month periods ended September 30, 1997 and 1996 are listed below and
have been computed by dividing net income or pro forma net income for those
periods by the weighted average number of common shares outstanding for the
applicable period. In determining the pro forma number of common shares
outstanding prior to the spinoff from Providian Corporation, the number of
shares of Providian Corporation common stock was used, since shareholders of
Providian Corporation received one share of Providian Financial Corporation
common stock for each share of Providian Corporation common stock held on the
record date for the spinoff. In addition, the effects of a February 1997
transaction in which the Company issued mandatorily redeemable capital
securities and used the proceeds to repay borrowings under notes payable to
affiliates and to redeem preferred stock has been included in the calculation of
pro forma earnings per common share.
(Dollar amounts in thousands, except per
share data) For the three months ended
September 30
-----------------------------
1997 1996
------------ ------------
Net Income $48,564
Pro Forma Net Income $38,082
Pro Forma weighted average number of
shares outstanding 95,291,014 93,571,236
Pro forma earnings per share $0.51 $0.41
(Dollar amounts in thousands, except per
share data) For the nine months ended
September 30
-----------------------------
1997 1996
------------ ------------
Net Income (1) $137,450
Pro Forma Net Income $108,804
Pro Forma weighted average number of
shares outstanding 94,819,511 93,649,746
Pro forma earnings per share $1.45 $1.16
(1) Impact of pro forma adjustments not considered material.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" ("SFAS No. 128"), which establishes new computation,
presentation and disclosure guidance for earnings per share. SFAS No. 128
replaces primary and fully diluted earnings per share, under Accounting
Principles Board Opinion No. 15, "Earnings per Share," with basic and diluted
earnings per share, respectively. The Company will be required to adopt the new
SFAS No. 128 standards in the fourth quarter of 1997 and to restate prior
periods for comparative purposes. The adoption of SFAS No. 128 is not expected
to have a material effect on the Company's earnings per share.
Note C - Stock Option, Stock Purchase and Stock Ownership Plans
In June 1997, the Company adopted the Providian Financial Corporation 1997
Stock Option Plan (the "Option Plan") which authorizes grants of incentive and
nonqualified stock options to officers, key employees and non-employee
Directors. All stock options granted under the Option Plan have an exercise
price equal to the market value of the Company's common stock and a maximum term
of ten years. In connection with the spinoff from Providian Corporation, the
Company converted Providian Corporation stock options held by employees and
certain Directors into 1,937,524 Providian Financial Corporation stock options
("Rollover Options"). The conversion maintained the converted options' vesting
provisions, option periods and ratio of exercise price per option to market
value per share. No additional compensation expense was recorded as a result of
the stock option conversions. Since the spinoff, the Company has granted
3,356,598 nonqualified stock options to employees and non-employee Directors
under the Option Plan.
The Option Plan permits the issuance of a total of 10,000,000 shares of
common stock in addition to the shares issuable as a result of Rollover Options,
resulting in a maximum number of 11,937,524 shares of common stock issuable in
conjunction with the exercise of stock options. As of September 30, 1997, the
number of common shares available for future grants under the Option Plan was
6,992,460 shares. Activity under the Option Plan since adoption through
September 30, 1997 was as follows:
Number of
Number of Option Price Shares
Shares per Share Exercisable
---------- -------------- -----------
Outstanding at:
June 10, 1997 - - -
Rollover Options 1,937,524 $11.12 - 23.33 1,310,995
Granted 3,356,598 $32.11 - 38.31 -
Exercised (86,282) $17.07 - 23.33 -
Forfeited (349,058) $17.07 - 32.11 -
---------- -------------- -----------
Outstanding at
September 30, 1997 4,858,782 $11.12 - 32.11 1,310,995
========== ============== ===========
In June 1997, the Company adopted the Providian Financial Corporation Stock
Ownership Plan (the "Stock Ownership Plan") which provides for three forms of
awards to key officers, employees and Directors: nonrestricted stock, matching
restricted stock and discretionary restricted stock. A maximum of 4,000,000
shares of common stock are permitted to be issued under the Stock Ownership
Plan. Restricted stock is subject to forfeiture during the vesting period.
Matching restricted stock is granted in conjunction with nonrestricted stock and
may be forfeited in the event the nonrestricted stock is not maintained on
deposit with the Company's transfer agent. Since the spinoff from Providian
Corporation, the Company has granted 304,252 shares of restricted stock and
9,020 shares of nonrestricted stock to employees and non-employee Directors
under the Stock Ownership Plan. The market value of the restricted stock grants
was recorded as deferred compensation at the time of the grants and is being
amortized over the applicable vesting periods.
In August, 1997, the Company adopted the Providian Financial Corporation
Employee Stock Purchase Plan (the "Stock Purchase Plan") for eligible employees.
A maximum of 1,000,000 shares of common stock are permitted to be issued under
the Stock Purchase Plan. Under the Stock Purchase Plan, shares of the Company's
common stock may be purchased at the end of each offering period at 85% of the
lower of the fair market value on the first or the last day of such offering
period. Employees may purchase shares having a value not exceeding 7% of their
gross compensation during an offering period. The offering periods begin every
six months, on each January 1 and July 1, and have a duration of twelve months.
However, the first offering period starts on October 1, 1997 and ends on June
30, 1998. The Company intends to use open market puchases to provide shares for
issuance under the Stock Purchase Plan.
Note D - Asset Securitization
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"), effective for financial
asset sales occurring after December 31, 1996. Under SFAS No. 125, gains are
recognized at the time of initial sale and each subsequent sale of loan
receivables in a securitization. As a result, the Company now recognizes gains
from such loan sales as "loan servicing income" on its statement of income and
the related asset as a component of "due from securitizations" on its statement
of financial condition. As a result of the adoption of SFAS No. 125, loan
servicing income increased $5.8 million and $56.2 million during the three and
nine months ended September 30, 1997, respectively. This increase in loan
servicing income is not expected to be representative of future periods. Any
future gains that will be recognized by the Company in accordance with SFAS No.
125 will be dependent on the timing, performance and amount of future
securitizations. The increase in loan servicing income is non-recurring because,
for the first nine months of 1997, the Company recognized both excess servicing
income generated by securitized balances existing at December 31, 1996 and gains
on additional loan sales made during that period. In accordance with SFAS No.
125, prior years have not been restated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
Providian Financial Corporation and its subsidiaries (collectively referred
to as the "Company") offer a range of consumer loan products, deposit products
and fee-based products and services to customers throughout the United States.
The Company utilizes primarily direct mail and telemarketing account origination
channels and the Company is one of the twenty largest issuers of credit cards in
the United States. As of September 30, 1997 the Company had $7.8 billion of
managed unsecured revolving consumer loans outstanding. The Company also offers
secured credit card loans and home equity loans. As of September 30, 1997
secured credit card loans and managed home equity loans outstanding were $730
million and $1.0 billion, respectively. The primary factors affecting the
profitability of the Company's consumer credit products are the number of
customer accounts and outstanding loan balances, net interest margins, credit
usage, level of fee income, credit quality, and the level of solicitation,
marketing, servicing and other administrative expenses.
Forward-Looking Statements
Certain statements contained herein include forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking statements
are based on management's beliefs and assumptions and on information currently
available to management. Forward-looking statements include expressions of the
"belief," "anticipation" or "expectations" of management, as well as other
statements which are not historical fact, statements as to industry trends and
the possible or future results of operations of the Company. Forward-looking
statements are not guarantees of future performance. Such forward-looking
statements involve certain risks, uncertainties and assumptions that could cause
actual results to differ materially from those in the forward-looking
statements. The risks and uncertainties that may affect the operations,
performance and results of the Company's business include the following:
competition, delinquencies, risks related to outside vendor relationships,
dependence on funding sources, prepayment and credit risk, economic conditions
and government regulation. For additional information concerning such risks,
uncertainties, and assumptions, see "Risk Factors" in the registration statement
on Form 10 filed by the Company with the Securities and Exchange Commission on
April 17, 1997.
Earnings Summary
Net income for the quarter ended September 30, 1997 was $48.6 million, or
$0.51 per share, compared to pro forma net income of $38.1 million, or $0.41 pro
forma per share, for the quarter ended September 30, 1996. Net income for the
nine months ended September 30, 1997 was $137.5 million, or $1.45 pro forma per
share, compared to pro forma net income of $108.8 million, or $1.16 pro forma
per share, for the first nine months of 1996. As described in Note B to the
Company's condensed consolidated financial statements, the Company's historical
earnings per share have not been presented because prior to June 10, 1997 all of
the Company's common stock was held by its former parent, Providian Corporation,
and such information would not be meaningful.
The overall growth in earnings for the quarter was primarily attributable
to the growth in managed outstandings, higher net interest margins, reduced
credit losses and increases in non-interest fee income. Managed loan
outstandings increased from $8.6 billion at September 30, 1996 to $9.5 billion
as of September 30, 1997, which reflects the impact of the Company's
solicitation, marketing and customer activation efforts. On-balance sheet loans
decreased from $3.5 billion at September 30, 1996 to $3.1 billion as of
September 30, 1997, as managed loan growth was offset by the completion of loan
securitizations which, net of related amortization, increased a total of $1.4
billion during the twelve months ended September 30, 1997. Managed loans
outstanding increased from $9.2 billion as of June 30, 1997 to $9.5 billion as
of September 30, 1997, a moderate increase of 3.3% which is consistent with
industry wide growth rates and reflects previous tightening of the Company's
credit standards.
Return on average total assets for the three months ended September 30,
1997 was 1.83%, compared to 1.75% pro forma for the same period during 1996.
This higher return is primarily a result of higher net interest margins driven
by repricing of certain portfolios combined with growth of higher margin
portfolios. Return on average shareholders' equity for the three months ended
September 30, 1997 was 36.58%, compared to 41.72% pro forma for the same period
last year. This lower return on average shareholder's equity resulted from the
increase in earnings for the quarter being offset by an even greater increase in
average shareholders' equity for the quarter.
Managed Loan Portfolio
The Company's consumer loan products include unsecured and secured credit
cards, unsecured revolving lines of credit, and secured home equity lines of
credit. Since 1989, the Company has securitized unsecured credit card and
revolving lines of credit and, beginning in 1996, has securitized home equity
lines of credit. Securitized assets are not considered assets of the Company
and, therefore, are not shown on its statement of financial condition.
The Company services the accounts underlying the securitized loans and
earns a stated monthly servicing fee which generally offsets the servicing costs
incurred by the Company. The finance charge and fee revenue generated by the
securitized loans, in excess of interest paid to investors, related credit
losses, the stated servicing fee and other credit enhancement costs and program
expenses, is referred to as excess servicing income and is a component of loan
servicing income. Excess servicing income is recognized as it accrues except
that the present value of projected excess servicing income is recognized as a
gain on sale as assets are securitized. The effect of this treatment is to
reduce net interest income and the provision for credit losses, and to increase
other income, on the Company's statement of income. For the three months ended
September 30, 1997 and 1996, the net interest income was reduced by $173.6
million and $122.4 million, respectively; the provision for credit losses was
reduced by $115.8 million and $74.4 million, respectively; and other income was
increased by $57.8 million and $48 million, respectively. For the nine months
ended September 30, 1997 and 1996, the net interest income was reduced by $474.1
million and $329.2 million, respectively; the provision for credit losses was
reduced by $348.6 million and $189.3 million, respectively; and other income was
increased by $125.5 million and $139.9 million, respectively.
The following summarizes selected data on the Company's managed consumer
loan portfolio:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - MANAGED CONSUMER LOAN PORTFOLIO INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------- -------------------------------------
(Dollars in thousands) 1997 1996 1997 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 3,098,427 $ 3,492,803 $ 3,098,427 $ 3,492,803
Securitized consumer loans 6,444,925 5,090,000 6,444,925 5,090,000
----------------- ----------------- ----------------- ----------------
Total managed consumer loan portfolio $ 9,543,352 $ 8,582,803 $ 9,543,352 $ 8,582,803
================= ================= ================= ================
Average Balances:
On-balance sheet consumer loans $ 3,028,584 $ 3,370,640 $ 3,152,565 $ 3,461,140
Securitized consumer loans 6,365,213 4,841,100 6,098,479 4,095,737
----------------- ----------------- ----------------- ----------------
Total average managed consumer loan portfolio $ 9,393,797 $ 8,211,740 $ 9,251,044 $ 7,556,877
================= ================= ================= ================
Operating Data and Ratios: (1) Pro Forma Pro Forma
--------- ---------
Reported:
Average earning assets $ 3,484,670 $ 3,575,778 $ 3,633,706 $ 3,713,674
Return on average assets 4.73% 3.96% 4.39% 3.73%
Net interest margin (2) 11.30% 11.04% 10.86% 9.86%
Managed:
Average earning assets $ 9,849,883 $ 8,416,878 $ 9,732,185 $ 7,809,411
Return on average assets 1.83% 1.75% 1.75% 1.82%
Net interest margin (2) 11.05% 10.51% 10.55% 10.31%
(1) 1996 operating results are shown on a pro forma basis.
(2) Net interest margin is equal to net interest income divided by average earning assets.
</TABLE>
Net Interest Income
Net interest income represents the interest earned from the Company's
on-balance sheet consumer loans less the related interest expense related to
deposits and borrowings. As a result of securitizations of consumer loans, the
volume of on-balance sheet loans, deposits and borrowings will vary over time.
Net interest income for the third quarter of 1997 totaled $98.4 million,
compared to $102.1 million for the same period of 1996. This decrease is
primarily attributable to lower average on- balance sheet consumer loans and was
offset in part by higher net interest margins. The annualized net interest
margin on average earning assets during the nine months ended September 30, 1997
was 10.86%, compared to 9.86% pro forma for the same period in the prior year.
Higher yields on earning assets and lower overall funding costs contributed to
the increase in average margins.
Statement of Average Balances, Income and Expense, Yields and Rates
The following table provides an analysis of interest income, interest
expense, net interest margin and average balance sheet data for the three and
nine month periods ended September 30, 1997 and 1996, as prepared from
historical financial information:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 2 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended September 30
-----------------------------------------------------------------------------------
1997 1996
---------------------------------------- ----------------------------------------
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------- -------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning assets
Consumer loans $ 3,028,584 $ 135,799 17.94% $ 3,370,640 $ 145,852 17.31%
Interest-earning cash 71,657 1,281 7.15% 97,749 590 2.41%
Federal funds sold 232,093 3,308 5.70% 57,509 793 5.52%
Investment securities 152,336 2,291 6.02% 49,880 640 5.13%
-------------- ------------- -------- -------------- ------------ ---------
Total interest-earning assets 3,484,670 $ 142,679 16.38% 3,575,778 $ 147,875 16.54%
Allowance for loan losses (133,203) (105,232)
Other assets 751,731 380,704
-------------- --------------
Total assets $ 4,103,198 $ 3,851,250
============== ==============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 2,927,184 $ 40,499 5.53% $ 2,371,241 $ 31,525 5.32%
Borrowings 254,354 3,749 5.90% 898,700 14,297 6.36%
-------------- ------------- -------- -------------- ------------ ---------
Total interest-bearing liabilities 3,181,538 $ 44,248 5.56% 3,269,941 $ 45,822 5.61%
Other liabilities 230,250 150,720
-------------- --------------
Total liabilities 3,411,788 3,420,661
Capital securities 160,000 -
Equity 531,410 430,589
-------------- --------------
Total liabilities and equity $ 4,103,198 $ 3,851,250
============== ==============
NET INTEREST SPREAD: 10.82% 10.93%
======== ==========
Interest income to
average interest-earning assets 16.38% 16.54%
Interest expense to
average interest-earning assets 5.08% 5.13%
-------- ----------
Net interest margin 11.30% 11.41%
======== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------- -------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning assets
Consumer loans $ 3,152,565 $ 414,340 17.52% $ 3,461,140 $ 417,386 16.08%
Interest-earning cash 93,333 4,051 5.79% 110,964 2,014 2.42%
Federal funds sold 278,511 11,475 5.49% 65,099 2,596 5.32%
Investment securities 109,297 4,683 5.71% 76,471 2,889 5.04%
-------------- ------------- -------- -------------- ------------- ---------
Total interest-earning assets 3,633,706 $ 434,549 15.95% 3,713,674 $ 424,885 15.25%
Allowance for loan losses (125,105) (100,728)
Other assets 663,516 277,647
-------------- --------------
Total assets $ 4,172,117 $ 3,890,593
============== ==============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 3,002,449 $ 122,466 5.44% $ 2,410,305 $ 97,627 5.40%
Borrowings 345,626 16,201 6.25% 918,424 42,825 6.22%
-------------- ------------- -------- -------------- ------------- ---------
Total interest-bearing liabilities 3,348,075 $ 138,667 5.52% 3,328,729 $ 140,452 5.63%
Other liabilities 179,034 161,985
-------------- --------------
Total liabilities 3,527,109 3,490,714
Capital securities 140,073 -
Equity 504,935 399,879
-------------- --------------
Total liabilities and equity $ 4,172,117 $ 3,890,593
============== ==============
NET INTEREST SPREAD: 10.43% 9.62%
======== =========
Interest income to
average interest-earning assets 15.95% 15.25%
Interest expense to
average interest-earning assets 5.09% 5.04%
-------- ---------
Net interest margin 10.86% 10.21%
======== =========
</TABLE>
Interest Volume and Rate Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The quarter ended September 30, 1997 compared to the prior year
quarter reflects increased securitization activity in 1997 which has reduced
on-balance sheet loans. This securitization activity had the effect of removing
unsecured loans and home equity loans from the balance sheet, leaving a higher
proportion of secured credit card loans, which are higher yielding assets,
on-balance sheet. The following table sets forth the dollar amount of the
increase (decrease) in interest income and interest expense resulting from
changes in the volume, rates and yields:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - INTEREST VARIANCE ANALYSIS
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Month Ended Nine Months Ended
September 30, 1997 vs. 1996 September 30, 1997 vs. 1996
-------------------------------------------------- ------------------------------------------------
Increase Change due to (1) Increase Change due to (1)
(Dollars in thousands) (Decrease) Volume Rate (Decrease) Volume Rate
-------------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Consumer loans $ (10,053) $ (38,707) $ 28,654 $ (3,046) $ (51,265) $ 48,219
Federal funds sold 2,515 2,488 27 8,879 8,791 88
Other securities 2,342 497 1,845 3,831 811 3,020
-------------- -------------- -------------- -------------- -------------- ------------
Total interest income (5,196) (35,722) 30,526 9,664 (41,663) 51,327
Interest Expense:
Deposits 8,974 7,669 1,305 24,839 24,122 717
Borrowings (10,548) (9,575) (973) (26,624) (26,999) 375
-------------- --------------- -------------- ------------- -------------- ------------
Total interest expense (1,574) (1,906) 332 (1,785) (2,877) 1,092
-------------- --------------- -------------- ------------- -------------- ------------
Net interest income (1) $ (3,622) $ (33,816) $ 30,194 $ 11,449 $ (38,786) $ 50,235
============== =============== ============== ============= ============== ============
(1) The change in interest due to both volume and rate has been allocated in proportion to the relationship of the absolute
dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the
table.
</TABLE>
Non-interest Income
Other income primarily consists of loan servicing income and credit product
fee income, and represented approximately 51% of on-balance sheet revenues
during the nine months ended September 30, 1997, compared to approximately 41%
for the nine months ended September 30, 1996. This increase results from
increased credit product fee revenue and higher average securitized assets as a
percentage of average earning assets.
Loan Servicing Income
Average securitized loans, which exclude principal collections accumulated
in principal funding accounts prior to being paid to investors, were $6.4
billion and $4.8 billion during the three months ended September 30, 1997 and
1996, respectively. Loan servicing income increased 44% to $111.3 million for
the quarter ended September 30, 1997 compared to $77.4 million for the same
period in 1996.
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"), effective for financial
asset sales occurring after December 31, 1996. Under SFAS No. 125, gains are
recognized at the time of initial sale and each subsequent sale of loan
receivables in a securitization. As a result, the Company now recognizes gains
from such loan sales as "loan servicing income" on its statement of income and
the related asset as a component of "due from securitizations" on its statement
of financial condition. As a result of the adoption of SFAS No. 125, loan
servicing income increased $5.8 million and $56.2 million during the three and
nine months ended September 30, 1997, respectively. The increase in loan
servicing income resulting from the adoption of SFAS No. 125 was largely offset
by incremental business development investments and increases in provisions for
possible future credit losses. This increase in loan servicing income is not
expected to be representative of future periods. Any future gains that will be
recognized by the Company in accordance with SFAS No. 125 will be dependent on
the timing, performance and amount of future securitizations. The increase in
loan servicing income is non-recurring because, for the first nine months of
1997, the Company recognized both excess servicing income generated by
securitized balances existing at December 31, 1996 and gains on additional loan
sales made during that period. In accordance with SFAS No. 125, prior years have
not been restated.
Credit Product Fee Income
Credit product fee income totaled $67.9 million for the quarter ended
September 30, 1997, compared to $33.6 million for the prior year quarter. This
increase of 102% resulted from increased membership fees on secured credit
cards, increased income from other fee-based products and additional volume and
repricing of late and overlimit fees.
Non-interest Expense
Non-interest expense for the three months ended September 30, 1997 was
$155.8 million, an increase of 39% over $111.9 million for the same period in
the prior year. Salaries and benefits increased $14.5 million, or 37%, to $54
million for the three months ended September 30, 1997, compared to $39.5 million
for the same period in the prior year. This increase reflects an increase in the
employee base to support increased customer volume, the development of
additional marketing channels by the Company and the recognition of compensation
expenses related to the accelerated vesting of restricted stock and other
deferred compensation arrangements as part of the Company's spinoff from
Providian Corporation. Solicitation costs include direct mail, postage,
telemarketing and package materials for both new and existing customers and
totaled $39.7 million for the quarter ended September 30, 1997, a 47% increase
over the prior year quarter total of $27 million. This increase in solicitation
costs resulted from continued investment in business development including
telemarketing capabilities and other initiatives designed to improve customer
activation and retention.
The Company is currently evaluating, on an ongoing basis, expenditures
associated with modifying its computer systems to process data and transactions
for the Year 2000. Costs incurred to modify computer systems will be expensed as
incurred and are not expected to have a material impact on the Company's future
financial results or condition.
Income Taxes
The Company's income tax expense was $30.4 million for the three months
ended September 30, 1997, compared to $24.4 million for the three months ended
September 30, 1996. The overall effective income tax rate reflects an increase
in state tax rates associated with the spinoff from Providian Corporation. The
Company anticipates that the higher combined tax rate will be applicable in
future periods.
Asset Quality
Delinquencies and net credit losses experienced on the Company's consumer
loan portfolio reflect, among other factors, the creditworthiness of the
borrowers, the average age of accounts (generally referred to as "seasoning"),
the success of the Company's collection efforts and general economic conditions.
Delinquencies
An account is considered delinquent if the minimum payment is not received
by the next billing date. Interest and fee income continue to accrue on an
account after the account becomes delinquent (unless the customer is in
bankruptcy or is deceased) until the loan is either repaid or recognized as a
credit loss. The following table presents delinquency information as of
September 30, 1997 and 1996:
<TABLE>
- ------------------------------------------------------------------------------------------------
TABLE 4 - DELINQUENCIES
- ------------------------------------------------------------------------------------------------
<CAPTION>
September 30
--------------------------------------------------------------------
1997 1996
--------------------------------- --------------------------------
% of % of
(Dollars in thousands Loans Total Loans Loans Total Loans
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Reported: (1)
Loans outstanding $ 3,098,427 100.00 % $ 3,492,803 100.00 %
Loans delinquent:
30 - 60 days 55,497 1.79 49,856 1.43
61 - 90 days 33,787 1.09 26,591 0.76
91 or more days 70,338 2.27 45,903 1.31
-------------- --------------- -------------- -------------
Total $ 159,622 5.15 % $ 122,350 3.50 %
============== =============== ============== =============
Managed:
Loans outstanding $ 9,543,352 100.00 % $ 8,582,803 100.00 %
Loans delinquent:
30 - 60 days 164,744 1.72 137,843 1.61
61 - 90 days 97,058 1.02 74,726 0.87
91 or more days 180,045 1.89 123,993 1.44
-------------- --------------- -------------- -------------
Total $ 441,847 4.63 % $ 336,562 3.92 %
============== =============== ============== =============
(1) Includes consumer loans held for securitization.
</TABLE>
The managed loan delinquency rate as of September 30, 1997 was 4.63%,
compared to 4.37% as of June 30, 1997 and 3.92% as of September 30, 1996. The
increase in the managed loan delinquency rate over the prior quarter reflects
expected increased rates of delinquency on secured credit card outstandings. The
delinquency rate for on-balance sheet loans was 5.15% as of September 30, 1997,
compared to 5.05% at June 30, 1997 and 3.50% at September 30, 1996. This
increase in the on-balance sheet loan delinquency rate reflects the Company's
secured credit card outstandings, which are increasing as a percentage of total
on-balance sheet loans and experience a higher delinquency rate than the
Company's unsecured loans. Secured credit card outstandings are collateralized
in whole or in part by customer savings accounts, which mitigates the increased
risk associated with higher delinquencies for this product.
Net Credit Losses
Net credit losses for consumer loans consist of the principal amount of
charge-offs resulting from customers who are unwilling or unable to pay their
existing loan balances, including bankrupt and deceased customers, less current
period recoveries on previously charged-off accounts. Net credit losses exclude
accrued finance charge and fee income which is charged against the related
income at the time of credit loss recognition. Losses from fraudulent activity
are included in non-interest expenses.
The following table presents the Company's net credit losses for consumer
loans for the three and nine month periods ended September 30, 1997 and 1996:
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
TABLE 5 - NET CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------- -------------------------------------
(Dollars in thousands) 1997 1996 1997 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Reported: (1)
Average loans outstanding $ 3,028,584 $ 3,370,640 $ 3,152,565 $ 3,461,140
Net charge-offs 29,725 26,319 87,274 76,460
Net charge-offs as a percentage
of average loans outstanding 3.93 % 3.12 % 3.69 % 2.95 %
Managed:
Average loans outstanding $ 9,393,797 $ 8,211,740 $ 9,251,044 $ 7,556,877
Net charge-offs 145,527 99,477 435,834 267,477
Net charge-offs as a percentage
of average loans outstanding 6.20 % 4.85 % 6.28 % 4.72 %
(1) Includes consumer loans held for securitization.
</TABLE>
The managed net credit loss rate for the three months ended September 30,
1997 was 6.20%, compared to 6.59% for the quarter ended June 30, 1997 and 4.85%
for the quarter ended September 30, 1996. The increase in the managed net credit
loss rate for the quarter ended September 30, 1997, as compared to the quarter
ended September 30, 1996, is consistent with general economic trends and
industrywide consumer credit performance, including rising bankruptcy rates.
Consistent with the Company's effort to manage its risk-adjusted return, the
increase in managed net credit losses was offset by an increase in the finance
charge yield on managed loans.
Allowance and Provision for Possible Credit Losses
The allowance for possible credit losses is maintained for on-balance sheet
loans. The Company maintains the allowance at a level believed to be adequate to
absorb future credit losses, net of recoveries, arising from the existing loans
outstanding. In evaluating the adequacy of the allowance, the Company considers
several factors including general economic conditions, asset quality, seasoning,
security and historical trends in credit losses and delinquencies. The Company's
policy is to recognize principal credit losses on unsecured loans and secured
credit card loans no more than 180 days after they become delinquent. However,
accounts for bankrupt and deceased accountholders are charged-off earlier upon a
determination of post-bankruptcy collectibility or collectibility from the
deceased accountholder's estate. Home equity loans are reviewed for
collectibility upon becoming 60 days delinquent, and following analysis credit
losses are recognized for the amount by which the book value of the loan exceeds
the estimated net realizable value of the underlying security.
The following table sets forth the activity in the allowance for possible
credit losses for the three and nine months ended September 30, 1997 and 1996:
<TABLE>
- -----------------------------------------------------------------------------------------------------------
TABLE 6 - SUMMARY OF ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- --------------------------------
(Dollars in thousands) 1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 129,743 $ 95,470 $ 114,540 $ 93,429
Provision for loan losses 43,071 37,510 115,823 89,692
Charge-offs (33,850) (29,360) (96,583) (85,394)
Recoveries 4,125 3,041 9,309 8,934
-------------- ------------- -------------- --------------
Net charge-offs (29,725) (26,319) (87,274) (76,460)
-------------- ------------- -------------- --------------
Balance at end of period $ 143,089 $ 106,661 $ 143,089 $ 106,661
============== ============= ============== ==============
Allowance for loan losses to
loans at period-end (1) 4.76 % 3.59 % 4.76 % 3.59 %
(1) Excludes consumer loans held for securitization.
</TABLE>
Funding and Liquidity
The Company maintains diversified funding sources, including direct and
broker retail deposits, institutional deposits, term federal funds, public and
private asset securitizations and credit facilities. Funding is further
diversified by product types, industry and geographical location. The Company
offers maturity terms on its funding products ranging from one week to seven
years. Maturity distributions are dependent on several factors, including
expected asset duration, investor demand, shape of the yield curve and
anticipated issuance in the securitization and capital markets.
The following table summarizes the contractual maturity of large
denomination certificates of deposit as of September 30, 1997:
- ------------------------------------------------------------------------------
TABLE 7 - MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
- ------------------------------------------------------------------------------
September 30
-------------------------------------------------
(Dollars in thousands) 1997 1996
---------------------- ----------------------
Less than three months $ 262,975 $ 607,965
Three to six months 231,560 188,287
Six to twelve months 250,528 244,566
More than twelve months 610,916 346,230
---------------------- ----------------------
Total $ 1,355,979 $ 1,387,048
====================== ======================
Deposits decreased from $3.4 billion as of December 31, 1996 to $3.1
billion as of September 30, 1997. This decrease is the result of increased asset
securitizations during the period and an increase in federal funds purchased.
Interest expense on borrowings for the quarter ended September 30, 1997 was
$3.7 million, compared to $14.3 million for the quarter ended September 30,
1996. This decrease was the result of lower average funding provided by
borrowings of federal funds purchased and notes payable to banks.
The Company maintains a $1.2 billion committed revolving credit facility
from a syndicate of domestic and international banks which is scheduled to
expire in May 1999. Borrowings under this credit facility are available to four
of the Company's subsidiaries, First Deposit National Bank, Providian National
Bank, Providian Bank and Providian Credit Corporation (the "Borrowers"), and
the credit facility is guaranteed by Providian Financial Corporation. As of
September 30, 1997 borrowings under the credit facility totaled $109 million.
Among other covenants, the credit facility contains certain financial covenants
applicable to the Company, including consolidated asset return and capital
requirements and a loan delinquency test. In addition, certain financial ratios
are required to be maintained by each of the Borrowers. The unused commitment is
available to the Borrowers as funding needs may arise.
Providian Financial Corporation is also a party to three separate 364 day
credit facilities totaling $275 million, under which short-term borrowings are
available to Providian Financial Corporation for general corporate purposes.
These short-term facilities contain financial covenants generally similar to
those contained in the Company's revolving credit facility described in the
preceding paragraph. Two of these short-term facilites also contain a financial
leverage ratio covenant.
The securitization of consumer loans is a significant source of the
Company's funding. Commercial paper-based conduit facilities are used to
securitize certain unsecured credit card and home equity line of credit
receivables. As of September 30, 1997, the Company had securitized $1.7 billion
of loans through such conduit facilities. Term securitizations through the
Company's master trust totaled $5.0 billion as of September 30, 1997.
Amortization of previously securitized loans totaled $100 million during the
three months ended September 30, 1997 and amortization of securitized loans is
expected to continue through 2004. As securitized loans are paid or reduced by
the amount of credit losses during the amortization period of a securitization,
the Company's funding requirements will correspondingly increase. Term
securitizations typically have principal accumulation periods during which
principal payments are aggregated for repayment to investors. As principal
payments on the term securitization loans accumulate, on-balance sheet loans
will increase correspondingly. Such increases are funded by the Company through
new securitizations or other funding sources.
In February 1997, Providian Capital I, a subsidiary trust of the Company,
issued $160 million aggregate amount of mandatorily redeemable capital
securities bearing interest at 9.525% which mature in February 2027. The
proceeds of the offering were used by the Company to redeem preferred stock of
$63.2 million and to repay notes payable to former affiliates of $42.5 million;
the remainder was available for general corporate purposes.
The Company's goal for liquidity management is to ensure that funding will
be available to support Company operations in varying business environments. In
addition to the Company's credit facilities, the Company maintains a portfolio
of high-quality securities such as U.S. government obligations, commercial
paper, interest bearing deposits with other banks, federal funds sold and other
cash equivalents in order to provide additional liquidity. Investment securities
have increased from $7.2 million as of December 31, 1996 to $171.3 million as of
September 30, 1997. Federal funds sold increased from $172.3 million to $275.8
million over the same period.
Capital Adequacy
Each of the Company's banking subsidiaries, First Deposit National Bank,
Providian National Bank and Providian Bank, is subject to risk-based capital
adequacy guidelines as defined by its primary federal regulator. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that could have a material effect
on the consolidated financial statements of the Company. Under the guidelines,
capital is defined as either Tier 1 (core), which consists principally of
shareholders' equity less goodwill, or Tier 2 (supplementary), which also
includes a portion of the allowance for possible credit losses. Based on those
definitions of capital, the regulations further define three capital adequacy
ratios which are used to measure whether a financial institution achieves "well
capitalized" or "adequately capitalized" status. A bank is considered
"adequately capitalized" if the Total Risk-Based, Tier 1 and Leverage capital
ratios are at least 8%, 4% and 4%, respectively. In order to be considered "well
capitalized" a bank must maintain Total Risk-Based, Tier 1, and Leverage capital
ratios of 10%, 6% and 5%, respectively. As of September 30, 1997, the Company's
banking subsidiaries maintained "well capitalized" status in all risk-based
capital ratio categories as set forth below: capital ratio categories as set
forth below:
<TABLE>
<CAPTION>
First Deposit Providian
National National Providian
Capital Ratio Bank Bank Bank
- ---------------------------------------------------------- ------------- --------- ---------
<S> <C> <C> <C>
Total Risk-Based (Tier 1 + Tier 2/Total risk-based assets) 11.46% 14.92% 17.36%
Tier 1 (Tier 1/Total risk-based assets) 10.20% 13.66% 16.04%
Leverage (Tier 1/Average total assets less intangibles) 14.73% 25.75% 18.34%
</TABLE>
On October 30, 1997, the Board of Directors of the Company approved a
fourth quarter dividend of $.05 per share payable on December 15, 1997 to
shareholders of record on December 1, 1997. The payment of common stock
dividends by the Company may in the future be limited by certain factors
including regulatory capital requirements and financial covenants relating to
the maintenance of capital under the Company's credit facilities. In addition,
if the Company defers interest payments on the junior subordinated debentures
supporting dividend payments to holders of Providian Capital I's mandatorily
redeemable capital securities, dividends on the Company's common stock may not
be declared.
The primary source of funds for payment of shareholder dividends by the
Company is dividends from the Company's banking subsidiaries. The amount of
dividends a bank may declare in any year is subject to certain regulatory
restrictions. Dividends are generally limited to current year net profits, as
defined by regulatory agencies, combined with retained net income for the
preceding two years. As of September 30, 1997, the amount available to be paid
as dividends to the Company by its banking subsidiaries without regulatory
approval, while still maintaining their well capitalized status, totaled $76.8
million.
Off-Balance Sheet Risk
The Company is subject to off-balance sheet risk in the normal course of
business, including risks associated with commitments to extend credit, excess
servicing income from securitizations and interest rate swap and cap agreements
("swaps" and "caps"). Taking into account the repricing characteristics of
assets and liabilities, the Company manages interest rate risk seeking to
optimize the relationship between hedging costs and the impact of interest rate
movements on earnings. In doing so, the Company has selectively entered into
swaps and caps which involve elements of credit and/or interest rate risk in
excess of the amount recognized on the statement of financial condition. All
swap and cap transactions are over-the-counter transactions executed with highly
rated United States and international banks under standard form Master
Agreements of the International Swaps and Derivatives Association, Inc. (ISDA),
and hedge identified interest rate risks for both accounting and tax purposes.
The following tables present a summary of swap activity as well as the
notional value of caps for the three and nine months ended September 30, 1997
and 1996 and their respective maturities as of September 30, 1997:
<TABLE>
- -----------------------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF INTEREST RATE SWAPS
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- --------------------------------
(Dollars in thousands) 1997 1996 1997 1996
-------------- -------------- -------------- --------------
Notional Amount
<S> <C> <C> <C> <C>
Pay Fixed/Receive Variable:
Beginning $ 120,000 $ 187,750 $ 120,000 $ 550,000
Additions - - - 43,500
Maturities - 1,200 - 406,950
-------------- -------------- -------------- --------------
Ending $ 120,000 $ 186,550 $ 120,000 $ 186,550
============== ============== ============== ==============
Receive Fixed/Pay Variable:
Beginning $ 835,500 $ 973,951 $ 970,500 $ 654,556
Additions 100,000 - 163,333 570,000
Maturities 100,000 3,451 298,333 254,056
-------------- -------------- -------------- --------------
Ending $ 835,500 $ 970,500 $ 835,500 $ 970,500
============== ============== ============== ==============
Receive Variable/Pay Variable:
Beginning $ - $ 200,000 $ 200,000 $ 200,000
Additions - - - -
Maturities - - 200,000 -
-------------- -------------- -------------- --------------
Ending $ - $ 200,000 $ - $ 200,000
============== ============== ============== ==============
Total Notional Amount
Beginning $ 955,500 $ 1,361,701 $ 1,290,500 $ 1,404,556
Additions 100,000 - 163,333 613,500
Maturities 100,000 4,651 498,333 661,006
-------------- -------------- -------------- --------------
Ending $ 955,500 $ 1,357,050 $ 955,500 $ 1,357,050
============== ============== ============== ==============
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 9 - MATURITY OF INTEREST RATE SWAPS AND CAPS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(Dollars in thousands) Balance at Balances maturing in:
--------------------------------------------------------------------
September 30, 1997 1997 1998 1999 Thereafter
-------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable:
Notional Value $ 120,000 $ - $ 120,000 $ - $ -
Weighted Average Pay Rate 6.24 % - % 6.24 % - % - %
Weighted Average Receive Rate (1) 5.72 % - % 5.72 % - % - %
Receive Fixed/Pay Variable:
Notional Value $ 835,500 $ 100,000 $ 600,000 $ 85,500 $ 50,000
Weighted Average Pay Rate (1) 5.68 % 5.66 % 5.68 % 5.72 % 5.74 %
Weighted Average Receive Rate 6.35 % 6.26 % 6.14 % 7.73 % 6.84 %
Receive Variable/Pay Variable:
Notional Value $ - $ - $ - $ - $ -
Weighted Average Pay Rate - % - % - % - % - %
Weighted Average Receive Rate - % - % - % - % - %
Total Notional Value $ 955,500 $ 100,000 $ 720,000 $ 85,500 $ 50,000
Weighted Average Pay Rate (1) 5.75 % 5.66 % 5.78 % 5.72 % 5.74 %
Weighted Average Receive Rate (1) 6.27 % 6.26 % 6.06 % 7.73 % 6.84 %
(1) Variable rates are held constant for future periods at their effective rates
as of their most recent reset prior to September 30, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
Caps:
Notional Value $ 1,134,700 $ 212,500 $ 866,950 $ 50,500 $ 4,750
Weighted Average Strike Rate 11.07 % 11.16 % 11.42 % 10.97 % 6.75 %
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Various legal actions arising in the ordinary course of business are
pending against the Company. None of the litigation pending against the Company,
individually or collectively, is expected to have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
Item 5. Other Information.
On October 10, 1997, an application was filed with the Office of the
Comptroller of the Currency to merge Providian National Bank, a subsidiary of
the Company, into First Deposit National Bank, another subsidiary of the
Company. The merger, which is subject to regulatory approvals, is expected to
occur on or after January 1, 1998.
On October 30, 1997, the Board of Directors of the Company increased the
number of voting Directors from eight to nine and appointed John L. Weinberg,
who was previously a non-voting Director of the Company, as a full voting
Director with a term scheduled to expire at the Company's 1999 annual
stockholders meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 10.1 Providian Financial Corporation Stock Ownership Plan,
as amended on August 7, 1997.
Exhibit 10.2 Providian Financial Corporation 1997 Employee Stock
Purchase Plan, as adopted by the Board of Directors on
August 7, 1997.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providian Financial Corporation
-------------------------------
(Registrant)
Date: November 14, 1997 /s/ David J. Petrini
--------------------
David J. Petrini
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer and Duly
Authorized Signatory)
Date: November 14, 1997 /s/ Daniel Sanford
------------------
Daniel Sanford
Vice President and Controller
Chief Accounting Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit 10.1 Providian Financial Corporation Stock Ownership Plan, as amended
on August 7, 1997.
Exhibit 10.2 Providian Financial Corporation 1997 Employee Stock Purchase
Plan, as adopted by the Board of Directors on August 7, 1997.
Exhibit 27.1 Financial Data Schedule
PROVIDIAN FINANCIAL CORPORATION
STOCK OWNERSHIP PLAN
As Amended and Restated June 4, 1997
As Amended August 7, 1997
1. History and Purpose of Plan. (a) This plan was originally adopted by
Providian Corporation, a Delaware corporation ("Parent"). On March 27, 1997, it
was adopted by Providian Financial Corporation ("Providian"), formerly known as
Providian Bancorp, Inc., a wholly owned subsidiary of Parent, with such
amendments as were necessary to reflect the change in the identity of the
sponsor of the Plan. This amendment and restatement of the Plan was adopted by
the Board of Directors of Providian on June 4, 1997.
(b) The shareholders of Parent approved this Plan, as originally adopted,
at the 1992 annual meeting of the shareholders of Parent, and as thereafter
amended, at the 1995 annual meeting. On April 2, 1997, Parent, as sole
shareholder of Providian, approved the Plan as adopted by Providian.
(c) The purpose of this Stock Ownership Plan is to promote the growth and
profitability of Providian and its subsidiaries (Providian and its subsidiaries
are hereinafter collectively referred to as the "Company") by encouraging
selected key employees of the Company and non-employee directors of the Company
to acquire and retain a proprietary interest in the Company. Such proprietary
interest should increase the personal interest and special efforts of such
persons in providing for the continued success and progress of the business of
the Company and should enhance the Company's efforts to attract and retain
competent key employees and non-employee directors.
2. Definitions. The following terms when used herein shall have the meaning
set forth below, unless a different meaning is plainly required by the context:
a. "Board of Directors" shall mean the Board of Directors of Providian.
b. "Change in Control" shall mean:
i. When any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) who becomes a beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (A) the Outstanding Common Stock or (B) the
Outstanding Voting Securities; provided, however, that beneficial ownership
by any of the following shall not constitute a Change in Control: (1) the
Company; (2) any employee benefit plan (or related trust) sponsored or
maintained by the Company; or (3) any corporation with respect to which,
following such acquisition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Common Stock and Outstanding Voting Securities
immediately prior to such acquisition in substantially the same proportions
as their ownership, immediately prior to such acquisition, of the
Outstanding Common Stock and Outstanding Voting Securities, as the case may
be; or
ii. When individuals who, as of the date hereof, constitute the
Incumbent Board cease for any reason to constitute at least a majority of
the Board of Directors; provided, however, that any individual becoming a
director of Providian subsequent to the date hereof whose election, or
nomination for election by Providian's shareholders, was approved by a vote
of at least a majority of the directors of Providian then comprising the
Incumbent Board shall be considered as though such individual were a member
of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such term is used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act); or
iii. A reorganization, merger or consolidation, with respect to which,
in each case, all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Common Stock
and Outstanding Voting Securities immediately prior to such reorganization,
merger or consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such reorganization, merger or consolidation in
substantially the same proportions as their ownership, immediately prior to
such reorganization, merger or consolidation of the Outstanding Common
Stock and Outstanding Voting Securities, as the case may be; or
iv. (A) approval by the shareholders of Providian of a complete
liquidation or dissolution of Providian or (B) the sale or other
disposition of all or substantially all of the assets of Providian, other
than to a corporation, with respect to which following such sale or other
disposition, more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Common
Stock and Outstanding Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Common Stock and Outstanding Voting Securities, as the case may be.
c. "Code" shall mean the Internal Revenue Code of 1986, as amended.
d. "Committee" shall mean the committee appointed by the Board of Directors
to administer this Plan which shall include two or more directors of the Company
who are "nonemployee directors" (within the meaning of Rule 16b-3 promulgated
under the Exchange Act) and shall include only directors who are "outside
directors" within the meaning of Proposed Treasury Regulation 1.162-27 (or any
successor provision) promulgated under the Code.
e. "Common Stock" shall mean the shares of Providian's common stock, par
value $0.01 per share, and any other shares of common stock from time to time
authorized pursuant to Providian's Certification of Incorporation.
f. "Disability" shall mean when a Participant is considered permanently
disabled under a disability insurance policy carried by the Company, or, if no
such policy is carried by the Company, when a Participant is permanently and
totally disabled within the meaning of Section 22(e)(3) of the Code.
g. "Employee" shall mean an individual who is a key salaried employee of
the Company.
h. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
i. "Incumbent Board" shall mean those individuals who, on the date of the
adoption of this Plan by the Board of Directors, constitute the Board of
Directors.
j. "Non-Employee Director" shall mean a member of the Board of Directors
who is not also an Employee.
k. "Nonrestricted Stock" shall mean shares of Common Stock granted to a
Participant pursuant to this Plan which are not Restricted Stock.
l. "Outstanding Common Stock" shall mean the then outstanding shares of
Common Stock.
m. "Outstanding Voting Securities" shall mean the then outstanding voting
securities of Providian entitled to vote generally in the election of directors
of Providian.
n. "Participants" shall mean (i) Employees who are selected by the
Committee to participate in the Plan and (ii) all Non-Employee Directors.
o. "Plan" shall mean this Stock Ownership Plan as the same may be amended
from time to time.
p. "Restricted Period" shall have the meaning given such term in Section
10.
q. "Restricted Stock" shall mean Common Stock which is subject to the
restrictions provided for in Section 9.
r. "Retirement" shall mean retirement by a Participant in accordance with
the terms of the Company's retirement plans.
s. "Value" shall be the mean between the highest and lowest sale price of
the Common Stock as reflected on the consolidated tape of the New York Stock
Exchange issues on the date of a grant hereunder; provided, however, that if no
shares of Common Stock were sold on such date, the determination shall be made
as of the last immediately preceding date on which the shares of the Common
Stock were sold.
3. Eligibility and Participation. Persons eligible to receive Nonrestricted
Stock and Restricted Stock under this Plan shall be (a) those Employees who are
selected by the Board of Directors or the Committee to participate in the Plan
and (b) those persons who are Non-Employee Directors. In determining the
Employees who shall become Participants, the Board of Directors or the Committee
shall take into account the duties of the Employees, their present and potential
contribution to the success of the Company, such other factors as it deems
relevant in connection with accomplishing the purposes of this Plan. An Employee
who has previously been granted Nonrestricted Stock and Restricted Stock
pursuant to the terms of this Plan may be granted additional Nonrestricted Stock
and Restricted Stock as the Board of Directors or the Committee shall determine
in its sole discretion. The Board of Directors or the Committee, from time to
time, may designate a defined class of Employees or Non-Employee Directors who
shall be eligible to participate in the Plan and specify the terms under which
such Participants may receive shares of Common Stock hereunder by adopting an
appendix to the Plan or adopting modifications or amendments to any existing
appendix, provided that the adoption of appendices shall not be the exclusive
means of determining participation. Any appendices so adopted shall be and
hereby are incorporated by this reference as part of this Plan.
4. Shares Subject to the Plan. Subject to the adjustments provided for in
Section 11, the aggregate number of shares of Common Stock which may be granted
under this Plan shall not exceed 4 million shares. Restricted Stock issued under
this Plan which is later forfeited pursuant to Section 9 may again be granted
under this Plan. The Common Stock to be offered under this Plan may be shares
held by the Company in its treasury, shares previously forfeited under the terms
of this Plan or newly issued shares.
5. Administration. This Plan shall be administered by the Committee.
Subject to the provisions of this Plan and the requirements of Section 162(m) of
the Code and such orders or resolutions not inconsistent with the provisions of
this Plan as made from time to time by the Board of Directors, the Committee
shall have sole and complete authority with respect to the following:
a. Selection of Participants;
b. Determining the number of shares, times, Restricted Periods and other
terms and conditions of grants hereunder;
c. Adopting, amending and rescinding such rules and regulations as, in its
opinion, may be advisable for the administration of this Plan;
d. Construing and interpreting this Plan and any related documents; and
e. Making all other determinations deemed advisable and necessary for the
administration of this Plan such that this Plan operates in the best interest of
the Company for the purposes set forth herein.
All decisions and determinations made by the Committee shall be final and
binding upon all Participants. Notwithstanding the foregoing provisions of this
Section 5, the Board of Directors shall have full power and authority to take
any action that may be taken by the Committee hereunder.
6. Discretionary Nonrestricted Stock Grants. From time to time, the
Committee shall determine those Participants to whom Nonrestricted Stock shall
be granted and the amount of the Nonrestricted Stock to be granted to each. In
no event, however, shall the aggregate Value of the Nonrestricted Stock granted
to any Employee Participant under this Plan in any year exceed 25% of the
Employee Participants' total incentive by the Participant under the
Corporation's Management Incentive Compensation Plan. In determining the amount
of the Nonrestricted Stock to be granted to Employee Participants, the Committee
shall take into account the past performance of such Employee Participant and
such additional items as it shall deem appropriate, including, but not limited
to, the salary of the Employee, the other benefits being received by the
Employee from the Company (including amounts received or to be received under
any incentive or bonus plans of the Company), the position of the Employee and
the Employee's potential for ongoing contribution to the success of the Company.
7. Restricted Stock Grants.
a. All Participants who receive Nonrestricted Stock grants in any year also
shall receive a matching Restricted Stock grant at the same time. The amount of
the matching Restricted Stock grant shall be determined by the Committee and
shall be a percentage (which shall be the same for all Employee Participants) of
the corresponding number of shares of Nonrestricted Stock, but in no event may
the number of shares of matching Restricted Stock granted to an Employee
Participant exceed 200% of the corresponding number of shares of Nonrestricted
Stock granted to the Employee Participant.
b. The Committee, in its discretion, also may make discretionary Restricted
Stock grants to Employee Participants under this Section 7.b. Such discretionary
grants may be made only (i) for use as a hiring bonus, (ii) as a reward for
extraordinary performance or (iii) to provide additional incentives for future
performance. Any grant of additional Restricted Stock to Employee Participants
pursuant to this Section 7.b will depend on achievement by the Company and/or
the Employee Participant of performance objectives established by the Committee.
Such performance objectives shall be established within 90 days after the
commencement of the period to which the performance objectives relate. The
performance objectives with respect to any performance periods shall be based
upon the Company's earnings, earnings per share, revenue, expenses, margin or
return on equity, as well as any individual performance objectives which the
Committee may establish, and shall be calculated in accordance with the formula
established for such performance period. An Employee Participant shall only be
entitled to receive a grant of additional Restricted Stock pursuant to this
Section 7.b upon attainment by the Company and/or the Employee Participant of
the pre-established performance objectives. The Committee shall certify in
writing before any additional shares of Restricted Stock are issued with respect
to a performance period that the performance objectives for such period have
been satisfied. In no event shall the Committee grant to any Employee
Participant in any year under this Section 7.b a number of shares of Restricted
Stock exceeding 100,000 multiplied by the "Ratio," as that term is defined in
that certain Employee Benefits Agreement entered into in connection with the
distribution by Parent to its shareholders of the Common Stock of Providian
pursuant to the Agreement and Plan of Distribution dated December 28, 1996 (the
"Distribution"). All shares of Restricted Stock granted pursuant to the
provisions of this Section 7.b shall be subject to all of the provisions of this
Plan applicable to Restricted Stock.
c. The Board of Directors or the Committee may make discretionary
Restricted Stock grants to Participants under this Section 7.c. Such
discretionary grants may be made based on such criteria as the Board of
Directors or the Committee determines to be appropriate, which may include (i)
for use as a hiring bonus, (ii) as a reward for extraordinary performance or
(iii) to provide additional incentives for future performance; provided that no
grants of Restricted Stock may be made to Employee Participants under this
Section 7.c based directly or indirectly on the attainment of, or failure to
attain, any performance objectives established with respect to Restricted Stock
grants pursuant to Section 7.b; and provided further that Restricted Stock
grants under this Section 7.c may not be made to any Employee Participant within
one year after the close of any performance period with respect to which the
Employee Participant has received a grant pursuant to Section 7.b. In no event
shall the Board of Directors or the Committee grant in excess of 150,000 shares
of Restricted Stock to any Employee Participant in any year under this Section
7.c. Restricted Stock granted to all Participants pursuant to this Section 7.c
shall be subject to all of the provisions of this Plan applicable to Restricted
Stock, provided that the Board of Directors or the Committee shall establish the
terms of the Restricted Period applicable to such Restricted Stock for purposes
of Section 10.
8. Provisions Applicable to Nonrestricted Stock.
a. At the time Nonrestricted Stock is granted to a Participant,
certificates representing the appropriate number of shares of Nonrestricted
Stock shall be registered in the name of such Participant, but such certificates
shall be held by the Company for the account of such Participant.
b. Notwithstanding the fact that the Company shall retain physical
possession of the certificates representing the Nonrestricted Stock granted to
Participants, the Participants shall have all of the rights of a holder of
Common Stock, including, but not limited to, the right to vote such shares and
to receive all distributions with respect to such shares.
c. Upon the request of a Participant, the Company will deliver the
certificates representing the shares of Nonrestricted Stock granted to such
Participant as soon as reasonably practicable following receipt of such request;
provided, however, that the delivery of such certificates shall result in the
forfeiture of such Participant's corresponding shares of Restricted Stock to the
extent provided in Section 9. Upon the termination of employment of an Employee
Participant, the certificates representing all of the shares of Nonrestricted
Stock granted to such Employee Participant shall be delivered to such Employee
Participant as soon as reasonably practicable.
9. Provisions Applicable to Restricted Stock.
a. At the time Restricted Stock is granted to a Participant, certificates
representing the appropriate number of shares of Restricted Stock shall be
registered in the name of such Participant, but during the Restricted Period the
certificates representing such shares of Restricted Stock shall be held by the
Company for the account of such Participant. As a condition to the receipt of a
Restricted Stock grant, the Participant shall deliver to the Company stock
powers duly endorsed in blank by the Participant. The certificates representing
the Restricted Stock held by the Company shall bear the following legend: "The
sale or other transfer of the shares represented by this certificate is subject
to certain restrictions on transfer set forth in the Providian Financial
Corporation Stock Ownership Plan and the rules of administration adopted
pursuant thereto. A copy of such Stock Ownership Plan and the rules adopted
pursuant thereto may be obtained from the secretary of Providian Financial
Corporation."
b. During the Restricted Period, until such time as the Participant has
forfeited the Participant's rights to the Restricted Stock, notwithstanding the
fact that the Company shall retain physical possession of the certificates
representing the shares of Restricted Stock granted to Participants, the
Participants shall have all of the rights of a holder of Common Stock,
including, but not limited to the right to vote such shares and to receive all
distributions with respect to such shares.
c. The Restricted Stock shall be subject to the following restrictions
during the Restricted Period (unless otherwise provided by the Committee):
i. None of the Restricted Stock may be sold, exchanged, transferred,
assigned, pledged or otherwise encumbered or disposed of by the Participant
during the Restricted Period.
ii. If an Employee Participant ceases to be an Employee prior to the
expiration or other termination of the Restricted Period, other than by
reason of death, Disability or Retirement, or if a Non-Employee Director is
removed from the Board of Directors for cause (as determined by the
disinterested members of the Board of Directors), any shares of Restricted
Stock granted to such Participant which are still subject to restrictions
shall be forfeited and all rights of the Participant to such Restricted
Stock shall terminate without further obligation on the part of the
Company.
iii. If any Nonrestricted Stock certificates are requested and
delivered to a Participant, all or a portion of any corresponding shares of
matching Restricted Stock shall be forfeited, and all rights of such
Participant to such matching Restricted Stock shall terminate without
further obligation on the part of the Company. The number of shares of
matching Restricted Stock to be forfeited shall be designated by the
Committee at the time of the grant.
10. Restricted Period.
a. The term "Restricted Period" shall mean the period established by the
Committee at the time the Restricted Stock is granted to the Participant. Such
"Restricted Period" may be defined by the passage of time, the achievement of
performance goals or any other criteria deemed appropriate by the Committee.
b. Notwithstanding any other provisions of this Plan to the contrary, the
following shall apply:
i. Following the occurrence of a Change in Control, all restrictions
applicable to any Restricted Stock shall terminate as to any shares of
Restricted Stock which are still subject to restriction and all
certificates representing such shares shall be immediately distributed.
ii. If an Employee Participant ceases to be an Employee by reason of
death, Disability or Retirement, or a Non-Employee Director ceases to be a
director for any reason other than for cause (as determined by the
disinterested members of the Board of Directors), then with respect to each
grant of Restricted Stock, the Restricted Period shall terminate only as to
those shares of Restricted Stock with the shortest remaining Restricted
Period and any remaining shares of Restricted Stock with respect to such
grant be forfeited.
c. At the end of the applicable Restricted Period with respect to any
shares of Restricted Stock, or at such earlier time as otherwise provided for
herein, all restrictions with respect to such Restricted Stock shall terminate,
the Participant shall become vested with respect to such shares and certificates
for the appropriate number of shares of Common Stock, free of restriction and
without the legend provided for hereunder, shall be delivered as soon as
practicable to the Participant or the Participant's beneficiary or estate, as
the case may be.
11. Changes in Capitalization.
a. In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation, he
definition of such term in Section 368 of the Code) or any partial or complete
liquidation of the Company, the Committee or the Board of Directors may make
such substitution or adjustments in the aggregate number and kind of stock or
other securities or property reserved for issuance under the Plan, in the number
and kind of stock or other securities or property subject to outstanding awards
granted under the Plan and/or such other equitable substitution or adjustments
as it may determine to be appropriate in its sole discretion; provided, however,
that the number of shares subject to any award shall always be a whole number.
b. If any shares of Common Stock are received by a Participant by reason of
the Common Stock owned by such Participant pursuant to the terms of this Plan,
and (i) if the certificates representing the shares of Nonrestricted Stock with
respect to which additional Common Stock was received is then held by the
Company, the certificates representing such additional shares of Common Stock
shall likewise be held by the Company and shall, for all purposes of this Plan,
be considered Nonrestricted Stock, or (ii) if such additional shares of Common
Stock are received with respect to Restricted Stock, such additional shares of
Common Stock shall, for all purposes of this Plan, be considered Restricted
Stock, subject to the same restrictions as the Restricted Stock with respect to
which they were received.
12. Designation of Beneficiary. A Participant may designate a person or
persons to receive, in the event of the Participant's death, any rights to which
the Participant would be entitled under this Plan. Such a designation shall be
made in writing and filed with the Committee. A beneficiary designation may be
changed or revoked by a Participant at any time by filing a written statement of
such change or revocation with the Committee. If a Participant dies without
having filed a beneficiary designation, or if a Participant's beneficiary does
not survive the Participant, then the Participant's estate shall be deemed to be
the Participant's beneficiary.
13. Amendment and Discontinuance. The Board of Directors may discontinue,
amend, alter or suspend this Plan. Any amendment or termination of this Plan
shall not apply with respect to shares of Nonrestricted Stock or Restricted
Stock previously granted, which shares shall continue to be subject to the terms
and conditions of this Plan in effect on the date of the grant of the
Nonrestricted Stock or Restricted Stock, unless the affected Participant
consents.
14. No Granting of Rights. Neither this Plan, nor any action taken
hereunder, shall be deemed as giving any Employee or Board member the right to
become a Participant, nor shall a Nonrestricted Stock grant or Restricted Stock
employment by the Company or Board membership. The Company expressly reserves
the right to terminate, whether by dismissal, discharge or otherwise, an
Employee's employment at any time, with or without cause, except as may
otherwise be provided by any written agreement between the Company and the
Employee.
15. Nontransferability. A Participant's rights under this Plan may not be
assigned, pledged or otherwise transferred, except that upon a Participant's
death, a Participant's rights may be transferred to the Participant's designated
beneficiary, or in the absence of such designation, by will or the laws of
descent and distribution.
16. Withholding. The Company shall have the right to deduct or withhold
from any payment owed to a Participant by the Company any amount which is
necessary in order to satisfy any withholding requirement which the Company
believes is imposed upon it with respect to any Federal, state or local taxes as
the result of the issuance of, or lapse of restriction on, Nonrestricted Stock
or Restricted Stock, or otherwise require a Participant to make provision for
payment of any such withholding amount. Subject to such conditions as the
Committee may establish from time to time, a Participant may elect to have
Restricted Stock otherwise issuable upon a grant hereunder withheld, or tender
back to the Company Restricted Stock granted hereunder, in order to satisfy all
or a portion of the taxes required to be withheld or otherwise deducted and paid
by the Company.
17. Securities Compliance. This Plan and its administration is intended to
comply with Rule 16b-3 promulgated under the Exchange Act. In the event any
provision or administration of this Plan is deemed not to comply with Rule
16b-3, such provision or administration shall be deemed to be void ab initio and
of no force and effect. All Common Stock granted under this Plan shall be issued
only in compliance with all applicable securities laws, rules and regulations of
the Securities and Exchange Commission, state Blue Sky laws and applicable
listing requirements of any national securities exchange on which the Common
Stock is listed. The Committee may impose such conditions, restrictions and
limitations as it may deem necessary and appropriate to assure compliance with
the foregoing.
18. Governing Law. This Plan shall be governed by, and construed in
accordance with, the laws of the state of Delaware without regard to its
conflict of laws rules.
19. Effective Date. This Plan shall become effective on the date of the
Distribution.
PROVIDIAN FINANCIAL CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
Adopted August 7, 1997
Approved by the Stockholders on [___________, 1998]
1. Purpose.
(a) The purpose of this 1997 Employee Stock Purchase Plan (the "Plan") is
to provide a means by which employees of Providian Financial Corporation, a
Delaware corporation (the "Company"), and its Affiliates, as defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be
given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. Administration.
(a) The Plan shall be administered by the Human Resources Committee (the
"Committee") of the Board of Directors (the "Board") of the Company. The
Committee shall have, in connection with the administration of the Plan, all
powers possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. Notwithstanding anything to the foregoing, the Board shall
have full power and authority to take any action that may be taken by the
Committee hereunder.
(b) The Board or the Committee shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the Company
shall be granted and the provisions of each offering of such rights (which
need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its
administration. The Board or the Committee, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan, in a manner
and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as the
Board or the Committee deems necessary or expedient to promote the best
interests of the Company and its Affiliates and to carry out the intent
that the Plan be treated as an "employee stock purchase plan" within the
meaning of Section 423 of the Code.
3. Shares Subject to the Plan.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate one million (1,000,000) shares of the
Company's common stock (the "Common Stock"). If any right granted under the Plan
shall for any reason terminate without having been exercised, the Common Stock
not purchased under such right shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. Grant of Rights; Offering.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 5 through 8, inclusive.
5. Eligibility.
(a) Rights may be granted only to employees of the Company or, as the Board
or the Committee may designate as provided in subparagraph 2(b), to employees of
any Affiliate of the Company. Except as provided in subparagraph 5(b), an
employee of the Company or any Affiliate shall not be eligible to be granted
rights under the Plan unless, on the Offering Date, such employee has been in
the employ of the Company or any Affiliate for such continuous period preceding
such grant as the Board or the Committee may require, but in no event shall the
required period of continuous employment be equal to or greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that each person who, during the
course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the
exercise price of such right;
(ii) the period of the Offering with respect to such right shall begin
on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person first
becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that
Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board or
the Committee may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. Rights; Purchase Price.
(a) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding twenty percent (20%) of such
employee's Earnings (as defined in subparagraph 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. The Board
or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(b) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
7. Participation; Withdrawal; Termination.
(a) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as an employee's regular salary or wages
(including amounts thereof elected to be deferred by the employee, that would
otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), and may include, if determined by the Board or the Committee and set
forth in the terms of the Offering, all of the following items of compensation:
bonuses, commissions, overtime pay, incentive pay, profit sharing, or other
remuneration (excluding fringe benefits) paid directly to the employee.
Notwithstanding the foregoing, Earnings shall not include the cost of employee
benefits paid for by the Company or an Affiliate, education or tuition
reimbursements, imputed income arising under any group insurance or benefit
program, traveling expenses, business and moving expense reimbursements, income
received in connection with stock options, contributions made by the Company or
an Affiliate under any employee benefit plan, and similar items of compensation,
as determined by the Board or the Committee. The payroll deductions made for
each participant shall be credited to an account for such participant under the
Plan and shall be deposited with the general funds of the Company. A participant
may reduce (including to zero) or increase such payroll deductions, and an
eligible employee may begin such payroll deductions, after the beginning of any
Offering only as provided for in the Offering. A participant may make additional
payments into his or her account only if specifically provided for in the
Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(b) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides. Such
withdrawal may be elected at any time prior to the end of the Offering except as
provided by the Board or the Committee in the Offering. Upon such withdrawal
from the Offering by a participant, the Company shall distribute to such
participant all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's right
to acquire Common Stock under that Offering shall be automatically terminated. A
participant's withdrawal from an Offering will have no effect upon such
participant's eligibility to participate in any other Offerings under the Plan
but such participant will be required to deliver a new participation agreement
in order to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of a participant's employment with the Company and
any designated Affiliate, for any reason, and the Company shall distribute to
such terminated employee all of his or her accumulated payroll deductions
(reduced to the extent, if any, such deductions have been used to acquire stock
for the terminated employee), under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a
participant other than by will or the laws of descent and distribution, or by a
beneficiary designation as provided in paragraph 14, and during a participant's
lifetime, shall be exercisable only by such participant.
8. Exercise.
(a) On each Purchase Date specified in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. Unless
otherwise provided for in the applicable Offering, no fractional shares shall be
issued upon the exercise of rights granted under the Plan. The amount, if any,
of accumulated payroll deductions remaining in each participant's account after
the purchase of shares which is less than the amount required to purchase one
share of stock on the final Purchase Date of an Offering shall be held in each
such participant's account for the purchase of shares under the next Offering
under the Plan, unless such participant withdraws from such next Offering, as
provided in subparagraph 7(b), or is no longer eligible to be granted rights
under the Plan, as provided in paragraph 5, in which case such amount shall be
distributed to the participant after such final Purchase Date, without interest.
The amount, if any, of accumulated payroll deductions remaining in any
participant's account on the final Purchase Date of an Offering after the
purchase of shares which is equal to or in excess of the value of one whole
share of common stock shall be distributed in full to the participant after such
Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. Covenants of the Company.
(a) During the terms of the rights granted under the Plan, the Company
shall at all times keep available as authorized but unissued shares that number
of shares of stock required to satisfy such rights.
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. Use of Proceeds from Stock.
Proceeds from the sale of stock to participants pursuant to rights granted
under the Plan shall constitute general funds of the Company.
11. Rights as a Stockholder.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shares acquired upon exercise
of rights hereunder are recorded in the books of the Company (or its transfer
agent).
12. Adjustments upon Changes in Stock.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(b) In the event of: (1) a dissolution or liquidation of the Company; (2) a
merger or consolidation in which the Company is not the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise; or (4) the acquisition by any person,
entity or group within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any comparable
successor provisions (excluding any employee benefit plan, or related trust,
sponsored or maintained by the Company or any Affiliate of the Company) of the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, as determined by the Board in its
sole discretion (i) any surviving or acquiring corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.
13. Amendment of the Plan.
(a) The Board or the Committee at any time, and from time to time, may
amend the Plan. However, except as provided in paragraph 12 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company within twelve (12) months before or
after the adoption of the amendment if such amendment requires stockholder
approval in order for the Plan to obtain employee stock purchase plan treatment
under Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act.
(b) The Board or the Committee may amend the Plan in any respect the Board
or the Committee deems necessary or advisable to provide eligible employees with
the maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder relating to employee stock purchase
plans and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(c) Rights and obligations under any rights granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan, except with
the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or rights granted under the Plan comply
with the requirements of Section 423 of the Code.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice in the form prescribed by the Company. In the event
of the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its sole discretion, may deliver such shares and/or cash to the spouse or to
any one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. Termination or Suspension of the Plan.
(a) The Board or the Committee in its discretion, may suspend or terminate
the Plan at any time. No rights may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
16. Effective Date of Plan.
The Plan shall become effective upon adoption by the Board (the "Effective
Date"), but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the Board, which date may
be prior to the Effective Date.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN FINANCIAL CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 128,415
<SECURITIES> 171,303
<RECEIVABLES> 3,098,427
<ALLOWANCES> 143,089
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 58,150
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 4,198,365
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 545,209
<TOTAL-LIABILITY-AND-EQUITY> 4,198,365
<SALES> 0
<TOTAL-REVENUES> 882,030
<CGS> 0
<TOTAL-COSTS> 407,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115,823
<INTEREST-EXPENSE> 138,667
<INCOME-PRETAX> 219,824
<INCOME-TAX> 82,374
<INCOME-CONTINUING> 137,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,450
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Non-classified balance sheet
<F2>PP&E shown net
</FN>
</TABLE>
