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 June 30, 1998
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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 1998, there were 95,024,429 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
June 30, 1998
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...........................................26
Item 4. Submission of Matters to a Vote of Security Holders.........26
Item 5. Other Information...........................................27
Item 6. Exhibits and Reports on Form 8-K............................27
Signatures....................................................................28
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)(unaudited)
<CAPTION>
June 30 December 31
1998 1997
<S> ----------- -----------
Assets: <C> <C>
Cash and cash equivalents $ 145,550 $ 112,522
Federal funds sold 140,470 114,960
Investment securities at cost (which approximates market value) 512,445 172,756
Loans held for securitization or sale - 450,233
Loans receivable, less allowance for credit losses of $355,789 at
June 30, 1998 and $145,312 at December 31, 1997 4,348,128 2,815,364
Due from securitizations 267,245 472,145
Interest receivable 86,821 80,434
Premises and equipment, net 72,399 61,625
Other assets 229,614 169,374
----------- -----------
Total assets $5,802,672 $4,449,413
=========== ===========
Liabilities:
Deposits: $3,731,150 $3,212,766
Term federal funds purchased 420,000 150,000
Notes payable to banks - 82,000
Long-term notes payable 399,717 -
Accrued expenses and other liabilities 399,705 249,533
----------- -----------
Total liabilities 4,950,572 3,694,299
Company obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated deferrable
interest debentures of the Company (Capital Securities) 160,000 160,000
Shareholders' Equity:
Common stock, par value $.01 per share, (authorized: 400,000,000
shares; issued: June 30, 1998 - 94,986,921 shares;
December 31, 1997- 95,156,545 shares) 954 954
Additional paid-in capital 4,690 4,217
Retained earnings 709,306 599,856
Common stock held in treasury - at cost:June 30, 1998 - 438,399
shares; December 31, 1997 - 268,775 shares) (22,850) (9,913)
----------- -----------
Total shareholders' equity 692,100 595,114
----------- -----------
Total liabilities and shareholders' equity $5,802,672 $4,449,413
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -----------------------
1998 1997 1998 1997
--------- ------------ --------- --------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 185,213 $ 132,216 $ 355,283 $ 278,541
Investments Securities 9,007 7,483 15,514 13,329
--------- ------------ --------- ---------
Total interest income 194,220 139,699 370,797 291,870
Interest expense:
Deposits 48,970 37,955 95,123 81,967
Borrowings 12,561 6,366 21,164 12,452
--------- ------------ --------- ---------
Total interest expense 61,531 44,321 116,287 94,419
Net interest income 132,689 95,378 254,510 197,451
Provision for credit losses 117,851 38,950 175,507 72,752
--------- ------------ --------- ----------
Net interest income after
provision for credit
losses 14,838 56,428 79,003 124,699
Non-interest income:
Loan servicing income 156,677 91,004 270,793 184,826
Credit product fee income 120,847 43,716 217,255 82,752
Other 485 362 664 501
--------- ------------ ---------- ----------
278,009 135,082 488,712 268,079
Non-interest expenses:
Salaries and employee benefits 60,911 37,814 120,645 88,438
Solicitation 46,663 39,890 88,275 68,013
Occupancy, furniture and
equipment 11,088 9,554 22,354 17,799
Data processing and
communication 22,080 12,053 37,834 23,786
Other 48,183 19,817 101,870 53,879
--------- ------------ -------- -------
188,925 119,128 370,978 251,915
--------- ------------ ---------- ---------
Income before income taxes 103,922 72,382 196,737 140,863
Income tax expense 41,059 26,658 77,766 51,977
--------- ------------ ----------- ----------
Net Income $ 62,863 $ 45,724 $ 118,971 $ 88,886
========= ============ =========== ==========
Basic earnings per share $ 0.66 N/A $ 1.26 N/A
========= ============ =========== ==========
Earnings per share -
assuming dilution $ 0.65 N/A $ 1.23 N/A
========= ============ =========== ===========
Dividends paid per share $ 0.05 N/A $ 0.10 N/A
========= ============ =========== ===========
Weighted average common shares
outstanding - basic (000) 94,698 N/A 94,768 N/A
========== ============ =========== ===========
Weighted average shares and
assumed conversions (000) 96,779 N/A 96,661 N/A
========== ============ ========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
7.25% Common
Cumulative Additional stock
Preferred Common Paid-In Retained Held in
Stock Stock Capital Earnings Treasury Total
---------- -------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 $ 63 $ 5 $ 63,706 $ 419,370 $ - $ 483,144
Net Income 88,886 88,886
Redemption of preferred stock (63) (63,207) (63,270)
Net issuance of shares 948 (499) (449) -
Reimbursement relating to the
conversion of stock options 6,846 6,846
Issuance of restricted/unrestricted stock 1 5,115 5,116
Deferred compensation related to
grant of restricted and unrestricted
stock less forfeited shares (5,116) (5,116)
Cash dividend:
Preferred - paid to former parent (1,006) (1,006)
---------- -------- ---------- ------------ --------- ----------
Balance at June 30, 1997 $ - $ 954 $ 6,845 $ 506,801 $ - $ 514,600
========== ======== ========== ========== ========== ==========
Balance at December 31, 1997 $ - $ 954 $ 4,217 $ 599,856 $ (9,913) $ 595,114
Net Income 118,971 118,971
Cash dividend:
Common - $0.10 per share (9,521) (9,521)
Purchase of 357,200 common
shares for treasury 3,730 (24,436) (20,706)
Exercise of stock options (5,856) 8,094 2,238
Issuance of restricted and
unrestricted stock less
forfeited shares 1,429 3,405 4,834
Deferred compensation related to
grant of restricted and unrestricted
stock less amortization of $1,842 (3,018) (3,018)
Put warrant premium 1,325 1,325
Net tax effect from exercise of stock options
and issuance of restricted stock 2,863 2,863
--------- -------- --------- ----------- --------- -------
Balance at June 30, 1998 $ - $ 954 $ 4,690 $ 709,306 $(22,850) $692,100
========= ======== ========= =========== ========== =========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands) (unaudited)
<CAPTION>
Six Months Ended
June 30
---------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Operating Activities:
Net Income $ 118,971 $ 88,886
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 175,507 72,752
Depreciation and amortization of premises and equipment 7,302 7,189
Amortization of net loan acquisition costs 19,741 19,507
Amortization of discount on sale of loans receivables 263 242
Amortization of deferred compensation
related to restricted and unrestricted stock 1,816 -
(Increase) decrease in deferred income tax benefit (50,108) 18,353
Increase in interest receivable (6,387) (9,192)
Increase in other assets (29,873) (79,221)
Increase (decrease) in accrued expenses and other liabilities 153,035 (11,799)
------------- --------------
Net Cash Provided by Operating Activities 390,267 106,717
Investing Activities:
Adjustments to reconcile net income to net cash used by investing activities:
Net increase in money market instrument investments (299,480) (1,050)
Net cash used for loan originations and principal
collections on loans receivable (385,947) (624,557)
Net proceeds from securitization of loans 1,049,911 1,391,618
Portfolio acquisitions (1,922,265) -
Decrease (increase) in due from securitizations 204,900 (123,515)
Purchases of investment securities (40,284) (366,050)
Proceeds from maturities of investment securities 75 219,660
Increase in federal funds sold (25,510) (107,450)
Net purchases of premises and equipment (18,076) (12,483)
------------- -------------
Net Cash (Used) Provided by Investing Activities (1,436,676) 376,173
Financing Activities:
Adjustments to reconcile net income to net cash provided by financing
activities:
Net increase (decrease) in deposits 518,384 (547,290)
Proceeds from issuance of term federal funds 450,000 244,000
Repayment of term federal funds (180,000) (116,000)
(Decrease) increase in notes payable to banks (82,000) 33,000
Decrease in note payable to affiliates - (42,500)
Increase (decrease) in long-term notes payable 399,717 (50,000)
Proceeds from the issuance of capital securities - 160,000
Redemption of preferred stock - (63,270)
Reimbursement relating to conversion of stock options - 6,846
Purchase of treasury stock (20,706) -
Put warrant premium 1,325 -
Dividend paid (9,521) (1,006)
Proceeds from exercise of stock options 2,238 -
----------------- --------------
Net Cash Provided (Used) by Financing Activities 1,079,437 (376,220)
----------------- --------------
Net Increase in Cash and Cash Equivalents 33,028 106,670
Cash and Cash Equivalents at beginning of year 112,522 82,946
----------------- ---------------
Cash and Cash Equivalents at end of period $ 145,550 $ 189,616
================= ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1998 (unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of
Providian Financial Corporation 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. The
principal operating subsidiaries of the Company are Providian National Bank and
Providian Bank, 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 to a fair statement of the
results for the interim period presented 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 six months ended
June 30, 1998 are not necessarily indicative of the results for the year ended
December 31, 1998. The notes to the financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 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 1998 presentation.
Note 2 - Significant Accounting Policies
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expense, gains and losses) in the financial
statements. The adoption of SFAS No. 130 has had no material effect on the
Company's consolidated results of operations, financial position or cash flows.
Note 3 - Earnings Per Share
Historical earnings per share for the quarter ending June 30, 1997 are not
presented because prior to June 10, 1997, when the Company was spun off from its
former parent, Providian Corporation (the "Spinoff"), all of the shares of
common stock of the Company were held by its former parent, and such information
would not be meaningful. Pro forma earnings per share, with and without dilution
for the quarter ended June 30, 1997, have been computed by dividing net income
reported for the period by the pro forma weighted average number of common
shares outstanding for the applicable period.
The pro forma number of common shares outstanding prior to the Spinoff was
determined on the basis of the number of shares of Providian Corporation common
stock then outstanding, since shareholders of Providian Corporation received one
share of the Company's common stock for each share of Providian Corporation
common stock held on the record date for the Spinoff. Included in the
computation of fully diluted common shares prior to the Spinoff are Providian
Corporation options which were exercised between January 1, 1997 and June 10,
1997. These options have been included because, when they were exercised, they
became eligible to be converted to the Company's common stock in connection with
the Spinoff.
<PAGE>
Three months ended June 30 Six months ended June 30
(In thousands,
except per share data) 1998 1997 (1) 1998 1997 (1)
- --------------------------------------------------------------------------------
Income available to $62,863 $45,724 $118,971 $88,886
common stockholders ===================================================
Weighted average shares
outstanding--Basic 94,698 94,991 94,773 94,559
Effect of dilutive securities
Restricted Stock issued--
non vested 373 42 350 21
Employee stock options 1,708 337 1,538 469
--------------------------------------------------
Dilutive potential
common shares 2,081 379 1,888 490
------------------------- -----------------------
Adjusted weighted average
shares and assumed
conversions 96,779 95,371 96,661 95,049
==================================================
Earnings per share $0.66 $0.48 $1.26 $0.94
==================================================
Earnings per share--
assuming dilution $0.65 $0.48 $1.23 $0.94
==================================================
(1) Earnings per share for the three and six months ended June 30, 1997 are
presented on a pro forma basis. For purposes of pro forma earnings per share,
net income has not been adjusted for dividends on preferred stock, which was
redeemed in February 1997 out of proceeds from the issuance of mandatorily
redeemable capital securities.
Note 4 - Loan Portfolio Acquisitions and Allowance for Credit Losses
During the first six months of 1998, the Company completed two purchases of
portfolios of unsecured credit card loans from First Union Direct Bank, N.A.
("First Union") for approximately $948 million and $974 million, respectively,
in cash (the "Portfolio Acquisitions"). These two portfolios included
approximately 1,050,000 account relationships and related records and other
rights. The Company did not, and does not plan to, acquire any fixed assets or
employees of First Union in connection with the portfolio acquisitions. The
Company records the allowance for credit losses for acquired loan portfolios
upon purchase to reflect the credit quality and expected collectibility of the
loans included in the acquisition.
The activity in the allowance for credit losses for the six months ended
June 30, 1998 and 1997 is as follows (in thousands):
Six Months Ended June 30
1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of period $ 145,312 $ 114,540
Provision for credit losses 175,507 72,752
Reserve acquired 178,959 -
Charge-offs (155,915) (62,733)
Recoveries 11,926 5,184
-------------------------
Net charge-offs (143,989) (57,549)
-------------------------
Balance at end of period $ 355,789 $ 129,743
=========================
Note 5 - Senior and Subordinated Bank Notes
In February 1998, one of the Company's banking subsidiaries, Providian
National Bank ("PNB"), established a program for the issuance of senior and
subordinated debt instruments to further diversify its available funding
sources. Under this program, PNB from time to time may issue fixed or variable
rate debt instruments in the aggregate principal amount of up to $4 billion,
with maturities ranging from seven days to 15 years. During the six months ended
June 30, 1998, PNB issued $400 million in principal amount of long-term notes
with an average interest rate of 6.58%.
Note 6 - Shareholders' Equity
In June 1998, the Company entered into an agreement to purchase, on a
forward basis, 500,000 shares of its common stock. At the Company's election,
the agreement may be settled on a physical basis or, subject to certain
conditions, on a net basis in shares of Providian Financial common stock or in
cash. To the extent that the market price of the Company's common stock on a
settlement date is higher (lower) than the forward purchase price, the net
differential is received (paid) by the Company. As of June 30, 1998, the
agreement covered 451,863 shares of the Company's common stock at a forward
price of $77.92 per share. The agreement has a term of one year but may be
settled earlier. If this agreement were settled on a net share basis at the June
30, 1998 market price of the Company's common stock ($78.56 per share), the
Company would receive approximately 3,700 shares of its common stock. In June
1998, settlement of the agreement resulted in the Company receiving 48,137
shares of its common stock, which were recorded as treasury shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
Providian Financial Corporation is a diversified consumer lender, offering
a range of lending products, including unsecured credit cards, revolving lines
of credit, home loans, secured and partially secured credit cards, and fee-based
products, primarily through direct mail and direct telemarketing account
origination channels. Through these products, the Company seeks to achieve
diversified earnings sources, with both spread-based and fee-based income from
loans and related products and services. The products offered by the Company
include unbanked products ("Unbanked Products"), primarily consisting of
secured, partially secured and unsecured credit cards designed to serve a
population that the Company believes has been largely underserved by traditional
financial institutions due to a lack of credit history or past credit problems.
The Company also offers deposit products to customers nationwide. The primary
factors affecting the profitability of the Company's consumer 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, servicing, and other 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. Forward-looking statements
include expressions of the "belief," "anticipation" or "expectations" of
management, statements as to industry trends or as to future results of
operations of the Company, and other statements which are not historical fact.
Undue reliance should not be placed on forward-looking statements.
Forward-looking statements are not guarantees of future performance.
Forward-looking statements are based on certain assumptions by management and
are subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. These risks and
uncertainties include, but are not limited to, competition, delinquencies,
credit losses, outside vendor relationships, funding costs and availability,
general economic conditions, government policy and regulations, and risks
related to growth, product development, acquisitions and operations. These and
other risks and uncertainties are described in the Company's 1997 Annual Report
on Form 10-K under the heading "Cautionary Statements." The Company undertakes
no obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Earnings Summary
Net income for the quarter ended June 30, 1998 was $62.9 million, or $0.65
per diluted share, compared to net income of $45.7 million, or $0.48 pro forma
per diluted share, for the quarter ended June 30, 1997. Net income for the six
months ended June 30, 1998 was $119 million, or $1.23 per diluted share,
compared to net income of $88.9 million, or $0.94 pro forma per diluted share,
for the first six months of 1997. As stated in Note 3 to the Company's condensed
consolidated financial statements, the Company's historical earnings per share
have not been presented for the quarter ended June 30, 1997 and prior periods
because until 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 is primarily attributable to
growth in managed loans outstanding, higher year to date net interest margins
and increased non-interest income, offset by higher net credit losses and
increased non-interest expenses. Average managed loans outstanding increased
from $9.2 billion for the quarter ended June 30, 1997 to $11.3 billion for the
quarter ended June 30, 1998, reflecting the impact of marketing and customer
activation efforts combined with the Portfolio Acquisitions. End of period
managed loans receivable increased from $9.2 billion as of June 30, 1997 to
$11.5 billion as of June 30, 1998. On-balance sheet loans also increased year
over year to $4.7 billion as of June 30, 1998, compared to $2.9 billion as of
June 30, 1997.
From December 31, 1997 to June 30, 1998, total managed loans outstanding
increased from $9.9 billion to $11.5 billion, reflecting new customer balances
realized from marketing activity, activation of existing customers and loan
Portfolio Acquisitions offset by balance attrition due to payments and credit
loss activity. The Company added 2.6 million new customer accounts during the
six months ended June 30, 1998. This number includes new accounts from the
Portfolio Acquisitions and excludes customer attrition. These new accounts added
to the Company's customer base for fee-based product sales.
Return on average total managed assets for the three months ended June 30,
1998 was 1.92%, compared to 1.71% for the same period during 1997. The 21 basis
point increase in return on assets is primarily due to higher net interest
margins driven by growth in Unbanked Product accounts and to increased fee-based
product and other fee income. Return on average shareholders' equity for the
three months ended June 30, 1998 was 37.91%, compared to 37.60% for the same
period in 1997, reflecting the increased return on average total managed assets
for the period, offset by a higher ratio of average equity to average managed
assets.
Managed Loan Portfolio
The Company's consumer loan products include unsecured credit cards,
revolving lines of credit, home loans, and secured and partially secured credit
cards. Since 1989, the Company has securitized unsecured credit card and
revolving lines of credit and, beginning in 1996, home equity lines of credit.
During the six months ended June 30, 1998, the Company securitized secured and
partially secured credit card receivables for the first time. Securitized loans
are not considered assets of the Company and therefore are not shown on its
statement of financial condition. It is, however, the Company's practice to
analyze its financial performance on a managed loans basis. In order to do so,
the Company's income statement and statement of financial condition are adjusted
to reverse the effect of securitization.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No.125"), which
provided new accounting and reporting standards for securitization and other
similar transactions, effective January 1, 1997. Under SFAS No. 125, the Company
recognizes an "interest only strip receivable" asset, available for sale, equal
to the present value of the projected excess servicing income of the transferred
assets.
The following table summarizes selected data on the Company's managed
consumer loan portfolio:
<TABLE>
- ---------------------------------------------------------------------------------------------------------
TABLE 1-MANAGED CONSUMER LOAN PORTFOLIO INFORMATION
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
(Dollars in thousands) 1998 1997 1998 1997
---------- ------------ ------------- -----------
<S> <C> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 4,703,917 $ 2,864,782 $ 4,703,917 $ 2,864,782
Securitized consumer loans 6,791,054 6,379,953 6,791,054 $ 6,379,953
------------ ------------ ------------- -----------
Total managed consumer loan portfolio $11,494,971 $ 9,244,735 $ 11,494,971 $ 9,244,735
=========== ============ ============= ===========
Average Balances:
On-balance sheet consumer loans $ 4,398,017 $ 2,906,059 $ 4,190,478 $ 3,215,173
Securitized consumer loans 6,860,743 6,296,037 6,710,255 5,962,948
------------ ----------- ------------- -----------
Total average managed consumer loan portfolio $11,258,760 $ 9,202,096 $ 10,900,733 $ 9,178,121
============ =========== ============= ===========
Operating Data and Ratios:
Reported:
Average earning assets $ 5,021,452 $3,443,945 $ 4,730,898 $ 3,708,683
Return on average assets 4.48% 4.51% 4.41% 4.21%
Net interest margin (1) 10.57% 11.08% 10.76% 10.65%
Managed:
Average earning assets $11,882,195 $9,739,982 $ 11,441,153 $ 9,671,631
Return on average assets 1.92% 1.71% 1.88% 1.71%
Net interest margin (1) 10.79% 10.47% 7.12% 6.87%
(1) Net interest margin is equal to net interest income divided by average
earning assets
</TABLE>
<PAGE>
The Company services the accounts underlying the securitized loans and
earns a stated monthly servicing fee, which is generally offset by 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, servicing fee, credit enhancement costs and other program expenses, is
referred to as excess servicing income. Revenue resulting from excess servicing
income is recognized first as a reduction of the interest only strip receivable
and, to the extent the amount received exceeds the related component of the
interest only strip receivable (which was recorded at present value), as loan
servicing income. The effect of this treatment is to reduce net interest income
and the provision for credit losses, and to increase non-interest income, on the
Company's statement of income. For the three months ended June 30, 1998 and
1997, as a result of securitization, the Company's net interest income was
reduced by $187.9 million and $159.6 million, respectively; the provision for
credit losses was reduced by $127.6 million and $123.3 million, respectively;
and non-interest income was increased by $60.3 million and $36.3 million,
respectively. For the six months ended June 30, 1998 and 1997, as a result of
securitization, the Company's net interest income was reduced by $356.2 million
and $300.5 million, respectively; the provision for credit losses was reduced by
$247.3 million and $232.8 million, respectively; and non-interest income was
increased by $108.9 million and $67.7 million, respectively.
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. The Company's securitization of consumer loans has a
significant effect on the volume of on-balance sheet loans and borrowings and,
to a lesser degree, on deposits, and will cause variations in such balances over
time.
Net interest income for the second quarter of 1998 totaled $132.7 million,
compared to $95.4 million for the same period of 1997. This increase is
primarily attributable to higher average on-balance sheet consumer loans, offset
as expected by the lower yields on the balances acquired in the Portfolio
Acquisitions. Interest expense as a percentage of average interest-bearing
liabilities increased 4 basis points for the second quarter of 1998 compared to
the second quarter of 1997. The annualized net interest margin on average
earning assets for the second quarter of 1998 was 10.57%, compared to 11.08% for
the same period in the prior year, reflecting lower yields, as mentioned above,
combined with higher average equity as a percentage of assets during 1998.
On a managed loan basis, managed net interest income for the quarter ended
June 30, 1998 was $320.6 million, compared to $255 million for the same period
in 1997, an increase of $65.6 million, or 25.7%. The managed net interest margin
on average managed loans increased to 11.46% for the quarter ended June 30,
1998, from 11.16% for the quarter ended June 30, 1997. These increases in
managed net interest income and the managed net interest margin resulted from an
increase in average managed loans as well as higher finance charge yields on
selected portfolio segments that were repriced in the prior year.
Statement of Average Balances, Income and Expense, Yields and Rates
The following tables provide an analysis of interest income, interest
expense, net interest margin and average balance sheet data for the three month
and six month periods ended June 30, 1998 and 1997:
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 2-STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended June 30
-----------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- ------------------------------------------
(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 $ 4,398,017 $ 185,213 16.85% $ 2,906,059 $ 132,216 18.20%
Interest-earning cash 22,095 299 5.41% 108,836 1,482 5.45%
Federal funds sold 220,394 3,042 5.52% 294,670 4,106 5.57%
Investment securities 380,946 5,666 5.95% 134,380 1,895 5.64%
---------- --------- ------------ ------------ ----------- ------
Total interest-earning 5,021,452 $ 194,220 15.47% 3,443,945 $ 139,699 16.23%
assets
Allowances for loan losses (300,638) (124,973)
Other assets 894,863 738,040
------------ --------------
Total assets $ 5,615,677 $ 4,057,012
============ ==============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 3,588,554 $ 48,970 5.46% $ 2,825,265 $ 37,955 5.37%
Borrowings 826,600 12,561 6.08% 381,540 6,366 6.67%
----------- ------- ----------- ------------ ----------- ----------
Total interest-bearing liabilities 4,415,154 $ 61,531 5.57% 3,206,805 $ 44,321 5.53%
Other liabilities 377,171 203,803
----------- ------------
Total liabilities 4,792,325 3,410,608
Capital securities 160,000 160,000
Equity 666,352 486,404
------------ ------------
Total liabilities and equity $ 5,615,677 $ 4,057,012
============ ============
NET INTEREST SPREAD: 9.90% 10.70%
====== ======
Interest income to
average interest-earning assets 15.47% 16.23%
Interest expense to
average interest-earning assets 4.90% 5.15%
------ ----------
NET INTEREST MARGIN 10.57% 11.08%
======= ============
Six Months Ended June 30
-----------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
----------------------------------------- --------------------------------------------
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 $ 4,190,478 $ 355,283 16.96% $ 3,215,173 $ 278,541 17.33%
Interest-earning cash 31,477 855 5.43% 104,205 2,771 5.32%
Federal funds sold 215,936 5,945 5.51% 302,192 8,167 5.41%
Investment securities 293,007 8,714 5.95% 87,113 2,391 5.49%
---------- --------- ------------ ------------ ----------- ------
Total interest-earning 4,730,898 $ 370,797 15.68% 3,708,683 $ 291,870 15.74%
assets
Allowances for loan losses (266,193) (121,142)
Other assets 927,135 633,102
------------ --------------
Total assets $ 5,391,840 $ 4,220,643
============ ==============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 3,507,344 $ 95,124 5.42% $ 3,040,706 $ 81,967 5.39%
Borrowings 707,600 21,163 5.98% 391,213 12,452 6.37%
----------- ------- ----------- ------------ ----------- ------
Total interest-bearing liabilities 4,214,944 $116,287 5.52% 3,431,919 $ 94,419 5.50%
Other liabilities 374,725 167,566
----------- ------------
Total liabilities 4,589,699 3,599,485
Capital securities 160,000 129,945
Equity 642,171 491,213
------------ ------------
Total liabilities and equity $ 5,391,840 $ 4,220,643
============ ============
NET INTEREST SPREAD: 10.16% 10.24%
====== =======
Interest income to
average interest-earning assets 15.68% 15.74%
Interest expense to
average interest-earning assets 4.92% 5.09%
------ ---------
NET INTEREST MARGIN 10.76% 10.65%
======= ==========
</TABLE>
<PAGE>
Interest Volume and Rate Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets, the average interest rate paid on
interest-bearing liabilities and by changes in the volume of interest-earning
assets and interest-bearing liabilities. The quarter ended June 30, 1998
compared to the prior year quarter reflects growth in consumer loans and
investment securities, resulting in higher on-balance sheet earning assets.
Yields for on-balance sheet loans decreased for the quarter ended June 30, 1998
compared to the prior year quarter reflecting lower average finance charge
yields on the Acquired Portfolios. The following table sets forth the dollar
amount of the increase (decrease) in interest income and interest expense
resulting from changes in volume, rates and interest income:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
TABLE 3-INTEREST VARIANCE ANALYSIS
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
---------------------------------- ----------------------------------------
Increase Change due to (1) Increase Change due to (1)
(Decrease) Volume Rate (Decrease) Volume Rate
(Dollars in thousands) --------- --------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Consumer loans $ 52,997 $114,865 $(61,868) $76,742 $93,923 $(17,181)
Federal funds sold (1,064) (1,027) (37) (2,222) (2,654) 432
Other securities 2,588 2,489 99 4,407 4,022 385
--------- ---------- --------- -------- -------- ----------
Total interest income 54,521 116,327 (61,806) 78,927 95,291 (16,364)
Interest Expense:
Deposits 11,015 10,372 643 13,157 12,697 460
Borrowings 6,195 9,943 (3,748) 8,711 10,935 (2,224)
--------- ---------- ---------- -------- ------ -----------
Total interest expense 17,210 20,315 (3,105) 21,868 23,632 (1,764)
--------- ---------- ---------- -------- ------- -----------
Net interest income $ 37,311 $ 96,012 $(58,701) $57,059 $71,659 $(14,600)
========= ========= ========== ======== ======= ===========
(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
Non-interest income, which consists primarily of loan servicing income, fee
income from credit products and other fee-based product income, represented
approximately 59% of gross on-balance sheet revenues for the three months ended
June 30, 1998, compared to approximately 49% for the three months ended June 30,
1997. For the six months ended June 30, 1998 and 1997, fee income represented
57% and 48%, respectively, of gross on-balance sheet revenues. The increase in
non-interest income resulted from higher loan servicing income, due primarily to
higher average securitized assets and increased sales of fee-based products.
Loan Servicing Income
Average securitized loans, which are reduced by principal collections
accumulated in principal funding accounts prior to being paid to securitization
investors, were $6.9 billion during the three months ended June 30, 1998,
compared to $6.3 billion for the same period of 1997, a 10% increase. Loan
servicing income increased 72%, to $156.7 million, for the quarter ended June
30, 1998, compared to $91 million for the same period in 1997. For the six
months ended June 30, 1998, loan servicing income increased 46.5%, to $270.8
million, from $184.8 million for the same period in 1997. The increase in loan
servicing income resulted from higher net interest margins on securitized
receivables, offset in part by moderate increases in credit loss rates, on
higher average securitized loans. Further offsetting the increase in loan
servicing income was a decrease in the gain on sale of assets recognized
pursuant to SFAS No. 125, which became effective January 1, 1997. Gains recorded
upon securitization, recognized in accordance with SFAS No. 125, were $2.2
million and $50.4 million during the six months ended June 30, 1998 and 1997,
respectively. The decrease reflects the impact of SFAS No. 125 during the first
six months of 1997, when the Company was required to recognize both excess
servicing income generated by securitized balances existing at December 31, 1996
and gains on additional loan sales made during that period. The Company
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. Any future gains that
will be recognized by the Company in accordance with SFAS No. 125 will depend on
the timing, performance and amount of future securitizations.
Credit Product Fee Income
Credit product fee income increased 176.4%, to $120.8 million, for the
quarter ended June 30, 1998, compared to $43.7 million for the prior year
quarter. For the six months ended June 30, 1998, credit product fee income
increased 162.5%, to $217.3 million, from $82.8 million for the same period in
1997. These increases resulted from increased customer volume for credit card
membership and processing fees, increased income from sales of the Company's
fee-based products and an increase in late, overlimit and cash advance fees.
Non-Interest Expense
Non-interest expense for the three months ended June 30, 1998 was $188.9
million, an increase of 59% over non-interest expense of $119.1 million for the
same period in the prior year. Salaries and employee benefits increased $23.1
million, or 61%, to $60.9 million for the three months ended June 30, 1998,
compared to $37.8 million for the same period in the prior year. This increase
reflects an increase in the employee base to support increased customer service
volume and additional account acquisition efforts. Solicitation costs, which
include direct mail, postage, telemarketing and package materials for both new
and existing customers, totaled $46.7 million for the quarter ended June 30,
1998, a 17% increase over the prior year quarter total of $39.9 million. This
increase in solicitation costs resulted from an increased investment in the
direct mail and direct telemarketing acquisition channels and from other
initiatives designed to improve customer activation and retention.
The "Year 2000" problem is a result of computer systems using two digits
rather than four digits to define the applicable year. The Company is heavily
dependent upon computer systems for all of its operations. The Company processes
data through its own systems and obtains data and processing services from
various vendors. The Company has launched a Year 2000 Project to identify,
assess and, where appropriate, modify internal and vendor systems with respect
to Year 2000 problems. The Year 2000 Project team is currently assessing the
Company's internal systems and the systems of its material vendors for Year 2000
compliance and such assessment is substantially complete. The Company's goal is
to complete the Year 2000 Project testing and system modifications by June 30,
1999. The Company believes that it has adequate resources to achieve Year 2000
compliance for its internal systems and that it is taking appropriate steps to
identify exposure to Year 2000 problems with its material vendors.
The Company's total Year 2000 Project costs are expected to be no more than
$10 million and the Company has incurred approximately $4.8 million in Year 2000
Project expenses to date. The Company believes that the costs of Year 2000
compliance will not have a material impact on the Company's future financial
results or condition. However, if the Year 2000 Project is not completed on a
timely basis or is not fully effective, these issues could have a significant
adverse economic impact on the Company's financial results and condition.
Management's estimates for the Year 2000 Project completion date and Year 2000
Project compliance costs are based on assumptions about future events and are
subject to risks and uncertainties. These include the continued availability of
trained personnel, the Company's ability to identify and correct software
problems and the ability of its vendors to achieve Year 2000 compliance on a
timely basis.
Income Taxes
The Company's income tax expense, which includes both state and federal
taxes, was $41.1 million for the three months ended June 30, 1998, compared to
$26.7 million for the three months ended June 30, 1997. The overall current
effective income tax rate of 39.5% reflects an increase in state tax rates
associated with the Spinoff.
Asset Quality
Delinquencies and net credit losses experienced in 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.
The establishment of the allowance for credit losses generally depends on
historical levels of credit losses and current trends. As new portfolios are
originated, management uses historical credit loss and delinquency analyses to
establish reserves for future credit losses, based on the aggregation of loss
behavior of similar but more seasoned loan portfolios. The allowance for credit
losses related to acquired loan portfolios is recorded upon purchase to reflect
the credit quality and expected collectibility of the loans included in the
acquisition.
The Company's policy is to recognize principal credit losses on all
unsecured loans (including the unsecured portion of any partially secured credit
card loans) which become delinquent no more than 180 days after the delinquency
occurs unless the accountholder cures the default by making a partial payment
that qualifies under the Company's standards. Bankrupt accounts and accounts of
deceased customers are charged-off upon determination of uncollectibility. Home
loans are reviewed for collectibility when they become 60 days delinquent, and
credit losses are recognized for the amount by which the book value of the loan
exceeds the estimated net realizable value of the underlying collateral. The
Company continues to pursue collection of charged-off loans when appropriate,
and subsequent collections on charged-off loans are recognized as recoveries.
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 bankrupt or
is deceased) until the loan is either repaid or recognized as a credit loss. The
following table presents delinquency information as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE 4- DELINQUENCIES
- --------------------------------------------------------------------------------
June 30
---------------------------------------------------------
1998 1997
------------------------ -----------------------------
% of % of
Total Total
(Dollars in thousands) Loans Loans Loans Loans
--------- -------- ----------- -----
<S> <C> <C> <C> <C>
Reported: (1)
Loans outstanding $ 4,703,917 100.00% $ 2,864,782 100.00%
Loans delinquent:
31 - 60 days 97,953 2.08% 53,282 1.86%
61 - 90 days 59,866 1.27% 30,320 1.06%
91 or more days 125,012 2.66% 61,124 2.13%
----------- ------- ----------- -------
Total $ 282,831 6.01% $ 144,726 5.05%
=========== ======= =========== =======
Managed:
Loans outstanding $11,494,971 100.00% $ 9,244,735 100.00%
Loans delinquent:
31 - 60 days 197,108 1.72% 153,938 1.67%
61 - 90 days 122,841 1.07% 86,473 0.94%
91 or more days 242,933 2.11% 163,606 1.77%
----------- ------- ----------- -------
Total $ 562,882 4.90% $ 404,017 4.37%
=========== ======= =========== =======
(1) Includes loans held for securitization.
</TABLE>
The managed loan delinquency rate as of June 30, 1998 was 4.90%, compared
to 4.22% as of December 31, 1997 and 4.37% as of June 30, 1997. The increase in
the managed loan delinquency rate over the prior quarter reflects the higher
rates of delinquency associated with the loans acquired in the Portfolio
Acquisitions. Excluding the effect of the Portfolio Acquisitions, the
delinquency rate at June 30, 1998 would have been 4.26% pro forma, slightly
above the delinquency rate at December 31, 1997. The delinquency rate for
on-balance sheet loans was 6.01% as of June 30, 1998, compared to 4.17% as of
December 31, 1997 and 5.05% as of June 30, 1997. This increase in the on-balance
sheet loan delinquency rate reflects the effect of the loans acquired in the
Portfolio Acquisitions, which have not been securitized, and the Company's
Unbanked Product outstandings, which experience a higher delinquency rate than
the Company's other credit card loans. Secured and partially secured Unbanked
Product outstandings are collateralized in whole or in part by customer savings
accounts, which mitigate the increased risk associated with higher
delinquencies.
Net Credit Losses
Net credit losses for consumer loans consist of the principal amount of
charge-offs on loans to customers who are unwilling or unable to pay their loan
balances, including bankrupt and deceased customers, less current period
recoveries on previously charged-off accounts. Net credit losses exclude accrued
interest and fee income, which are written off as a reversal of current earnings
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 six months ended June 30, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
TABLE 5 - NET CREDIT LOSSES
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
(Dollars in thousands) 1998 1997 1998 1997
----------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Reported: (1)
Average loans outstanding $ 4,398,017 $ 2,906,059 $ 4,190,478 $ 3,215,173
Net charge-offs $ 85,094 $ 28,465 $ 143,989 $ 57,549
Net charge-offs as
a percentage of average
loans outstanding 7.74% 3.92% 6.87% 3.58%
Managed:
Average loans outstanding $11,258,760 $ 9,202,096 $10,900,733 $ 9,178,121
Net charge-offs $ 212,696 $ 151,711 $ 391,214 $ 290,312
Net charge-offs as
a percentage of average
loans outstanding 7.56% 6.59% 7.18% 6.33%
(1) Includes loans held for securitization.
</TABLE>
The managed net credit loss rate for the three months ended June 30, 1998
was 7.56%, compared to 6.78% for the quarter ended March 31, 1998 and 6.59% for
the quarter ended June 30, 1997. The increase over the prior quarter reflects
the higher credit loss rates on the loans acquired in the Portfolio Acquisitions
and account seasoning. Excluding the impact of the Portfolio Acquisitions, the
credit loss rate for the quarter ended June 30, 1998 would have been 6.36% pro
forma, a decrease from the prior quarter pro forma net credit loss rate of 6.49%
and reflective of the industry wide trend in consumer credit performance over
the prior year quarter.
Allowance and Provision for Possible Credit Losses
The Company maintains the allowance for credit losses at a level it
believes to be adequate to absorb future credit losses, net of recoveries,
inherent in the existing on-balance sheet portfolio. In evaluating the adequacy
of the allowance, management takes into consideration several factors, including
general economic conditions, asset quality, seasoning, security and trends in
credit losses and delinquencies.
The following table sets forth the activity in the allowance for possible
credit losses for the three and six months ended June 30, 1998 and 1997:
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
TABLE 6 - SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in Thousands) 1998 1997 1998 1997
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at beginning
of period $ 249,440 $ 119,258 $ 145,312 $ 114,540
Provision for credit losses 117,851 38,950 175,507 72,752
Reserve acquired 73,592 - 178,959 -
Charge-offs (91,495) (32,140) (155,915) (62,733)
Recoveries 6,401 3,675 11,926 5,184
---------- ---------- ----------- ----------
Net charge-offs (85,094) (28,465) (143,989) (57,549)
---------- ---------- ----------- ----------
Balance at end of period $ 355,789 $ 129,743 $ 355,789 $ 129,743
========== ========== =========== ==========
Allowance for credit losses
to loans at period-end (1) 7.56% 4.78% 7.56% 4.78%
(1) Excludes loans held for securitization.
</TABLE>
Funding, Liquidity and Market Risk
The Company's approach to funding its assets is to seek a diversified
funding mix and investor base. Funding products used by the Company include
retail and institutional deposits, term federal funds, public and private asset
securitizations, a committed revolving credit facility, long term notes and
mandatorily redeemable capital securities. Within funding product categories,
funding sources are further diversified based on the industry, geographical
location and type of investor. The Company currently offers a wide range of
maturity terms for its funding products, ranging from one week to seven years.
Actual maturity distributions depend on several factors, including expected
asset duration, investor demand, relative costs, shape of the yield curve and
anticipated issuance in the securitization and capital markets. Management's
goal is to achieve a balanced distribution of maturities, avoiding undue
concentration in any one period. Management also monitors existing funding
maturities and seeks to ensure that appropriate amounts of backup liquidity are
available to support maturing funding sources.
The following table summarizes the contractual maturities of deposits as of
June 30, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 7 - CONTRACTUAL MATURITIES OF DEPOSIT
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
---------------------------------------- --------------------------------------------
(Dollars in thousands) Direct Other Total Direct Other Total
Deposits Deposits Deposits Deposits Deposits Deposits
----------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 295,621 $235,773 $ 531,394 $ 254,690 $115,537 $ 370,227
Over three months
through 12 month 749,287 361,705 1,110,992 577,769 216,544 794,313
Over one year through
five years 521,947 580,550 1,102,497 394,355 402,157 796,512
Deposits without
contractual maturity 921,111 65,156 986,267 822,262 59,508 881,770
---------- ------------ ---------- ---------------------------------------
Total Deposits $2,487,966 $1,243,184 $3,731,150 $ 2,049,076 $793,746 $2,842,822
====================================================================================
</TABLE>
Deposits increased from $3.2 billion as of December 31, 1997 to $3.7
billion as of June 30, 1998. This increase resulted from management's efforts to
increase deposits to provide funding for on-balance sheet loans and investment
securities used in liquidity management.
Interest expense on borrowings for the quarter ended June 30, 1998 was
$12.6 million, compared to $6.4 million for the quarter ended June 30, 1997.
This increase was the result of higher average borrowings of term federal funds
purchased and long-term notes payable.
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 three
of the Company's subsidiaries, Providian National Bank, Providian Bank and
Providian Credit Corporation (the "Borrowers"), and the credit facility is
guaranteed by Providian Financial Corporation. As of June 30, 1998, there were
no outstanding borrowings under the credit facility. Among other covenants, the
credit facility contains certain financial covenants applicable to the Company,
including consolidated return on assets 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.
In February 1998, Providian National Bank ("PNB") established a program for
the issuance of senior and subordinated debt instruments to further diversify
funding sources. Under this program, PNB from time to time may issue fixed or
variable rate debt instruments in the aggregate principal amount of up to $4
billion, with maturities ranging from seven days to 15 years. During the six
months ended June 30, 1998, PNB issued $400 million in principal amount of
long-term notes.
The Company is also a party to three separate 364-day credit facilities
totaling $275 million, under which short-term borrowings are available to the
Company for general corporate purposes. These short-term facilities contain
financial covenants generally similar to those contained in the Company's
revolving credit facility described above.
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 securitization of consumer loans is a significant source of the
Company's funding. Commercial paper-based conduit facilities and other variable
funding facilities are used to securitize certain unsecured, secured and
partially secured credit card, revolving line of credit and home equity line of
credit card receivables. As of June 30, 1998, the Company had $2.3 billion of
outstanding securitized loans under such conduit and variable funding.
Outstanding term securitizations under the Company's master trust totaled $4.5
billion as of June 30, 1998. Term securitizations typically have either
amortization periods during which principal is paid to investors or principal
accumulation periods during which principal payments are aggregated for
repayment to investors on an expected maturity date. During the quarter ended
June 30, 1998, accumulation of principal for previously securitized loans of
$837.9 million was paid to investors. As securitized loans are reduced through
principal repayment or principal accumulation, the Company's on-balance sheet
loans will increase, to the extent such reductions are not offset by loan
attrition. Such increases are funded by the Company through new securitizations
or other funding sources.
The Company seeks to mitigate earnings volatility associated with interest
rate movements by generally matching the repricing characteristics of on- and
off-balance sheet assets and liabilities. Fixed rate liabilities generally fund
fixed annual percentage rate ("APR") assets, while variable rate liabilities
generally fund variable APR assets. Given the Company-directed repricing
characteristics of its credit card assets and historically favorable funding
rates for variable rate liabilities, the Company uses variable rate liabilities
to fund a portion of its fixed APR assets.
The Company uses derivative financial instruments, including interest rate
swap and cap agreements, with indices that generally correlate to managed assets
or liabilities to modify its net interest sensitivity to levels determined by
management to be appropriate based on the Company's current economic outlook.
The following table presents the notional amounts of interest rate swap, cap and
floor agreements for the periods indicated:
<TABLE>
- ----------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF INTEREST RATE SWAPS/CAPS
- ----------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in thousands) 1998 1997 1998 1997
------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Beginning Balance $ 955,500 $ 1,090,500 $ 955,500 $ 1,290,500
Additions 66,667 30,000 166,667 63,333
Maturities 886,667 165,000 986,667 398,333
--------- -------- --------- ---------
Ending Balance $ 135,500 $ 955,500 $ 135,500 $ 955,500
========= ========== ========= =========
Interest rate caps and floors:
Beginning Balance $ 709,470 $1,459,950 $ 922,220 $ 1,522,450
Additions 332,500 - 322,500 -
Maturities 350,000 112,750 562,750 175,250
----------- ---------- --------- ---------
Ending Balance $ 691,970 $1,347,200 $ 691,970 $ 1,347,200
=========== ========== ========= ==========
</TABLE>
The Company's goal in managing liquidity is to ensure that funding will be
available to support the Company's 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. Investment securities increased from $172.8 million
as of December 31, 1997 to $512.4 million as of June 30, 1998. Federal funds
sold increased from $115.0 million to $140.5 million over the same period.
As part of its comprehensive risk management strategy, the Company may
enter into sale and purchase transactions on its common stock. The Company's
goal in managing equity risk is to mitigate the effect of price volatility on
stock option grants made as part of the Company's equity-based benefit plans.
During the first quarter of 1998, the Company entered into an agreement to sell
equity put warrants for 250,000 shares of the Company's stock. The warrants
entitle the holder to sell to the Company, by physical delivery, a specified
number of shares of the Company's common stock at a price of $64.60 per share.
These put warrants may only be exercised on the expiration date, which is
February 26, 1999.
In June 1998, the Company entered into an agreement to purchase, on a
forward basis, 500,000 shares of its common stock. At the Company's election,
the agreement may be settled on a physical basis or, subject to certain
conditions, on a net basis in shares of Providian Financial common stock or in
cash. To the extent that the market price of the Company's common stock on a
settlement date is higher (lower) than the forward purchase price, the net
differential is received (paid) by the Company. As of June 30, 1998, the
agreement covered 451,863 shares of the Company's common stock at a forward
price of $77.92 per share. The agreement has a term of one year but may be
settled earlier. If this agreement were settled on a net share basis at the June
30, 1998 market price of the Company's common stock ($78.56 per share), the
Company would receive approximately 3,700 shares of its common stock. In June
1998, settlement of the agreement resulted in the Company receiving 48,137
shares of its common stock, which were recorded as treasury shares.
Capital Adequacy
Each of the Company's banking subsidiaries is subject to risk-based capital
adequacy guidelines as defined by its primary federal regulator. 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 reserve for credit losses. Based on these definitions of capital, the
regulations further define three capital adequacy ratios that are used to
measure whether a financial institution achieves "well capitalized" or
"adequately capitalized" status:
<TABLE>
<CAPTION>
"Well "Adequately
Capitalized Capitalized
Capital Ratio Calculation Ratios" Ratios"
- ----------------- -------------------------- ------------- ---------------
<S> <C> <C> <C>
Total Risk-Based Total Risk-Based (Tier 1 + Tier 2/total risk-based assets) => 10% =>8 <10%
Tier 1 Tier 1 (Tier 1/total risk-based assets) => 6% =>4% <6%
Leverage Leverage (Tier 1/average total assets less intangibles) => 5% =>4% <5%
</TABLE>
As of June 30, 1998, each of the Company's banking subsidiaries was
considered "well capitalized" based on its risk-based capital ratios, as set
forth below:
<TABLE>
<CAPTION>
Providian
National Providian
Capital Ratio Bank Bank
- ----------------------------------- ------------- ---------------
<S> <C> <C>
Total Risk-Based (Tier 1 + Tier 2/total risk-based assets) 12.65% 16.94%
Tier 1 (Tier 1/total risk-based assets) 11.58% 15.55%
Leverage (Tier 1/average total assets less intangibles) 13.15% 10.68%
</TABLE>
On May 6, 1998, the Board of Directors of the Company approved a quarterly
dividend of $.05 per share payable on June 15, 1998 to shareholders of record on
June 1, 1998. The payment of dividends on the common stock of 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, the Company will not be permitted to declare dividends on its common
stock.
The primary source of funds for payment of accrued distributions on the
Capital Securities and dividends on the common stock of the Company is dividends
from its banking subsidiaries. The amount of dividends a bank may declare is
generally limited to the sum of its net profit for the current year and its
retained earnings for the prior two years, less any dividends declared during
the related three-year measurement period. Also, a bank may not declare
dividends if such declaration would leave the bank inadequately capitalized.
Therefore, the Company's ability to pay accrued distributions on the Capital
Securities and dividends on its common stock depends on the future net income
and capital requirements of the Company's banking subsidiaries.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has been named as a defendant in various legal actions arising
in the ordinary course of the Company's business. In the opinion of the Company,
any liability that is likely to arise with respect to these actions will not
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1998 Annual Meeting of Stockholders was held on May 6, 1998.
(b) The following directors were elected at such meeting:
James V. Elliott
Lyle Everingham
J. David Grissom
The following directors continued their term of office after
such meeting:
John M. Cranor III (resigned effective July 1, 1998)
Christina L. Darwall
Ruth M. Owades
John L. Weinberg
Shailesh J. Mehta
F. Warren McFarlan
Larry D. Thompson
(c) The following matters were voted upon at such meeting:
Election of Directors Votes For Votes Withheld
--------------------- ----------- ---------------
James V. Elliott 81,103,850 930,367
Lyle Everingham 81,103,960 930,257
J. David Grissom 79,854,903 2,179,314
Item Votes For Votes Against Abstain
- ---------- ---------- --------------- ----------
Adoption of the Company's 1997
Employee Stock Purchase Plan 76,559,193 5,163,389 311,635
Ratification of the Selection of
Ernst & Young LLP as independent
auditors of the Company for 1998 81,872,194 37,732 124,291
No other matter was voted upon at such meeting.
Item 5. Other Information.
Effective July 1, 1998, John M. Cranor III resigned as a director of the
Company.
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 June 23, 1998
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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: August 14, 1998 /s/ David J. Petrini
-------------------------------
David J. Petrini
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Signatory)
Date: August 14, 1998 /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 June 23, 1998
Exhibit 27.1 Financial Data Schedule
PROVIDIAN FINANCIAL CORPORATION
STOCK OWNERSHIP PLAN
As Amended and Restated June 23, 1998
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 23, 1998.
(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 Employees and Consultants to 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 Employees,
Consultants 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 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 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 Providian 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 Treasury Regulation ss.
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. "Consultant" shall mean any person, including an advisor, engaged
by the Company to render consulting services and who is compensated for
such services.
g. "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.
h. "Employee" shall mean an individual who is a key salaried employee
of the Company.
i. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
j. "Grantor Trust" shall mean a revocable inter vivos grantor trust
established for the benefit of a Participant and such Participant's spouse,
children, stepchildren or grandchildren (whether adopted or natural) and
described in Sections 671 through 679 of the Code.
k. "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.
l. "Non-Employee Director" shall mean a member of either (i) the Board
of Directors or (ii) a Subsidiary Board of Directors who is not also an
Employee.
m. "Nonrestricted Stock" shall mean shares of Common Stock granted to
a Participant pursuant to this Plan which are not Restricted Stock.
n. "Outstanding Common Stock" shall mean the then outstanding shares
of Common Stock.
o. "Outstanding Voting Securities" shall mean the then outstanding
voting securities of Providian entitled to vote generally in the election
of directors of Providian.
p. "Participants" shall mean (i) Employees who are selected by the
Board of Directors or the Committee to participate in the Plan, (ii)
Consultants who are selected by the Board of Directors or the Committee to
participate in the Plan and (iii) Non-Employee Directors who are selected
by the Board of Directors or the Committee to participate in the Plan.
q. "Plan" shall mean this Stock Ownership Plan as the same may be
amended from time to time.
r. "Restricted Period" shall have the meaning given such term in
Section 10.
s. "Restricted Stock" shall mean Common Stock which is subject to the
restrictions provided for in Section 9.
t. "Retirement" shall mean retirement by a Participant in accordance
with the terms of the Company's retirement plans.
u. "Subsidiary Board of Directors" shall mean any board of directors
of any subsidiary of Providian.
v. "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,
(b) those Consultants who are selected by the Board of Directors or the
Committee to participate in the Plan, and (c) those persons who are Non-Employee
Directors who are selected by the Board of Directors or the Committee to
participate in the Plan. In determining the Employees, Consultants, or
Non-Employee Directors who shall become Participants, the Board of Directors or
the Committee shall take into account the duties of the Employees, Consultants,
or Non-Employee Directors, 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. A Participant 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, Consultants, 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 Providian's
Management Incentive 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 184,641.
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 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, the
appropriate number of shares of Nonrestricted Stock shall be issued and
registered in the name of such Participant, but such shares shall be held by the
Company or its agent for the account of such Participant.
b. Notwithstanding the fact that the Company or its agent may hold the
shares 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 or its agent will
transfer, or cause to be transferred, the shares of Nonrestricted Stock granted
to such Participant in accordance with instructions provided by the Participant
as soon as reasonably practicable following receipt of such instructions;
provided, however, that the transfer of such shares, other than a transfer to a
Grantor Trust, 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 a Participant's service as an Employee, Consultant or
Non-Employee Director, all of the shares of Nonrestricted Stock granted to such
Participant shall be transferred to such Participant as soon as reasonably
practicable.
9. Provisions Applicable to Restricted Stock.
a. At the time Restricted Stock is granted to a Participant, shares
representing the appropriate number of shares of Restricted Stock shall be
issued and registered in the name of such Participant, but during the Restricted
Period such shares of Restricted Stock shall be held by the Company or its agent
for the account of such Participant. As a condition to the receipt of any
certificates representing a Restricted Stock grant, the Participant shall
deliver to the Company stock powers duly endorsed in blank by the Participant.
Any 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 or its agent may hold the shares 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. Notwithstanding the foregoing, the Committee,
in its sole discretion, may provide that the Participant shall be permitted
to transfer shares of Restricted Stock to a Grantor Trust within the
meaning of Section 2.j, subject to the following:
(A) The trustee of such Grantor Trust (the "Trustee") shall,
prior to obtaining possession of shares of such Restricted Stock,
acknowledge in writing that the Grantor Trust and all beneficiaries
thereunder are bound by the terms of this Plan and that the Trustee
shall make no further transfers other than as provided herein;
(B) As a condition of the transfer to the Grantor Trust, the
Trustee must certify that the Grantor Trust qualifies as a revocable
inter vivos grantor trust within the meaning of Section 2.j and must
provide a copy of the Grantor Trust document to the Company;
(C) The Company, in its sole discretion, shall determine whether
the proposed transferee qualifies as a Grantor Trust within the
meaning of Section 2.j, and any transfer of Restricted Stock to a
transferee other than a Grantor Trust shall be void; and
(D) Grants of Restricted Stock made prior to June 23, 1998 shall
be transferable to a Grantor Trust if the Committee, in its sole
discretion, so provides and the affected Participant, pursuant to
Section 13, consents.
ii. If an Employee Participant ceases to be an Employee or a
Consultant ceases to provide services to the Company 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 or a Subsidiary Board of Directors for
cause (as determined by the disinterested members of the Board of Directors
or such Subsidiary 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 the Participant requests the transfer of any shares of
Nonrestricted Stock, other than to a Grantor Trust, and such transfer is
completed by the Company or its agent, 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 (unless otherwise provided by the Committee):
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 such shares
shall be immediately distributed.
ii. If an Employee Participant ceases to be an Employee or a
Consultant Participant ceases to be a Consultant 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 or a Subsidiary Board of
Directors), then with respect to each grant of Restricted Stock, the
Restricted Period shall terminate as to any shares of Restricted Stock
which are still subject to restrictions and all such shares shall be
immediately distributed.
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 the
appropriate number of shares of Common Stock, free of restriction shall be
transferred 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 or
reorganization (within the meaning of Section 368 of the Code), or any partial
or complete liquidation of Providian, 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 shares of Nonrestricted Stock with respect to which additional
Common Stock was received is then held by the Company or its agent, the shares
representing such additional shares of Common Stock shall likewise be held by
the Company or its agent 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 or the Committee
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, Consultant or Non-Employee
Director the right to become a Participant. Additionally, nothing in the Plan or
any instrument executed pursuant thereto shall confer upon any Employee,
Non-Employee Director or Consultant any right to continue in the employ of the
Company (or to continue acting as a Director or Consultant) or shall affect the
right of the Company to terminate the employment of any Employee or remove any
Director, with or without cause, or to terminate the relationship of any
Consultant.
15. Nontransferability. Except as provided in Sections 8.c and 9.c above, a
Participant's rights under this Plan may not be assigned, pledged or otherwise
transferred; provided, however, 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 June 23, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN FINANCIAL CORPORATION AND
SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 145,550
<SECURITIES> 512,445
<RECEIVABLES> 4,703,917
<ALLOWANCES> 355,789
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 72,399
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 5,802,672
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 691,146
<TOTAL-LIABILITY-AND-EQUITY> 5,802,672
<SALES> 0
<TOTAL-REVENUES> 859,509
<CGS> 0
<TOTAL-COSTS> 370,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 175,507
<INTEREST-EXPENSE> 116,287
<INCOME-PRETAX> 196,737
<INCOME-TAX> 77,766
<INCOME-CONTINUING> 118,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,971
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.23
<FN>
<F1> Non-classified balance sheet
<F2> PP&E shown net
</FN>
</TABLE>
