UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(MarkOne)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1999
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 April 30, 1999, there were 142,268,355 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
March 31, 1999
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...........................................27
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>
Condensed Consolidated Statements of Financial Condition (Unaudited)
Providian Financial Corporation and Subsidiaries
(Dollars in thousands)
<CAPTION>
March 31 December 31
1999 1998
-------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 123,331 $ 176,348
Federal funds sold 600,794 297,869
Investment securities:
Available-for-sale 156,337 114,858
Held -to-maturity 183,400 318,817
Loans receivable, less allowance for credit losses
of $547,655 at March 31, 1999 and $451,245
at December 31, 1998 6,295,947 5,282,014
Premises and equipment, net 91,473 82,858
Interest receivable 61,234 51,801
Due from securitizations 456,579 454,374
Deferred taxes 370,849 306,234
Other assets 187,030 146,042
----------- ------------
Total assets $ 8,526,974 $ 7,231,215
=========== ============
Liabilities:
Deposits:
Non-interest bearing $ 34,236 $ 48,220
Interest bearing 5,181,093 4,624,078
----------- ------------
5,215,329 4,672,298
Short-term borrowings 455,000 472,500
Long-term borrowings 949,259 399,757
Deferred fees 394,248 334,617
Accrued expenses and other liabilities 428,620 388,856
----------- ------------
Total liabilities 7,442,456 6,268,028
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 and
outstanding: March 31, 1999 - 141,914,876 shares;
December 31, 1998 - 141,732,008 shares) 954 954
Additional paid-in capital - -
Retained earnings 976,441 866,005
Net unrealized loss on available-for-sale securities (161) (320)
Common stock held in treasury - at cost:
(March 31, 1999 - 1,205,104 shares;
December 31, 1998 - 1,405,972 shares) (52,716) (63,452)
------------ ------------
Total shareholders' equity 924,518 803,187
------------ -----------
Total liabilities and shareholders' equity $ 8,526,974 $ 7,231,215
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Income (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
(Dollars in thousands, except per share data) Three Months Ended
March 31
--------------------
1999 1998
-------- --------
<S> <C> <C>
Interest income:
Loans $ 279,125 $ 170,070
Investment securities 12,491 6,507
------------ -----------
Total interest income 291,616 176,577
Interest expense:
Deposits 64,439 46,153
Borrowings 16,062 8,603
------------ -----------
Total interest expense 80,501 54,756
Net interest income 211,115 121,821
Provision for credit losses 182,073 57,656
------------ -----------
Net interest income after provision
for credit losses 29,042 64,165
Non-interest income:
Servicing and securitizations 131,211 114,116
Credit product fee income 341,810 96,408
Other 4,235 179
------------ -----------
477,256 210,703
Non-interest expense:
Salaries and employee benefits 95,987 59,734
Solicitation 99,447 41,612
Occupancy, furniture and equipment 15,304 11,266
Data processing and communication 24,762 15,754
Other 81,606 53,687
------------- -----------
317,106 182,053
------------- -----------
Income before income taxes 189,192 92,815
Income tax expense 75,646 36,707
------------- -----------
Net Income $ 113,546 $ 56,108
============= ===========
Earnings per share - basic $ 0.80 $ 0.39
============= ===========
Earnings per share - assuming dilution $ 0.78 $ 0.39
============= ===========
Cash dividends paid per share $ 0.05 $ 0.03
============= ===========
Weighted average common shares outstanding - basic (000) 141,247 142,262
============= ===========
Weighted average shares and assumed conversions (000) 145,502 144,771
============= ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
(Dollars in thousands, except per share data
Cumulative Common
Additional Other stock
Common Paid-In Retained Comprehensive Held in
Stock Capital Earnings Income Treasury Total
------ ---------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 954 $ 4,217 $599,856 $ - $ (9,913) 595,114
Net Income 56,108 56,108
Cash dividend:
Common - $0.03 per share (4,763) (4,763)
Purchase of 205,800 common
shares for treasury (7,654) (7,654)
Exercise of stock options (1,623) (257) 2,692 812
Issuance of restricted and
unrestricted stock less
forfeited shares 1,401 3,384 4,785
Deferred compensation related to
grant of restricted and unrestricted
stock less amortization of $837 (3,948) (3,948)
Net tax effect from exercise of stock options
and issuance of restricted stock (47) (47)
------- ---------- -------- ------------- --------- --------
Balance at March 31, 1998 $ 954 $ - $650,944 $ - $(11,491) $640,407
======= ========== ======== ============= ========= ========
Balance at December 31, 1998 $ 954 $ - $866,005 $ (320) $(63,452) 803,187
Comprehensive income:
Net Income 113,546 113,546
Other comprehensive income,
net of income tax:
Unrealized gain on securities
net of income taxes of ($94) 159 159
------------- --------
Comprehensive income 113,705
Cash dividend:
Common - $0.05 per share (7,089) (7,089)
Purchase of 275,496 common
shares for treasury 19,348 (27,617) (8,269)
Exercise of stock options and other awards (26,230) 3,979 29,858 7,607
Issuance of restricted and unrestricted
stock less forfeited shares (404) 8,495 8,091
Deferred compensation related to
grant of restricted and unrestricted
stock less amortization of $2,164 (5,925) (5,925)
Net tax effect from exercise of stock options
and issuance of restricted stock 13,211 13,211
-------- ---------- -------- ------------- --------- --------
Balance at March 31, 1999 $ 954 $ - $976,441 $ (161) $(52,716) $924,518
======== ========== ======== ============= ========= ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
(Dollars in thousands) Three Months Ended
March 31
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating Activities:
Net Income $ 113,546 $ 56,108
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 182,073 57,656
Depreciation and amortization of premises and equipment 7,418 4,131
Amortization of net loan acquisition costs 11,201 9,776
Amortization of deferred compensation
related to restricted and unrestricted stock 2,164 837
Amortization of deferred fees (118,405) (25,247)
Increase in deferred income tax benefit (64,709) (12,544)
Increase in deferred fees 178,036 58,694
Increase in interest receivable (9,433) (5,221)
Net increase in other assets (52,156) (21,040)
Net increase in accrued expenses and other liabilities 52,977 56,356
---------- ----------
Net Cash Provided by Operating Activities 302,712 179,506
Investing Activities:
Net decrease (increase) in money market instrument investments 119,867 (99,937)
Net cash used for loan originations and principal
collections on loans receivable (1,048,735) (133,779)
Net (decrease) increase in securitized loans (20,187) 769,870
Portfolio acquisitions (127,119) (948,462)
Increase in due from securitizations (2,205) (4,373)
Purchases of investment securities (71,046) (24)
Proceeds from maturities of investment securities 45,372 -
Increase in federal funds sold (302,925) (204,930)
Net purchases of premises and equipment (16,033) (8,195)
---------- ----------
Net Cash Used by Investing Activities (1,423,011) (629,830)
Financing Activities:
Net increase in deposits 543,031 175,492
Proceeds from issuance of term federal funds 430,000 250,000
Repayment of term federal funds (447,500) (180,000)
Decrease in notes payable to banks - (8,000)
Increase in long-term borrowings 549,502 199,852
Purchase of treasury stock (8,269) (7,654)
Dividends paid (7,089) (4,763)
Proceeds from exercise of stock options 7,607 208
---------- ----------
Net Cash Provided (Used) by Financing Activities 1,067,282 425,135
---------- ----------
Net Decrease in Cash and Cash Equivalents (53,017) (25,189)
Cash and cash equivalents at beginning of period 176,348 112,522
----------- ----------
Cash and cash equivalents at end of period $ 123,331 $ 87,333
=========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 1999 (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 three months ended
March 31, 1999 are not necessarily indicative of the results for the year ended
December 31, 1999. The notes to the financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 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 1999 presentation.
Note 2 - Earnings Per Share
The following table sets forth the computation of both the basic and
assumed conversion methods of earnings per share.
Three Months Ended March 31
(In thousands, except per share data) 1999 1998
- --------------------------------------------------------------------------------
Income available to common stockholders $ 113,546 $ 56,108
=============================
Weighted average shares outstanding--basic 141,247 142,262
Effect of dilutive securities
Restricted stock issued--non vested 518 502
Employee stock options 3,737 2,007
---------- ----------
Dilutive potential common shares 4,255 2,509
-----------------------------
Adjusted weighted average shares and
assumed conversions 145,502 144,771
=============================
Earnings per share--basic $ 0.80 $ 0.39
=============================
Earnings per share--assuming dilution $ 0.78 $ 0.39
=============================
<PAGE>
Note 3 - Allowance for Credit Losses
The activity in the allowance for credit losses for the three months ended
March 31, 1999 and 1998 was as follows (in thousands):
Three Months Ended March 31
1999 1998
---------------------------------------------------------------------------
Balance at beginning of period $ 451,245 $ 145,312
Provision for credit losses 182,073 57,656
Reserve acquired 14,310 105,367
Charge-offs (115,506) (64,420)
Recoveries 15,533 5,525
---------- ----------
Net charge-offs (99,973) (58,895)
-----------------------------
Balance at end of period $ 547,655 $ 249,440
=============================
Note 4 - Senior and Subordinated Bank Notes
During the first three months of 1999, the Company, through one of its
banking subsidiaries, issued an additional $550 million of senior bank notes
through a program that was established in 1998. The total notes outstanding
under this program as of March 31, 1999 was $949.3 million.
Note 5 - Shareholders' Equity
The Company is party to an agreement to purchase, on a forward basis,
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 the Company's common stock or in cash. To the extent that the market
price of the Company's common stock on a settlement date is higher than the
forward purchase price, the Company will receive the net differential. To the
extent that the market price of the Company's common stock on a settlement date
is lower than the forward purchase price, the Company will pay an agreed upon
premium amount. As of March 31, 1999, the agreement covered 374,180 shares of
the Company's common stock at a forward price of $110.00 per share. The
agreement expires in July 1999, but may be settled earlier. During the quarter
ended March 31, 1999, settlements from this forward purchase agreement resulted
in the Company receiving 193,052 shares of its common stock and paying premium
amounts of $583,000 which were recorded as adjustments to additional paid in
capital.
Note 6 - Segment Information
The operations of the Company consist of two primary segments: Credit Card
Loan and Home Loan. The Credit Card Loan segment represents consumer lending
products, including unsecured, secured and partially secured credit cards, and
includes non-credit card unsecured revolving lines of credit. Credit Card Loan
customer relationships are initiated primarily through direct mail marketing or
portfolio acquisitions from other financial institutions. The Home Loan segment
represents home equity loans, home equity lines of credit and other home loans
made to individuals targeted by the Company's home loan product marketing
programs. Fee-based product revenue, which is received from both Credit Card
Loan and Home Loan customers, is included in the respective segment summary
financial information.
The Company's securitized loans are not considered loans owned by the
Company and therefore are not shown on the statement of financial condition. It
is, however, the Company's practice to analyze its financial performance on a
managed loan portfolio basis. Segment information is presented below on the
Company's managed loan portfolios.
The following is a summary of the Company's segment activity on a managed
loan basis for the three months ended March 31, 1999 and 1998:
Credit Home
(Dollars in thousands) Card Loan Other Total
- --------------------------------------------------------------------------------
March 31, 1999
Revenue $ 986,882 40,034 2,796 $ 1,029,712
Profit or loss $ 231,092 (4,232) (22,943) $ 203,917
Assets $13,143,110 1,197,705 5,943 $14,346,758
March 31, 1998
Revenue $ 563,692 33,648 - $ 597,340
Profit or loss $ 108,168 3,383 - $ 111,551
Assets $ 9,587,729 1,067,907 - $10,655,636
The impact of securitizations on the Company's consolidated statements of
income is to reduce net interest income and the provision for credit losses, and
to increase non-interest income. The following is a reconciliation of the
Company's segment activity on a managed basis to the consolidated statements of
income of the Company for the three months ended March 31, 1999 and 1998:
March 31
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Total segment profits $ 203,917 $ 111,551
Corporate and other (14,725) (18,736)
--------------------------
Income before income taxes $ 189,192 $ 92,815
==========================
Note 7 - Business Combination
On February 18, 1999, the Company acquired the assets of GetSmart.com and
assumed certain related liabilities. GetSmart.com is an online referral service
for consumer borrowers which provides loan information and lender connections
through proprietary search and application technology. The purchase price was
$32.1 million, paid in cash, plus $1.5 million in transaction costs, and the
Company assumed liabilities of $4.4 million.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of GetSmart.com have been included in the Company's
consolidated financial statements from the date of acquisition.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Providian Financial Corporation (the "Company") is a leading provider of
consumer lending products, including credit cards, home loans, secured credit
cards, and fee-based products. In addition, the Company offers various deposit
products. The Company offers its products primarily through its banking
subsidiaries, Providian National Bank, a national bank, and Providian Bank, a
Utah industrial loan corporation. The Company's products are offered to a broad
spectrum of consumers. Credit card products range from gold and platinum cards
with high credit lines to lower line classic and secured cards designed for
consumers underserved by traditional financial institutions. The primary factors
affecting the profitability of the Company's consumer lending business are
growth in the number of customer accounts and outstanding loan balances, net
interest spread on loans, fee revenue, credit usage, credit quality
(delinquencies and credit losses), level of solicitation and marketing expenses,
and account servicing efficiency.
Forward-Looking Information
Certain statements contained herein include forward-looking statements
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 "belief," "anticipation," or "expectations" of
management, statements as to industry trends or future results of operations of
the Company, and other statements which are not historical fact. 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,
vendor relationships, funding costs and availability, general economic
conditions, government policy and regulations, risks related to growth, product
development, acquisitions and operations, and Year 2000 readiness. These and
other risks and uncertainties are described in detail in the Company's 1998
Annual Report on Form 10-K under the heading "Cautionary Statements." Readers
are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to update
any forward-looking statements.
Earnings Summary
Net income for the three months ended March 31, 1999 was $113.5 million, an
increase of 102% over net income of $56.1 million for the three months ended
March 31, 1998. This increase was primarily attributable to continued growth in
loans outstanding and strong growth in fee revenue. In addition, the Company
continued to strengthen net interest margins while relying less on low
introductory rates to attract customers. As of March 31, 1999, managed loans,
which include on-balance sheet and securitized loans, increased by $3.7 billion,
or 35%, over March 31, 1998. This growth was achieved through increases in the
Company's loan originations (particularly loans made under lower line credit
card products) combined with strategic acquisitions of credit card portfolios
and activation of existing customer accounts ("core accounts"). The Company
continues to evaluate acquisitions on an opportunistic basis as competitors exit
the credit card market. While the acquisitions environment may provide many
opportunities, the focus of the Company's acquisition strategy will continue to
be guided by its return driven approach.
The Company's managed net interest margin on loans increased to 12.26% in
the first quarter of 1999 from 11.09% for the same period in 1998, reflecting
growth in higher yield portfolios and the impact of repricing programs. The
managed net credit loss rate for the first three months of 1999 increased to
7.62% from 6.78% for the same period in 1998, reflecting account seasoning and
higher credit loss rates on acquired portfolios. Core account credit quality and
delinquency trends were generally stable during the first quarter of 1999, with
the managed net credit loss rate, excluding acquired portfolios, remaining
virtually unchanged at 6.58% compared to 6.54% for the fourth quarter of 1998.
Non-interest income represented 49% of managed revenue in the first three months
of 1999, up from 36% for the same period in 1998. The dollar contribution to
managed revenue from non-interest income for the first three months of 1999
increased more than 150% compared to the same period in 1998 to $416.2 million,
due to increased sales of fee-based products and increased revenue from credit
card fees, including annual membership, processing, cash advance, late and
overlimit fees. The Company reinvested a portion of the increased managed
revenue to strengthen loan loss reserves, increase marketing investment and
build infrastructure, such as expanding the employee base and product support
systems. Non-interest expense increased $135 million during the first three
months of 1999 to $317.1 million, due to the expenses associated with servicing
a greater number of customers and increased marketing activity.
The Company's return on average assets continued to improve, increasing to
5.78% for the first three months of 1999. The Company's market focus is to seek
out profitable consumer segments and apply its risk adjusted, return driven
approach to targeting and pricing. The Company believes this strategy has been
responsible for its continued overall superior financial performance. The
Company continued to strengthen its balance sheet during the first quarter of
1999 with improved profitability, combined with a high level of capital
retention, and was able to increase its return on equity to 52.19% for the first
three months of 1999 from 36.14% for the same period in 1998.
Managed Consumer Loan Portfolio and the Impact of Securitization
The Company securitizes unsecured credit cards, home equity lines of credit
and secured and partially secured credit card receivables. For additional
discussion of the Company's securitization activities, see "--Funding and
Liquidity." Securitized assets are not considered assets of the Company and
therefore are not shown on the statement of financial condition. It is, however,
the Company's practice to analyze its financial performance on a managed loan
portfolio basis. In order to do so, the Company's income statement and statement
of financial condition are adjusted to add back the effect of securitizations.
The following table summarizes the Company's managed loan portfolio:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------------
(Dollars in thousands) 1999 1998
----------------- -----------------
<S> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 6,857,160 $ 3,769,622
Securitized consumer loans 7,483,655 6,886,014
----------------- -----------------
Total managed consumer loan portfolio $ 14,340,815 $ 10,655,636
================= =================
Average Balances:
On-balance sheet consumer loans $ 6,283,115 $ 3,980,578
Securitized consumer loans 7,502,226 6,558,094
----------------- -----------------
Total average managed consumer loan portfolio $ 13,785,341 $ 10,538,672
================= =================
Operating Data and Ratios:
Reported:
Average earning assets $ 7,232,188 $ 4,437,060
Return on average assets 5.78% 4.35%
Net interest margin (1) 11.68% 10.98%
Managed:
Average earning assets $ 14,734,414 $ 10,995,154
Return on average assets 2.98% 1.84%
Net interest margin (1) 11.81% 10.55%
(1) Net interest margin is equal to net interest income divided by average
earning assets.
</TABLE>
Financial Statement Impact
Securitizations are treated as sales under GAAP. As a result, the
securitized loans are removed from the balance sheet in exchange for cash
proceeds and other consideration.
The Company, at the time it enters into a securitization, recognizes an
"interest-only strip receivable" asset, available for sale, equal to the present
value of the projected excess servicing income related to the securitized loans.
During the revolving period of a securitization, an additional interest-only
strip receivable is recognized each month, as additional receivables are
transferred to investors in respect of their share of principal collections and
losses on previously securitized loans.
The Company services the accounts underlying the securitized loans and
earns a monthly servicing fee, which is generally offset by the servicing costs
incurred by the Company. Accordingly, servicing assets have not been recognized
in connection with the Company's securitizations. The finance charge and fee
revenue generated by the securitized loans in excess of interest paid to
investors, related credit losses, servicing fees, credit enhancement costs and
other transaction expenses is referred to as "excess servicing income." Revenue
resulting from excess servicing income is recognized each month first as a
reduction of the interest-only strip receivable and then, to the extent the
amount received exceeds the related component of the interest-only strip
receivable (which was recorded at present value), as servicing and
securitizations income.
The effect of this accounting 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 March 31, 1999 and
1998 this accounting treatment had the effect of: reducing net interest income
by $223.8 million and $168.2 million; reducing the provision for credit losses
by $162.8 million and $119.6 million; and increasing non-interest income by
$61.0 million and $48.6 million. Because credit losses on the securitized loans
are reflected as a reduction in servicing and securitizations income rather than
a reduction of reserves for credit losses, the Company's provision for credit
losses is lower than would be the case had such loans not been securitized.
When loans are securitized, the Company retains a "seller's interest"
generally equal to the total amount of the pool of assets included in the
securitization less the investors' portion of those assets. As the amount of the
loans in the securitized pool fluctuates due to customer payments, purchases,
cash advances and credit losses, the amount of the seller's interest will vary.
The seller's interest is classified on the Company's statement of financial
condition as loans receivable at par less associated allowance for credit
losses. Periodically, the Company may elect to transfer new loan receivables
into a securitized pool in order to maintain the seller's interest above an
agreed-upon minimum balance.
Risk Adjusted Revenue and Return
One measure of product profitability that incorporates revenue and the most
significant costs inherent in consumer loan risk analysis is risk adjusted
revenue, which is net interest income plus fee income less net credit losses.
The Company uses risk adjusted revenue as a measure of loan portfolio
profitability, consistent with its goal of matching the revenue base of customer
accounts with the risk undertaken. Risk adjusted revenue may also be expressed
as a percentage of average consumer loans, in which case it is referred to as
risk adjusted return.
Managed risk adjusted revenue and return for the three months ended March
31, 1999 were $576.0 million and 16.72%, compared to $276.0 million and 10.46%
for the three months ended March 31, 1998. The increase during the first quarter
of 1999 is a result of increased yields on portfolios priced to address customer
risk, declining use of introductory rates on new accounts and higher fee revenue
per customer. The increase was partially offset by an increase in managed net
credit losses, which were 7.62% for the three months ended March 31, 1999,
compared to 6.78% for the same period in the previous year, reflecting higher
credit loss rates on acquired portfolios.
The components of risk adjusted revenue are discussed in more detail in
subsequent sections of this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Net Interest Income and Margin
Net interest income is interest earned from loan portfolios less interest
expense on deposits and borrowings used to fund the loans.
Managed net interest income for the three months ended March 31, 1999 was
$434.9 million, compared to $290.1 million for the same period in 1998, an
increase of $144.8 million or 50%. Managed net interest margin on average
managed loans increased to 12.26% for the three months ended March 31, 1999,
from 11.09% for the same period in 1998. The increase in managed net interest
income and margin reflects an increase in average managed loans, which increased
approximately $3.2 billion, combined with higher finance charge yields related
to an increase in the number of accounts for lower line credit card products,
which generate higher overall finance charge rates and fee income, consistent
with the Company's risk adjusted approach to pricing.
Statement of Average Balances, Income and Expense, Yields and Rates
The following table provides an analysis of interest income, interest
expense, net interest spread, and average balances for the three months ended
March 31, 1999 and 1998. Interest income and interest expense margins are
presented as a percentage of average earning assets, which include
interest-earning consumer loan portfolios and investments held for liquidity
purposes.
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
--------------- ------------ --------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets
Consumer loans $ 6,283,115 $ 279,125 17.77% $ 3,980,578 $ 170,070 17.09%
Interest-earning cash 95,724 1,175 4.91% 40,963 556 5.43%
Federal funds sold 479,005 5,655 4.72% 211,429 2,904 5.49%
Investment securities 374,344 5,661 6.05% 204,090 3,047 5.97%
---------------- ------------ --------- -------------- ------------- -----------
Total interest-earning assets 7,232,188 $ 291,616 16.13% 4,437,060 $ 176,577 15.92%
Allowance for loan losses (506,711) (227,560)
Other assets 1,128,962 948,937
---------------- ---------------
Total assets $ 7,854,439 $ 5,158,437
================ ===============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 4,928,978 $ 64,439 5.23% $ 3,425,203 $ 46,153 5.39%
Borrowings 1,061,815 16,062 6.05% 587,279 8,603 5.86%
---------------- -------------- --------- --------------- ------------- -----------
Total interest-bearing liabilities 5,990,793 $ 80,501 5.37% 4,012,482 $ 54,756 5.46%
Other liabilities 833,356 365,405
---------------- ---------------
Total liabilities 6,824,149 4,377,887
Capital securities 160,000 160,000
Equity 870,290 620,550
---------------- ---------------
Total liabilities and equity $ 7,854,439 $ 5,158,437
================ ===============
NET INTEREST SPREAD: 10.76% 10.46%
========= ===========
Interest income to
average interest-earning assets 16.13% 15.92%
Interest expense to
average interest-earning assets 4.45% 4.94%
--------- -----------
Net interest margin 11.68% 10.98%
========= ===========
</TABLE>
Interest Volume and Rate Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. Net interest income is also affected by changes in
the volume of interest-earning assets and interest-bearing liabilities. The
following table sets forth the dollar amount of the increase (decrease) in
interest income and interest expense resulting from changes in the volume and
rates:
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 vs. 1998
--------------------------------------------
Increase Change due to (1)
-----------------------------
(Dollars in thousands) (Decrease) Volume Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Consumer loans $ 109,055 $ 102,036 $ 7,019
Federal funds sold 2,751 3,209 (458)
Other securities 3,233 3,249 (16)
------------- ------------ -------------
Total interest income 115,039 108,494 6,545
Interest Expense:
Deposits 18,286 19,694 (1,408)
Borrowings 7,459 7,171 288
------------- ------------ -------------
Total interest expense 25,745 26,865 (1,120)
------------- ------------ -------------
Net interest income $ 89,294 $ 81,629 $ 7,665
============= ============ =============
(1) The changes due to both volume and rates have been allocated in proportion
to the relationship of the absolute dollar amounts of the change in each. The
changes in interest income and expense are calculated independently for each
line in the schedule.
</TABLE>
Non-Interest Income
Non-interest income, which consists primarily of servicing and
securitizations income and credit product fee income, represented approximately
62% and 54% of gross on-balance sheet revenues for the three months ended March
31, 1999 and 1998. Total non-interest income increased 126.5%, or $266.6
million, to $477.3 million for the first quarter of 1999 over the same period in
1998. This increase is attributable to increased credit product fee income
realized from proprietary fee-based products, increased late, overlimit,
membership and processing fees and moderately higher average securitized loan
balances.
Servicing Securitization Income
As of March 31, 1999, securitizations outstanding provided $7.4 billion in
funding, representing 46% of total managed funding, compared with $6.9 billion,
or 55%, as of March 31, 1998. The decrease in securitizations outstanding as a
percentage of total managed funding as of March 31, 1999 was due to the
Company's efforts to diversify its funding sources and increase deposit funding.
A more detailed discussion of the Company's securitization activities is set
forth under "--Funding and Liquidity."
Because excess servicing income on securitized loans essentially represents
a recharacterization of net interest income less the provision for loan losses
and servicing expense, excess servicing income will vary based upon the same
factors. Thus, changes in net credit losses (see "--Asset Quality, Net Credit
Losses") and changes in interest rates (to the extent that the receivables and
interest payable to investors are based upon floating rates) will cause excess
servicing income to vary (see "--Asset/Liability Risk Management").
For the three months ended March 31, 1999, servicing and securitization
income increased $17.1 million from the same period in the prior year, to $131.2
million. This increase reflects higher overall finance charge and fee revenue on
securitized loans and moderately higher average securitized loan balances,
partially offset by increased net credit losses and a year over year reduction
of the gain on sale upon transfer of assets.
Credit Product Fee Income
Credit product fee income includes late and overlimit charges, cash advance
fees, membership and processing fees, revenues from proprietary fee-based
products, and interchange activity. Fee revenue realized from securitized loans
is not included in credit product fee income but is instead recorded as part of
servicing and securitizations income. For the three months ended March 31, 1999
and 1998, credit product fee income was $341.8 million and $96.4 million,
reflecting increased volume in fee revenue associated with asset and account
growth and increases in fee rates. While the Company anticipates continued
significant growth in credit product fee income during 1999, there can be no
assurance that the historic rate of growth reflected in the Company's first
quarter 1999 and previous period results will continue.
The Company markets a number of proprietary fee-based services that
complement our credit products. For the three months ended March 31, 1999 and
1998, managed fee-based product revenue totaled $117.0 million and $36.2
million, reflecting increased penetration rates for sales of these products to
the Company's customer base. Proprietary fee-based product revenue is recognized
ratably over the term of the product, beginning after the end of the free or
money-back guarantee period, if any. Late and overlimit fees totaled $137.7
million and $51.7 million for the three months ended March 31, 1999 and 1998.
Annual membership fees, processing fees, cash advance fees, and interchange
income also increased during the first quarter of 1999 over the same period in
1998 as a result of customer volume growth. The Company has also realized
increases in the customer base of its lower line credit card product offerings,
which generate higher levels of fee revenue. Annual membership fees are
recognized over the life of the membership period, while cash advance, late, and
overlimit fees and interchange income are recognized monthly. Processing fees
are offset against loan origination costs and any remaining income is deferred
and amortized over one year.
Non-Interest Expense
Non-interest expense includes loan origination costs, such as printing,
postage, telemarketing, list processing and credit bureau costs paid to third
parties in connection with direct marketing account solicitation efforts. In
accordance with GAAP, the Company has capitalized the direct nonsolicitation
costs associated with successful account acquisition efforts, after offsetting
up-front processing fees. Capitalized loan origination costs are amortized over
the privilege period (currently one year) for credit card loans or the estimated
life of the loans for non-credit card revolving lines of credit, unless the
loans are securitized, in which case the costs are taken as an expense prior to
the securitization. The majority of loan origination costs are expensed as
incurred. In the three months ended March 31, 1999 and 1998, the Company
amortized loan origination costs of $11.2 million and $9.8 million. For the
three months ended March 31, 1999 and 1998, loan origination costs were $99.4
million and $41.6 million, reflecting increased direct mail volumes and other
marketing initiatives.
Non-interest expense also includes salary and benefit expenses, such as
staffing costs associated with marketing, customer service, collections, and
administration. Other non-interest expense includes third-party data processing
and communication costs, occupancy expenses, and other operational expenses,
such as collection costs, fraud losses, and bankcard association assessments.
The following table presents non-interest expense for the three months ended
March 31, 1999 and 1998:
Three months Ended March 31
----------------------------------
(Dollars in thousands) 1999 1998
---------------------------------------------------------------------------
Non-interest Expense:
Salaries and employee benefits $ 95,987 $ 59,734
Solicitation 99,447 41,612
Occupancy, furniture and equipment 15,304 11,266
Data processing and communications 24,762 15,754
Other 81,606 53,687
---------------- -----------------
Total $317,106 $182,053
================ =================
Impact of Year 2000
Many computer programs use two digits, rather than four, to refer to a
year. Unless these programs are corrected, they will be unable to interpret
dates beyond the year 1999, which could cause a system failure or other computer
errors. The Company, like all financial services institutions, is heavily
dependent on computer systems for its operations. The Company processes data
through its own information technology systems and the systems of third party
vendors and providers. In addition, various non-information technology systems
are affected by the Year 2000 issue, including elevators, security systems and
life safety systems.
To address this problem, and in accordance with Year 2000 readiness
guidelines established by the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, which regulate the Company's banking
subsidiaries, the Company launched a Year 2000 project in November 1996. The
Company's Year 2000 project consists of five phases: (1) planning, in which the
Year 2000 project team defines the approach to addressing the Year 2000 issue;
(2) inventory, in which the Company's vendors, hardware, internally developed
systems and third party-provided software are inventoried and critical systems
and critical vendors identified; (3) assessment, in which Year 2000 readiness of
the Company's systems is assessed; (4) modification, in which affected systems
are replaced, repaired, upgraded, or retired; and (5) testing, in which final
testing is performed for Year 2000 compliance.
The Company is currently in conformity with its banking regulators' Year
2000 requirements. The planning, inventory, and assessment phases are
substantially complete, including the inventory and assessment of critical
systems and vendors. In the modification phase, the Company substantially
completed remediation of internally developed systems in June 1998. Repair and
replacement of third party-provided hardware and software were substantially
complete as of March 31, 1999, and infrastructure upgrades are currently being
worked on and are scheduled to be completed by June 30, 1999. In July 1998, the
Company began testing its internally developed and third party-provided systems
for Year 2000 compliance. Testing of internally developed critical systems was
substantially completed in December 1998, while testing of third party-provided
critical systems was substantially completed as of March 31, 1999. Final testing
of all systems is scheduled to be completed by mid-July 1999. Statements
regarding completion dates for various aspects of the Year 2000 project are
estimates only. There can be no guarantee that the phases of the Company's Year
2000 project described above will be completed when anticipated.
The Company depends on technology and other services provided by third
parties, including technology vendors, credit providers, and processing
providers, and on financial systems (such as payment and clearing systems) and
the utility infrastructure (such as power, transportation, and
telecommunications). The Company relies on these third parties to assess the
impact of the Year 2000 issue on the technology and services they provide and to
take any necessary corrective action. A significant majority of the Company's
critical vendors have represented to the Company that their systems and products
will be Year 2000 compliant by June 30, 1999. The Company is monitoring the
progress of its critical vendors and other third parties and selectively
conducting tests to determine whether they have accurately assessed the problem
and taken corrective action. There can be no assurance that third parties that
supply products and services to the Company's critical systems will be
successful in taking corrective action in a timely manner.
If the Company is unsuccessful in its efforts to correct its critical
systems or if third parties on which the Company relies do not correct their
systems, the Company could experience significant disruption to its operations
(including loan origination and servicing), its ability to obtain and provide
funds, and its financial and accounting systems. Such disruption could result in
revenue loss and increased costs that could have a material adverse effect on
the Company's financial condition, liquidity, and results of operations.
The Company has augmented its existing business resumption and disaster
recovery plan to include contingency plans with respect to disruptions that
might result from Year 2000 issues. There can be no assurance that any such
plans will fully mitigate Year 2000 failures or problems.
The Company's total Year 2000 project costs are expected to be
approximately $13.5 million, and the Company has incurred $9.1 million in Year
2000 project expenses through March 31, 1999. The Company expects to fund all
Year 2000-related costs through operating cash flows. Year 2000 costs will be
expensed as incurred, and the Company believes that such costs will not have a
material impact on the Company's future financial results or condition.
The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including statements regarding the expected costs of the Company's
Year 2000 project, are based on estimates, and actual results may differ
materially from those anticipated. Specific factors that might cause results to
differ from those anticipated include, but are not limited to, the availability
of qualified personnel, success in identifying and modifying all relevant
computer systems, the sufficiency and outcome of Year 2000 testing, adequate
resolution of Year 2000 issues by governmental agencies, businesses and other
third party providers to the Company, and unanticipated costs. Such
"forward-looking statements" speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement.
Income Taxes
The Company recognized income tax expense of $75.6 million and $36.7
million for the three months ended March 31, 1999 and 1998. The Company's
effective tax rate increased to 39.98% for the three months ended March 31, 1999
from 39.55% for the same period in 1998.
Asset Quality
The Company's delinquencies and net credit losses reflect, among other
factors, the quality of loans, the average age of the Company's loan receivables
(generally referred to as "seasoning"), the success of the Company's collection
efforts, and general economic conditions. The quality of loans is subject to the
targeting and underwriting criteria used, account management, seasoning, and
demographic and other factors.
The level of credit losses directly affects earnings when reserves are
established through recognition of provisions for credit losses, which are
generally dependent on historical levels of credit losses and current trends. As
new portfolios of consumer loans are originated, management uses historical
credit loss and delinquency analyses of similar, more seasoned loan portfolios
and other qualitative factors to establish reserves for future credit losses
(see "--Allowance and Provision for Credit Losses"). As net credit losses are
experienced, the previously established reserve is used to absorb the credit
losses.
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. Accounts of bankrupt credit card
customers are charged off upon notification of bankruptcy. Accounts of deceased
credit card customers are charged off upon determination of uncollectibility.
Home loans are reviewed when a loss of all or part of the principal balance of
the loan is anticipated, and an allowance for credit losses is established in
the amount by which the book value of the loan exceeds the estimated net
realizable value of the underlying collateral. Anticipated losses on home loans
are charged off no later than 180 days after payments on such loans become
delinquent. At the time a loan is charged off, accrued but unpaid finance charge
and fee income is reversed against current earnings but is maintained on the
customer's record in the event of a future recovery. Once a loan is charged off,
the Company's policy is to continue to pursue collection of principal, interest,
and accrued fee income, to the extent legally permissible. Any subsequent
collections on previously charged-off loans will be recognized as recoveries.
Delinquencies
The following table presents the delinquency trends of the Company's
on-balance sheet and managed consumer loan portfolio for the three months ended
March 31, 1999 and 1998. An account is contractually delinquent if the minimum
payment is not received by the next billing date. Total delinquencies on managed
loans were 4.91% as of March 31, 1999 compared to 4.61% as of March 31, 1998,
and 5.33% as of December 31, 1998. The increase in delinquencies over the first
quarter of 1998 reflects account seasoning, the changing product mix (including
an increase in lower line credit card products, which tend to result in higher
delinquencies) and loan portfolio acquisitions.
<TABLE>
<CAPTION>
March 31
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
% of % of
Total Total
(Dollars in thousands) Loans Loans Loans Loans
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Reported: (1)
Loans outstanding $ 6,857,160 100.00% $ 3,769,622 100.00%
Loans delinquent:
30 - 59 days 108,549 1.58% 68,269 1.81%
60 - 89 days 83,352 1.22% 44,136 1.17%
90 or more days 176,615 2.58% 87,896 2.33%
----------------- -------------- ----------------- --------------
Total $ 368,516 5.37% $ 200,301 5.31%
================= ============== ================= ==============
Managed:
Loans outstanding $ 14,340,815 100.00% $ 10,655,636 100.00%
Loans delinquent:
30 - 59 days 224,887 1.57% 171,204 1.60%
60 - 89 days 158,902 1.11% 109,370 1.03%
90 or more days 320,885 2.24% 210,651 1.98%
----------------- -------------- ----------------- --------------
Total $ 704,674 4.91% $ 491,225 4.61%
================= ============== ================= ==============
(1) Includes loans held for securitization.
</TABLE>
Net Credit Losses
Net credit losses for consumer loans include the principal amount of losses
from customers unwilling or unable to pay their existing loan balances
(including charged-off bankrupt and deceased customer accounts), less current
period recoveries. Principal amounts include cash advances, purchases, and
certain financed fee-based product sales and exclude accrued finance charge and
other fee income, which is charged against the related income at the time of
credit loss recognition. Losses for cardholder accounts related to fraudulent
activity are included in other non-interest expenses.
The annualized managed net credit loss rate increased to 7.62% for the
first three months of 1999, compared to 6.78% for the same period in 1998,
reflecting higher credit loss rates on acquired portfolios. The Company's
pricing for finance charge and fee income incorporates an expected higher credit
loss rate when appropriate, consistent with the Company's efforts to generate
income using a risk adjusted return approach. Pro forma managed net credit
losses on the Company's core accounts (i.e. managed loans excluding the acquired
loan portfolios) remained stable at 6.58% for the first three months of 1999
compared to 6.49% for the same period in 1998.
The following table presents the Company's net credit losses and credit
loss rates for consumer loans for the periods indicated and is presented both on
a financial statement reporting basis and a managed portfolio basis:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------
(Dollars in thousands) 1999 1998
------------- -------------
<S> <C> <C>
Reported: (1)
Average loans outstanding $ 6,283,115 $ 3,980,578
Net charge-offs $ 99,973 $ 58,895
Net charge-offs as a percentage
of average loans outstanding 6.36% 5.92%
Managed:
Average loans outstanding $ 13,785,341 $ 10,538,672
Net charge-offs $ 262,759 $ 178,518
Net charge-offs as a percentage
of average loans outstanding 7.62% 6.78%
(1) Includes loans held for securitization.
</TABLE>
Allowance and Provision for Credit Losses
The Company maintains the allowance for credit losses at a level believed
to be adequate to absorb future credit losses, net of recoveries, inherent in
the existing on-balance sheet portfolio. The allowance for credit losses is
maintained for on-balance sheet loans only (see "--Managed Consumer Loan
Portfolio and the Impact of Securitization"). The entire allowance is allocated
to designated portfolios or pools of the Company's on-balance sheet loans.
The following table sets forth the activity in the allowance for credit
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------
(Dollars in thousands) 1999 1998
-------------- --------------
<S> <C> <C>
Balance at beginning of period $ 451,245 $ 145,312
Provision for credit losses 182,073 57,656
Reserve acquired 14,310 105,367
Charge-offs (115,506) (64,420)
Recoveries 15,533 5,525
--------------- ---------------
Net charge-offs (99,973) (58,895)
--------------- ---------------
Balance at end of period $ 547,655 $ 249,440
=============== ===============
Allowance for credit losses to loans at period-end (1) 7.99% 6.80%
(1) Excludes loans held for securitization.
</TABLE>
The allowance for credit losses increased to $547.7 million, or 7.99% of
on-balance sheet loans, as of March 31, 1999, from $451.2 million, or 7.86% of
on-balance sheet loans, as of December 31, 1998. The increase in the allowance
for credit losses as a percentage of on-balance sheet loans reflects an increase
in loans under lower line credit card products, which are generally expected to
experience higher credit loss rates (see " -Risk Adjusted Return and Revenue").
Funding and Liquidity
The Company funds its assets through a diversified mix of funding products
designed to appeal to a broad range of investors. It is the goal of the Company
to generate funding at the lowest cost possible consistent with ensuring prudent
liquidity and interest rate risk management.
The primary goal of liquidity management at the Company is to ensure that
funding will be available to support Company operations in varying business
environments. The Company employs three primary strategies to maintain a strong
liquidity position: diversification of funding sources; dispersion of
maturities; and maintenance of backup liquidity sources. The Company manages its
short-term liquidity position by projecting cash requirements, maintaining cash
balances, limiting liability concentrations, and prefunding large liability
maturities. The longer-term liquidity position is managed by maintaining its
credit facilities and investment portfolio at the appropriate size, dispersing
liability maturities, and developing new funding products, markets, and
investors.
The Company's approach to funding its assets is to seek a diversified
funding mix and investor base. Products offered include direct and brokered
retail and institutional deposits, term federal funds, public and private asset
securitizations, a committed revolving credit facility, mandatorily redeemable
capital securities, and senior and subordinated bank notes. Within product
categories, funding is diversified in terms of the types of products offered and
the types, industries, and geographical locations of investors.
The Company offers a wide range of maturity terms for its funding products
(from one week to thirty 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. Maturities are managed by the types of funding sources employed
and by the rates offered on different products. The goal is to achieve a
balanced distribution of maturities, avoiding undue concentration in any one
period. The Company monitors existing funding maturities and loan growth
projections to ensure that prudent amounts of backup liquidity are available to
support the maturities, if necessary.
The following table summarizes the contractual maturity of deposits at the
Company as of March 31, 1999 and 1998.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------------------------------- -------------------------------------------
Direct Other Total Direct Other Total
(Dollars in thousands) Deposits Deposits Deposits Deposits Deposits Deposits
------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 437,929 $ 275,842 $ 713,771 $ 329,269 $ 117,726 $ 446,995
Over three months through 12 months 1,065,863 545,228 1,611,091 642,500 218,602 861,102
Over one year through five years 925,646 897,037 1,822,683 534,545 578,904 1,113,449
Deposits without contractual maturity 988,086 79,698 1,067,784 897,721 68,991 966,712
------------------------------------------- -------------------------------------------
Total Deposits $3,417,524 $1,797,805 $5,215,329 $ 2,404,035 $ 984,223 $ 3,388,258
=========================================== ===========================================
</TABLE>
Deposits increased to $5.2 billion as of March 31, 1999 from $4.7 billion
as of December 31, 1998. This increase is attributable to the Company's
strategic decision to increase deposit funding and the strong demand for
FDIC-insured deposits.
During the first three months of 1999, the Company, through one of its
banking subsidiaries, issued an additional $550 million of senior bank notes,
bringing the total outstanding as of March 31, 1999 to $949.3 million. The
following table shows the Company's unsecured funding availability and
outstandings as of March 31, 1999.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------------
Effective/ Outstanding, Final
(Dollars or dollar equivalents in thousands) Issue Date Availability (1) Net Maturity
----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Senior and subordinated Bank Note program (2) 2/98 $4,000,000 $949,259 2/13
Short-term credit facilities (three 364 day Various 275,000 - Various
facilities)
Long-term credit facility 1/99 1,000,000 - 1/03
Providian Financial shelf registration 6/98 2,000,000 - -
Capital Securities 2/97 160,000 160,000 2/27
(1) All funding sources are revolving except for the Providian Financial shelf registration and
the Capital Securities. Funding availability is subject to market conditions.
(2) Includes availability to issue up to $500 million of subordinated bank notes, none outstanding
as of March 31, 1999
</TABLE>
On April 26, 1999, the Company entered into a new revolving credit facility
to finance the Company's expansion into the United Kingdom. The UK revolving
credit facility, in the amount of (Pound)25 million ($40.3 million equivalent
based on the exchange rate at closing) and has an expiration date of April 25,
2000. On April 27, 1999, the Company borrowed (Pound)10 million ($16.2 million)
under this facility.
The Company's securitizations are diversified across the public and private
securitization markets and across maturity terms. The primary objectives of
securitization are to diversify funding sources and to obtain efficient all-in
cost of funds, including the cost of capital. The securitized loans are pooled
to provide cash flow for securities sold to investors using legal structures
that generally provide for an interest only (revolving) period and a principal
repayment (amortization or accumulation) period. Under the terms of the
securitizations, once the amortization or accumulation period commences,
payments on the securitized loans are distributed or accumulated for payment to
the securitization investors and the Company's on-balance sheet portion of the
securitized pool of assets will increase.
For diversification and flexibility, in addition to publicly issued term
securities, the Company uses commercial paper-based conduit facilities and other
variable funding programs to securitize loan receivables. The conduit facilities
and variable funding programs are generally renewed annually. Balances
securitized under conduit and variable funding facilities totaled $2.9 billion
as of March 31, 1999.
The Company's term securitizations are expected to amortize over the
periods indicated below, based on currently outstanding securitized loans as of
March 31, 1999:
Amount
Amortizing
Year (Dollars in millions)
----------------------------------------------------------------------
1999 $ 158
2000 792
2001 1,026
2002 1,472
2003 832
2004 220
The Company believes that it can attract deposits, borrow funds from other
sources, and issue additional asset-backed securities to replace securitization
funding based on the amortization schedule summarized above, although no
assurances can be given to that effect.
CAPITAL ADEQUACY
Each of the Company's banking subsidiaries is subject to capital adequacy
guidelines as defined by its primary federal regulator. Core capital (Tier 1)
consists principally of shareholder's equity less goodwill. Total risk-based
capital (Tier 1 + Tier 2) includes a portion of the reserve for credit losses
and other capital components. Based on these classifications of capital, the
regulations further describe three capital adequacy ratios that are used to
measure whether a financial institution is "well capitalized" or "adequately
capitalized":
<PAGE>
<TABLE>
<CAPTION>
Well Adequately
Capitalized Capitalized
Capital Ratio Calculation Ratios Ratios
- ---------------------- ------------------------------------------- ---------------- -------------------
<S> <C> <C> <C>
Total Risk-Based (Tier 1 + Tier 2)/Total Risk-Based Assets => 10% => 8% < 10%
Tier 1 Tier 1/Total Risk-Based Assets => 6% => 4% < 6%
Leverage Tier 1/Adjusted average assets => 5% => 4% < 5%
</TABLE>
At March 31, 1999, each of the Company's banking subsidiaries was "well
capitalized" in all regulatory capital ratio categories, as set forth below:
<TABLE>
<CAPTION>
Providian
National Providian
Capital Ratio Bank Bank
- ------------------------ ---------------- -------------
<S> <C> <C>
Total Risk-Based 11.67% 11.31%
Tier 1 10.26% 9.96%
Leverage 12.00% 7.07%
</TABLE>
In accordance with the banking regulators' risk-based capital standards,
the amount of risk-based capital that must be maintained for assets transferred
with recourse will not exceed the maximum amount of recourse for which a
regulated entity is contractually liable under the recourse agreement. This
rule, known as the low level recourse rule, applies to transactions accounted
for as sales under generally accepted accounting principles in which a bank
contractually limits its risk of loss or recourse exposure to less than the full
effective minimum risk-based capital requirement for the assets transferred. Low
level recourse transactions arise when a bank securitizes assets and uses
contractual cash flows (such as interest-only strip receivables and spread
accounts), retained subordinated interests, or other assets as credit
enhancements. The Company's banking subsidiaries are required to hold risk-based
capital equivalent to the maximum recourse exposure on the assets transferred,
on a net-of-tax basis, not to exceed the amount of risk-based capital that would
be required if the low level recourse rule did not apply.
ASSET/LIABILITY RISK MANAGEMENT
The business of the Company and the composition of its balance sheet
consist primarily of investments in interest-earning assets (loans receivable
and investment securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). As a result, the Company's earnings are
subject to risk resulting from interest rate fluctuations to the extent that
there is a difference between the amount of interest-earning assets and the
amount of interest-bearing liabilities that mature, reprice, or prepay/withdraw
in a specific period.
The Company's receivables generally yield either a variable Annual
Percentage Rate ("APR"), indexed to the prime rate, or a fixed APR, set
independently of market interest rates. The interest rates on the Company's
liabilities are generally indexed to LIBOR or are fixed rates based on United
States Treasury Bond rates. These characteristics of the Company's receivables
and liabilities expose the Company to two types of interest rate risk: (a)
repricing risk, which results from differences between the timing of rate
changes and the timing of cash flows, which could impact net interest income if
liabilities reprice more often than assets, and (b) basis risk, which arises
from changing rate relationships between yield curves and markets, which could
impact net interest income derived from variable APR receivables if the spread
between the prime rate and LIBOR compresses or expands.
The Company's fixed APR credit card receivables have no stated maturity or
repricing period. However, the Company generally has the right to increase rates
when a customer fails to comply with the terms of the account agreement. In
addition, the Company's credit card receivables may be repriced by the Company
upon providing the required prior notice to the customer, which is generally no
more than 30 days. The Company occasionally reprices receivables to achieve
business objectives. These objectives include managing profitability, responding
to customer requests and balancing the risk/return trade-off.
The principal objective of the Company's asset/liability risk management
activities is to monitor and control the Company's exposure to adverse effects
resulting from movements of interest rates over time. The Company measures and
manages interest rate risk individually for each banking subsidiary and on a
consolidated basis, including both on- and off-balance sheet assets and
liabilities in its measurement and management. To measure exposure to interest
rate fluctuation, the Company uses net interest income ("NII") simulation
analysis and the market value of portfolio equity ("MVPE") method as its primary
quantitative tools.
The following table presents the estimated effects of positive and negative
parallel shifts in interest rates as calculated at March 31, 1999 and takes into
consideration the Company's current hedging activity:
March 31, 1999 (1)
---------------------------
Change in Interest Rates Percentage Change In
---------------------------
(In Basis Points) NII (2) MVPE (3)
- ------------------------------- ------------- -------------
+200 (2.7)% (9.1)%
Flat 0% 0%
- -200 3.5% 11.7%
(1) The information shown is presented on a consolidated, managed
asset/liability basis, giving effect to securitizations and related funding.
(2) The percentage change in this column represents NII for 12 months in a
stable interest rate environment versus the NII in the specified rate scenarios.
(3) The percentage change in this column represents the MVPE in a stable
interest rate environment versus the MVPE in the specified rate scenarios. MVPE
is defined as the present value of expected net cash flows from existing assets,
minus the present value of expected net cash flows from existing liabilities,
plus the present value of expected net cash flows from existing off-balance
sheet transactions.
The table above does not necessarily indicate the effect of general
interest rate movements on the Company's net interest income, because the
repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities assumed to mature or otherwise reprice within a
certain period may in fact mature or reprice at different times and at different
volumes.
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 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 liabilities, the
Company uses variable rate liabilities to fund a portion of its fixed rate
credit card assets.
The Company uses derivative financial instruments, including interest rate
swap and cap agreements, with indices that correlate to managed assets or
liabilities, to modify its indicated net interest sensitivity to levels deemed
appropriate based on the Company's risk tolerance. The objective in using these
hedges is to reduce interest rate risk by more closely aligning the repricing
characteristics of the Company's assets and liabilities. One hedging strategy
employed by the Company is to swap LIBOR-indexed variable rate liabilities for
fixed rate funding to support fixed rate assets. In this case, the Company
agrees with a counterparty to exchange interest payments on a notional amount
for a fixed period, with the Company making payments to the counterparty at a
fixed interest rate and the counterparty making variable payments to the Company
based on LIBOR. The Company also employs interest rate caps, where, for an
up-front fee, a counterparty agrees to pay the Company the excess, if any, of
LIBOR over a specified fixed rate, on a notional amount for a fixed period.
These transactions result in funding for fixed rate assets that is capped at a
given rate to minimize net interest margin compression in a rising interest rate
environment.
All of the Company's hedging transactions settle either monthly or
quarterly, with either the counterparty or the Company remitting to the other
the net payment, if any, for that period. The cash requirements of the Company,
if any, resulting from these payments are met with general operating cash
balances. All such hedging transactions are over-the-counter interest rate swap
and cap transactions executed with highly rated United States and international
banks under standard Master Agreements of the International Swap and Derivatives
Association, Inc. and hedge identified interest rate risks both for accounting
and tax purposes. The Company does not trade in derivatives or use derivatives
to speculate on interest rates or as an investment vehicle. The following table
presents the notional amounts of interest rate swap and cap agreements purchased
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------------------
(Dollars in thousands) 1999 1998
----------- -----------
<S> <C> <C>
interest rate swap agreements:
Beginning Balance $ 635,500 $ 955,500
Additions - 100,000
Maturities - 100,000
----------- -----------
Ending Balance $ 635,500 $ 955,500
=========== ===========
Interest rate cap agreements:
Beginning Balance $ 671,000 $ 922,220
Additions 50,000 -
Maturities 52,000 212,750
----------- -----------
Ending Balance $ 669,000 $ 709,470
=========== ===========
</TABLE>
Notional amounts of interest rate swaps and caps outstanding have decreased
due to market conditions that have created a closer match between the Company's
assets and liabilities. As market conditions change, the Company may increase or
decrease the notional amount of swaps and caps outstanding in order to manage
the Company's interest rate risk profile.
The Company manages credit risk arising from derivative transactions
through a rigorous ongoing credit review, approval, and monitoring process.
"Credit risk" for these derivative transactions is defined as the risk that a
loss will occur as the result of a derivative counterparty defaulting on a
contract when the contract is in a favorable economic position to the Company.
The Company enters into master netting agreements with swap counterparties to
reduce the exposure to credit risk with the individual counterparty. The Company
establishes credit risk limits for each counterparty based on total net credit
exposure to such counterparty. The Company also monitors exposure to
counterparty credit risk through sensitivity testing. Probable worst-case
scenarios are considered to determine the maximum credit risk exposure for
derivatives associated with a particular counterparty. This credit risk exposure
is then aggregated with other non-derivative credit risks associated with the
counterparty to determine compliance with the total credit risk limit for such
counterparty established by the Company during the credit review process. If
counterparty credit risk is determined to exceed the pre-established limit, then
action is taken to limit the Company's exposure with that counterparty.
<PAGE>
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 5. Other Information.
On May 11, 1999, the shareholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation which increases
the number of authorized shares of the Company's common stock from 400 million
to 800 million. A Certificate of Amendment of the Company's Amended and Restated
Certificate of Incorporation was filed on May 12, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 3.1 Certificate of Amendment of the Company's Amended and Restated
Certificate of Incorporation, filed on May 12, 1999
Exhibit 10.1 Deferred Compensation Plan for Senior Executives and
Employees, as amended and restated effective April 1, 1999
Exhibit 10.2 1999 Non-Officer Equity Incentive Plan adopted May 11, 1999
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividend
Requirements
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on March 26, 1999 with respect to
Amendment No. 1 to the Rights Agreement dated as of June 1, 1997 between the
Company and First Chicago Trust Company of New York, as Rights Agent.
(e) Ratio of Earnings to Fixed Charges and Ratio of Earning to Combined
Fixed Charges and Preferred Stock Dividend Requirements
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORP.
Select Financial Data
Three Months
Ended
March 31, Year Ended December 31
---------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS TO FIXED CHARGES
Excluding interest on deposits 11.43 10.88 14.20 5.93 4.90 5.17
Including interest on deposits 3.29 2.93 2.66 2.34 2.34 2.69
EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK (a)
Excluding interest on deposits 11.43 10.88 13.28 5.19 4.32 4.40
Including interest on deposits 3.29 2.93 2.63 2.25 2.24 2.51
(a) Preferred Stock dividend requirements are adjusted
to represent a pretax earnings equivalent
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providian Financial Corporation
(Registrant)
Date: May 14, 1999 /s/ David J. Petrini
-------------------------------------
David J. Petrini
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit 3.1 Certificate of Amendment of the Company's Amended and Restated
Certificate of Incorporation, filed on May 12, 1999
Exhibit 10.1 Deferred Compensation Plan for Senior Executives and
Directors, as amended and restated effective April 1, 1999
Exhibit 10.2 1999 Non-Officer Equity Incentive Plan adopted May 11, 1999
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividend
Requirements
Exhibit 27.1 Financial Data Schedule
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
PROVIDIAN FINANCIAL CORPORATION, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
FIRST. The Board of Directors of Providian Financial Corporation at a
meeting on February 17, 1999 duly adopted resolutions which set forth a proposed
amendment to the Amended and Restated Certificate of Incorporation of the
corporation, declaring such amendment to be advisable, and recommended such
amendment for approval by the stockholders of the corporation at its 1999 annual
meeting of stockholders. The proposed amendment provided that Section (A) of
Article FOURTH of the corporation's Amended and Restated Certificate of
Incorporation be amended to increase the number of shares of authorized common
stock from 400,000,000 to 800,000,000, and to read as follows:
FOURTH. (A) The total number of shares of all classes of stock which
the Corporation shall have the authority to issue is 850,000,000, of which
50,000,000 are to be Preferred Stock, par value $.01 per share (hereafter
called the "Preferred Stock"), and 800,000,000 are to be Common Stock, par
value $.01 per share (hereafter called the "Common Stock").
SECOND. At the 1999 annual meeting of stockholders of the corporation held
on May 11, 1999, and duly called upon notice in accordance with Section 222 of
the General Corporation Law of the State of Delaware, the necessary number of
shares as required by statute were voted in favor of the amendment.
THIRD. The amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Providian Financial Corporation has caused this
certificate to be signed by Shailesh J. Mehta, its Chairman, President and Chief
Executive Officer, and attested by Ellen Richey, its Executive Vice President,
General Counsel and Secretary, this 11th day of May, 1999.
PROVIDIAN FINANCIAL CORPORATION
By /s/ Shailesh J. Mehta
----------------------------
Shailesh J. Mehta,
Chairman, President and
Chief Executive Officer
ATTEST:
By: /s/ Ellen Richey
---------------------------
Ellen Richey,
Executive Vice President,
General Counsel and Secretary
PROVIDIAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
FOR SENIOR EXECUTIVES AND DIRECTORS
As Amended and Restated Effective April 1, 1999
1. Purpose...............................................................1
2. Definitions...........................................................1
3. Participation in the Plan.............................................5
4. Deferred Compensation Elections.......................................5
5. Deferred Compensation Accounts........................................7
6. Payment of Plan Benefits.............................................11
7. Administration.......................................................14
8. Beneficiary Designation..............................................14
9. Claims, Inquiries and Appeals........................................15
10. Miscellaneous........................................................16
PROVIDIAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
FOR SENIOR EXECUTIVES AND DIRECTORS
As Amended and Restated Effective April 1, 1999
1. Purpose
The purpose of the Deferred Compensation Plan for Senior Executives and
Directors (the "Plan") is to provide retirement, long-term savings, death or
termination of service benefits to Senior Executives (as hereinafter defined)
and Non-Employee Directors (as hereinafter defined) of Providian Financial
Corporation and its affiliates. The Plan succeeds the Providian Bancorp, Inc.
Deferred Compensation Plan (formerly known as the First Deposit Corporation
Deferred Compensation Plan), which was originally adopted effective January 1,
1991 (the "Predecessor Plan"), as to those Participants who were participating
in the Predecessor Plan immediately prior to the Effective Date (as hereafter
defined).
2. Definitions
2.1 "Active Service" means employment by the Company, service as a member
of the Board (a "Director") or service as a paid consultant to the Company
immediately following a period of employment or service as a Director (a
"Consultant"), provided that amounts paid for services as a Consultant shall not
be included as Compensation for purposes of the Plan. Active Service shall not
be considered to have ceased as long as a Participant continues to serve the
Company in any of the capacities described above, without interruption,
notwithstanding a change in the capacity of such service and without regard to
whether or not the Participant continues to be eligible to elect Deferred
Compensation hereunder.
2.2 "Beneficiary" means the person or persons so designated by a
Participant in accordance with Section 8 hereof.
2.3 "Board" shall mean the Board of Directors of Providian Financial
Corporation.
2.4 "Board Cycle" shall mean the period beginning on June 1 of each year
and ending on May 31 of the following year, provided that the initial Board
Cycle shall commence on the Effective Date and end on May 31, 1998.
2.5 "Cash Account" means a Deferred Compensation Account (or subaccount)
pursuant to which a Participant's Deferred Compensation shall be credited with
interest as provided in Section 5.4 hereof.
2.6 "Change in Control" shall mean the occurrence of any of the following
after the Effective Date:
(a) Any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(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 (i)
the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that beneficial ownership by any of the
following shall not constitute a Change of Control: (x) the Company or any
of its subsidiaries, (y) any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries or (z)
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 Company Common Stock
and Outstanding Company Voting Securities immediately prior to such
acquisition in substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be; or
(b) Individuals who, as of the date hereof, constitute the Board of
the Company (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a
vote of at least a majority of the directors 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 terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act); or
(c) 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 Company Common
Stock and Outstanding Company 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 share of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such reorganization, merger
or consolidation in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be; or
(d) (i) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation, with respect to which following such sale or other
disposition, more than 60% of, respectively, the then outstanding share 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 Company
Common Stock and Outstanding Company 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 Company Common Stock and Outstanding Company Voting
Securities, as the case may be.
2.7 "Committee" means the Human Resources Committee of the Board.
2.8 "Company" means Providian Financial Corporation and its affiliate
corporations who participate in the Plan.
2.9 "Compensation" means, in the case of a Senior Executive, the Salary and
Incentive Award payable to the Senior Executive by the Company, and, in the case
of a Non-Employee Director, the Retainer paid to the Non-Employee Director by
the Company in connection with his or her service as a Director of Providian
Financial Corporation. Compensation also shall include such other amounts of
wages, earnings or benefits to which a Participant may be entitled to receive
from the Company that the Committee, in accordance with Section 4.4, permits to
be deferred by such Participant under the Plan, including (without limitation)
incentive pay, bonuses, commissions, stock awards or gains attributable to the
appreciation of stock awards (including options), non-recurring payments and
similar items.
2.10 "Deferred Compensation" means the amount of Compensation that a
Participant defers pursuant to his or her Election and that the Participant and
the Company mutually agree shall be deferred in accordance with the Plan.
2.11 "Deferred Compensation Account" means either a Cash Account or a
Phantom Stock Unit Account (or any subaccounts thereof) maintained by the
Company on its books for a Participant and to which shall be credited the
Participant's Deferred Compensation, together with interest or other gains or
losses determined under Section 5, and which shall be reduced by any
distributions made to a Participant. The Company, at the discretion of the
Committee, may establish such other Deferred Compensation Accounts (or
subaccounts) or discontinue any Deferred Compensation Accounts (or subaccounts)
as it determines to be appropriate from time to time.
2.12 "Effective Date" means June 11, 1997.
2.13 "Election" means the election of a Participant to defer Compensation,
which shall be made on such form or forms as the Company may prescribe from time
to time.
2.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2.15 "Fiscal Year" means the fiscal year of the Company, which currently is
the calendar year.
2.16 "Incentive Plan" means the Providian Financial Corporation Management
Incentive Plan.
2.17 "Incentive Award" means a cash amount payable pursuant to the
Incentive Plan upon the achievement of pre-established performance objectives.
2.18 "Market Value" means the average of the daily high and low trading
prices of a share of Stock on the New York Stock Exchange ("NYSE") on the date
upon which such Market Value is to be determined for the purpose of crediting a
Participant's Phantom Stock Unit Account or making a distribution to a
Participant therefrom.
2.19 "Non-Employee Director" means a member of the Board who is not
currently an employee or officer of the Company.
2.20 "Participant" means any Senior Executive selected by the Committee to
participate in the Plan and each Non-Employee Director.
2.21 "Phantom Stock Unit Account" means a Deferred Compensation Account (or
subaccount) pursuant to which a Participant's Deferred Compensation shall be
treated as if it had been used to purchase shares of Stock of the Company on the
date on which the Participant's Deferred Compensation is credited to the
Participant's Deferred Compensation Account.
2.22 "Plan" means this Deferred Compensation Plan for Senior Executives and
Directors.
2.23 "Plan Year" means the calendar year.
2.24 "Retainer" means the annual fees paid to a Non-Employee Director for
his or her service as a Director, which shall include any fees paid for service
on a committee of the Board or as chair thereof and meeting attendance fees (if
any), but shall exclude expense reimbursements and any remuneration or other
payments paid to the Non-Employee Director for services or otherwise in any
capacity other than as a Non-Employee Director.
2.25 "Retirement Age" means attainment by a Participant of the first to
occur of (i) normal retirement age specified in the Company's retirement plan,
(ii) age sixty-five (65), or (iii) age fifty-five (55) (or older) having
completed at least ten (10) years of Active Service.
2.26 "Salary" means the base salary of a Participant who is a Senior
Executive.
2.27 "Senior Executive" means an officer or other key employee who is a
top-level executive of the Company, as determined by the Committee.
2.28 "Stock" shall mean common stock, par value $.01 per share, of the
Company.
2.29 "Unforeseeable Hardship" means severe financial hardship to a
Participant resulting from a sudden and unexpected illness or accident of the
Participant or a dependent (as defined in Section 152(a) of the Internal Revenue
Code) of the Participant, loss of the Participant's property due to casualty, or
other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the control of the Participant.
3. Participation in the Plan
3.1 Eligibility for participation in the Plan shall be limited to (1)
Senior Executives who are members of a select group of management or highly
compensated employees of the Company, within the meaning of Section 401(a)(1) of
ERISA, and (2) Non-Employee Directors.
3.2 The total number of Senior Executives selected to participate in the
Plan shall be determined by the Committee.
4. Deferred Compensation Elections
4.1 Deferrals of Salary.
(a) A Senior Executive who makes an Election in accordance with this
Section 4.1 may elect to defer receipt of up to seventy-five percent (75%)
of his or her Salary or such lesser amount determined by the Company from
time to time and communicated to Senior Executives. The Company may
establish a reasonable minimum as to the amount of Salary that may be
deferred hereunder and may also require that deferrals be made in specified
dollar or percentage increments, which shall be communicated to Senior
Executives from time to time. The amount of Salary deferred also shall be
subject to the provisions of Section 4.6.
(b) Each Senior Executive who immediately prior to the Effective Date
has an election in effect with respect to the deferral of Salary under the
Predecessor Plan (a "Predecessor Election") shall automatically begin to
participate in the Plan on the Effective Date and shall be deemed to have
made an Election under the Plan to defer the amount of Salary specified in
the Predecessor Election. Each other Senior Executive who is eligible to
participate on the Effective Date may begin to participate in the Plan as
of July 1, 1997, with respect to Salary for services performed on and after
that date, provided that such Senior Executive completes and returns to the
Company within 30 days after the Effective Date an executed Election to
defer a portion of such Salary in accordance with the Plan. Each Senior
Executive who first becomes eligible after the Effective Date may begin
deferring Salary under the Plan with respect to services performed on and
after the first day of the month next following the date such Senior
Executive completes and returns an executed Election to the Company,
provided that such Election is made within 30 days after the date that the
Senior Executive is notified of his or her eligibility to participate in
the Plan.
(c) A Senior Executive who has not made an Election as described in
Section 4.1(b) may begin deferring Salary with respect to services
performed on and after the beginning of any Plan Year by completing and
returning an executed Election to the Company prior to the beginning of
such Plan Year (or such earlier date established by the Company and
announced to the Senior Executive).
(d) After the beginning of a Plan Year, a Senior Executive's Election
shall be irrevocable with respect to Salary payable for such Plan Year. An
Election to defer Salary shall continue in effect for each subsequent Plan
Year until changed or revoked by the Senior Executive, as provided in this
Section 4.1(d), unless otherwise determined by the Company and announced to
the Senior Executive. A Senior Executive may change the amount of his or
her Salary to be deferred or may cease deferring Salary, by completing a
new Election or revoking his or her Election, provided that the new
Election or the revocation shall become effective as of the beginning of
the next Plan Year. A Senior Executive who previously has revoked an
Election to defer all or a part of his or her Salary may again elect to
defer Salary under the terms of the Plan by completing and returning an
executed Election to the Company prior to the beginning of the Plan Year
(or such earlier date established by the Company and announced to the
Senior Executive) to which such Election applies.
4.2 Deferral of Retainer.
(a) Prior to the beginning of each Board Cycle, each Non-Employee
Director may elect to defer from twenty-five percent (25%) to one hundred
percent (100%) of the cash portion of his or her Retainer payable with
respect to such Board Cycle. The amount of Retainer deferred shall be an
increment of five percent (5%) and shall be subject to the provisions of
Section 4.6. In order to defer all or part of his or her Retainer, a
Non-Employee Director must complete and return an executed Election to the
Company prior to the time announced by the Company, which in any event
shall be prior to the beginning of the Board Cycle to which such Election
relates.
(b) A Non-Employee Director's Election to defer a portion of his or
her Retainer for a Board Cycle shall apply only for such Board Cycle and
shall be irrevocable. In order to defer a portion of his or her Retainer
for a subsequent Board Cycle, a Non-Employee Director must make a new
Election in accordance with Section 4.2(a).
(c) At the time of making an election under Section 4.2(a), a
Non-Employee Director also may elect to have an amount of such Deferred
Compensation credited as Nonrestricted Units (as defined in Section 5.5) to
a Phantom Stock Unit Account as provided in Section 5.9. The Company shall
credit matching Restricted Units (as defined in Section 5.5) to the Phantom
Stock Unit Account of each Non-Employee Director who makes such an
election, pursuant to Section 5.9.
4.3 Deferral of Incentive Awards.
(a) Prior to the beginning of each Fiscal Year, each Participant who
is a Senior Executive may elect to defer from twenty-five percent (25%) to
one hundred percent (100%) of the cash portion of his or her Incentive
Award payable with respect to such Fiscal Year pursuant to the terms of the
Incentive Plan. The amount of Incentive Award deferred shall be an
increment of five percent (5%) and shall be subject to the provisions of
Section 4.6. In order to defer all or part of the cash portion of his or
her Incentive Award, a Senior Executive must complete and return an
executed Election to the Company prior to the time announced by the
Company, which in any event shall be prior to the beginning of the Fiscal
Year to which such Election relates.
(b) A Senior Executive's Election to defer a portion of his or her
Incentive Award for a Fiscal Year shall apply only for such Fiscal Year and
shall be irrevocable. In order to defer a portion of his or her Incentive
Award for a subsequent Fiscal Year, a Senior Executive must make a new
Election in accordance with Section 4.3(a).
4.4 Deferral of Other Compensation Amounts.
(a) From time to time, as determined by the Committee in its sole
discretion, a Participant may be permitted to defer receipt of other
amounts of Compensation (e.g., gains in stock option value attributable to
appreciation of the Company's common stock) and be credited with Deferred
Compensation hereunder in lieu of receiving such Compensation. The form and
amount or portion of any Deferred Compensation that may be credited under
this Section 4.4 shall be established by the Committee and communicated to
Participants determined by the Committee to be eligible therefor.
(b) An Election to defer Compensation under this Section 4.4, shall be
made at such time prior to an eligible Participant's receipt or
constructive receive thereof as the Committee determines, and such
Election, once made, shall be irrevocable. The Committee shall determine
the Deferred Compensation Account or Accounts to which Compensation
deferred under this Section 4.4 shall be credited and may establish other
rules and procedures for the deferral of Compensation under this Section
4.4.
4.5 The Company may establish rules and procedures, and from time to time
modify or change such rules and procedures, governing the manner of Elections of
Deferred Compensation under the Plan, as it may determine in its discretion,
including (but not limited to) establishing and changing any minimum or maximum
amounts of Compensation that may be deferred hereunder.
4.6 All Deferred Compensation shall be withheld and deducted from the
Participant's Salary, Retainer, Incentive Award or other Compensation (as the
case may be) without reduction for any income taxes or withholding (except to
the extent required by law) and shall be credited to the appropriate Deferred
Compensation Accounts for the Participant as provided below. Notwithstanding the
foregoing, the Company may reduce the amount credited to a Participant's
Deferred Compensation Accounts by any amounts which the Company must pay to
satisfy its withholding obligations for employment or other taxes (including
FICA), amounts authorized by a Participant to purchase benefits under other
employee benefit plans sponsored by the Company, or any other amounts which the
Company is obligated to withhold by law or which the Participant has authorized
to be withheld from his or her Compensation.
5. Deferred Compensation Accounts
5.1 The Company shall establish one or more Deferred Compensation Accounts
(which shall include any subaccounts established under Section 2.11), with
respect to Deferred Compensation under the Plan, for each Participant in
accordance with the instructions provided by such Participant. The establishment
of such Deferred Compensation Accounts constitutes only a method, by bookkeeping
entry, of determining the amount of deferred payments to be made under the Plan.
The Company shall be under no obligation to acquire or hold any Stock or any
other securities or specific assets by reason of the credits made to the
Deferred Compensation Accounts hereunder.
5.2 A Participant's or Beneficiary's rights to receive payments under this
Plan are merely those of an unsecured general creditor of the Company. Such
rights constitute a mere promise by the Company to make payments to Participants
and their Beneficiaries in the future. All amounts under the Plan, including a
Participant's Deferred Compensation Accounts, shall remain (until paid to the
Participant or Beneficiary) the property of the Company and shall be subject to
the claims of the Company's creditors in the event of the Company's financial
insolvency. The Plan shall be unfunded for federal tax purposes and for purposes
of Title I of ERISA. The obligation of the Company may, in its sole discretion,
be satisfied from any source of funds, including but not limited to payment from
a trust or trusts established by the Company which permit such payments to be
made therefrom. No Participant or Beneficiary shall have any secured or
beneficial interest in any property, rights or investments held by the Company,
whether or not held in connection with the Plan, including but not limited to
any assets held in any trust established by the Company in connection with the
Plan.
5.3 Subject to Section 5.7, a Participant's Deferred Compensation shall be
credited to a Cash Account or a Phantom Stock Unit Account (or such other
Deferred Compensation Account as may then be in effect), as selected by the
Participant, as soon as practicable following the time at which such amounts
would have been paid to the Participant in the absence of an Election to defer
such amount of Compensation, provided that one-fourth (1/4) of the full amount
elected to be deferred from a Non-Employee Director's Retainer for a Board Cycle
will be credited to the Deferred Compensation Account or Accounts selected by
such Non-Employee Director on the first day of each quarter of the Board Cycle
on which Stock is traded on the NYSE, except that no amounts shall be credited
for any quarter of the Board Cycle that begins after the Non-Employee Director
has ceased service as a Non-Employee Director. For purposes of the Plan, a
quarter of a Board Cycle shall be the period of three months commencing each
June 1, September 1, December 1 and March 1.
5.4 Interest on the Cash Account balance shall be calculated and shall
either be paid to the Participant or credited to the account at the end of each
calendar quarter in accordance with the direction of the Participant given at
the time of his or her Election. In the absence of directions from the
Participant, interest shall be credited to the Cash Account. Amounts credited to
the Cash Account after the first day of a calendar quarter shall be credited
with pro rata interest on the basis of the number of days of such quarter during
which such amounts were credited. Distributions or withdrawals prior to the end
of a calendar quarter shall be credited with interest for the number of days
during the quarter for which such amount was credited. The interest rate for the
quarter shall be equal to the Prime Rate of Interest reported in the "Money
Rates" section of the Wall Street Journal as of the beginning of such quarter,
plus two percent (2%).
5.5 Deferred Compensation or other amounts credited to a Phantom Stock Unit
Account shall be converted into a number of phantom stock units of Stock of the
Company. Such phantom stock units may be credited subject to certain vesting or
forfeiture restrictions established under the Plan or by the Committee
("Restricted Units") or may be fully vested and nonforfeitable ("Nonrestricted
Units") when credited. The number of phantom stock units of Stock of the Company
to be so credited shall be equal to the Deferred Compensation or other amounts
to be credited to the Phantom Stock Unit Account, divided by the Market Value of
a share of Stock on the date of the credit. Permitted accretion and adjustments
shall be credited and determined as set forth below.
(a) As of the date when any cash dividend or other cash distribution
is payable with respect to the Stock, there shall be credited to the
Phantom Stock Unit Account an amount equal to the value which would have
been payable with respect to shares of Stock equal in number to the number
of phantom stock units then credited to the Phantom Stock Unit Account.
Such amount shall then be converted into a number of phantom stock units
based upon the amount to be credited divided by the Market Value of a share
of Stock on the date of the credit. All phantom stock units credited under
this Section 5.5(a) shall be Nonrestricted Units, without regard to whether
the phantom stock units from which they are derived are Restricted Units or
Nonrestricted Units.
(b) In the event of any change in the number of shares of outstanding
Stock by reason of any stock split, stock dividend, recapitalization, or
the like, whereby the outstanding shares of Stock are adjusted, the number
of phantom stock units credited to the Phantom Stock Unit Account shall be
equitably adjusted to reflect such change. Any adjustments provided in this
Section 5.5(b) with respect to Nonrestricted Units shall be in the form of
Nonrestricted Units. Any adjustments provided in this Section 5.5(b) with
respect to Restricted Units shall be in the form of Restricted Units, which
shall be subject to the same terms and conditions applicable to the
original Restricted Units from which they are derived.
5.6 The Company may change, discontinue, or add any Deferred Compensation
Accounts at any time as determined by the Committee in the Committee's sole
discretion. Any Deferred Compensation Account not specifically described above
shall be credited with such interest, gains or losses, or other accretions and
adjustments, as determined to be appropriate by the Committee in order to
simulate the investment performance of such asset, category of assets, fund,
index or other investment vehicle selected by the Committee in its discretion to
be applicable to such Deferred Compensation Account.
5.7 Except as specifically provided in the Plan with respect to
Non-Employee Directors and notwithstanding Section 5.3, no amounts of Deferred
Compensation shall be credited to a Phantom Stock Unit Account for any
Participant, and Phantom Stock Unit Accounts shall not be available under the
Plan, until such time, if any, as the Committee or the Board in its discretion
determines that Phantom Stock Unit Accounts shall be permitted hereunder. With
respect to Phantom Stock Unit Accounts currently provided for in the Plan for
Non-Employee Directors and any additional Phantom Stock Unit Accounts added to
the Plan by the Committee or the Board, such accounts, each Participant's
election to have Deferred Compensation credited to such an account, any Account
Transfers (as defined in Section 5.8), and any elections as to the time and
manner of distributions under the Plan shall be approved by the Committee or the
Board and administered in all respects in accordance with the conditions set
forth in Rule 16b-3 promulgated under the Exchange Act in order to obtain the
maximum available exemption from Section 16(b) of the Exchange Act for
transactions involving Phantom Stock Unit Accounts.
5.8 Subject to Section 5.7, the Committee or the Board may, but is not
required to, establish rules and procedures under which Participants may direct
that amounts credited to one or more Deferred Compensation Accounts be
transferred to other Deferred Compensation Accounts that may be available under
the Plan (an "Account Transfer"), provided that the following shall apply:
(a) Effective as of June 1, 1999, a Non-Employee Director may at any
time direct an Account Transfer from his or her Phantom Stock Unit Account
of amounts attributable to Nonrestricted Units (including any Corresponding
Units (as defined in Section 5.9(b) below), subject to Section 5.9(c)(1))
to his or her Cash Account (or to any other Deferred Compensation Account
then available under the Plan). Such direction must be made in writing, be
delivered to the person designated by the Committee and indicate the number
of Nonrestricted Units to be transferred. As of the first day of the next
succeeding quarter of the Board Cycle on which Stock is traded on the NYSE
following the Company's receipt of a Non-Employee Director's written
direction (the "Transfer Date"), such number of Nonrestricted Units shall
be deducted from his or her Phantom Stock Unit Account, and there shall be
credited to his or her Cash Account (or other applicable Deferred
Compensation Account, if any) an amount equal to the Market Value of a
share of Stock on the Transfer Date multiplied by the number of phantom
stock units to be transferred. No Account Transfers may be made as to any
Restricted Units.
(b) In no event shall a Participant be permitted to direct either (i)
an Account Transfer to the Phantom Stock Unit Account within six months
after an Account Transfer from such account or (ii) an Account Transfer
from the Phantom Stock Unit Account within six months after an Account
Transfer to such account.
5.9 Effective with the Board Cycle commencing June 1, 1999:
(a) A Non-Employee Director may elect, in accordance with Section
4.2(c), to have from twenty-five percent (25%) to one hundred percent
(100%) of his or her Deferred Compensation for a Board Cycle credited to a
Phantom Stock Unit Account, provided that such Non-Employee Director has
not elected to receive any portion of his or her Retainer for such Board
Cycle in the form of Nonrestricted Stock under the Providian Financial
Corporation Stock Ownership Plan. Subject to the foregoing, the amount of
Deferred Compensation that may be credited to a Phantom Stock Unit Account
shall be an increment of five percent (5%) of a Non-Employee Director's
Deferred Compensation for a Board cycle. On each quarterly date on which
Deferred Compensation is credited pursuant to Section 5.3, one-fourth (1/4)
of the amount of Deferred Compensation elected to be credited to his or her
Phantom Stock Unit Account for the Board Cycle shall be credited as
Nonrestricted Units. The balance of Deferred Compensation credited on such
date under Section 5.3, if any, shall be credited to one or more of the
Non-Employee Director's other Deferred Compensation Accounts in accordance
with his or her selection and the terms of the Plan.
(b) Each Non-Employee Director receiving a credit of Nonrestricted
Units hereunder also shall be credited, by the Company, on the date of
credit of the Nonrestricted Units, a number of matching Restricted Units
determined by dividing one-sixteenth (1/16) of the Non-Employee Director's
annual Retainer for the full Board Cycle with respect to which
Nonrestricted Units are credited by the Market Value of a share of Stock on
the date of credit. Restricted Units credited hereunder and an equal number
of Nonrestricted Units credited on the same date ("Corresponding Units")
shall be subject to the terms and conditions set forth in Section 5.9(c)
until the end of the specified restricted period ("Restricted Period")
applicable to such Restricted Units. Restricted Units not previously
forfeited shall vest and become nonforfeitable at the end of the applicable
Restricted Period and shall thereafter be Nonrestricted Units.
(c) The "Vesting Commencement Date" for Restricted Units shall be the
first day of the Board Cycle to which a Non-Employee Director's election to
have Deferred Compensation credited to his or her Phantom Stock Unit
Account applies. The Restricted Period for fifty percent (50%) of the
Restricted Units credited to a Non-Employee Director's Phantom Stock Unit
Account on a date of credit shall be three (3) years from the Vesting
Commencement Date for such Restricted Units. The Restricted Period for the
remaining fifty percent (50%) of the Restricted Units credited on such date
shall be six (6) years from the Vesting Commencement Date. Notwithstanding
the foregoing, in the event of a Change in Control, the Restricted Period
as to all Restricted Units shall terminate, and any phantom stock units
which are then Restricted Units shall immediately become Nonrestricted
Units. During the applicable Restricted Period, the following terms and
conditions shall apply:
(1) If a Non-Employee Director directs that an Account Transfer
be made of any Corresponding Units from his or her Phantom Stock Unit
Account to another Deferred Compensation Account, then an equal number
of matching Restricted Units credited at the same time as such
Corresponding Units were credited shall be forfeited, and all rights
of the Non-Employee Director to receive any benefits under the Plan
attributable to such forfeited Restricted Units shall terminate. For
this purpose, Account Transfers from the Non-Employee Director's
Phantom Stock Unit Account shall be deemed to be made first from
Nonrestricted Units that are not Corresponding Units, if any, and an
Account Transfer will be made as to Corresponding Units only if and
when the remaining Nonrestricted Units in his or her Phantom Stock
Unit Account are all Corresponding Units.
(2) If a Non-Employee Director is removed from the Board for
cause (as determined by the disinterested members of the Board), any
phantom stock units credited to such Non-Employee Director which are
still Restricted Units shall be forfeited and all rights of the
Participant to receive any benefits under the Plan attributable to
such forfeited Restricted Units shall terminate. If 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), then the
Restricted Period shall terminate as to all remaining Restricted
Units, and any phantom stock units which are then Restricted Units
shall immediately become Nonrestricted Units.
6. Payment of Plan Benefits
6.1 Distribution Elections. Subject in all respects to Section 5.7, the
following shall apply:
(a) At the time of each Election, pursuant to Section 4.2, Section 4.3
or Section 4.4, to defer receipt of a portion of his or her Retainer,
Incentive Award or other form of Compensation for the succeeding Board
Cycle, Fiscal Year or other applicable period (as the case may be), a
Participant also may make an election, on such form as the Company may
prescribe, as to the time and manner of payment of the portion of his or
her Deferred Compensation Accounts attributable to the amount of Deferred
Compensation specified in such Election.
(b) A Participant also may elect the time and manner for the payment
of the portion of his or her Deferred Compensation Accounts attributable to
Salary deferred under the Plan. Such a payment election shall be made on
such form and at such time or times as the Company may prescribe. Only one
payment election under this Section 6.1(b) shall be in effect at any one
time, and such election shall apply to all amounts in a Participant's
Deferred Compensation Accounts attributable to deferrals of Salary.
(c) The permitted payment methods which a Participant may elect shall
be a lump sum or substantially equal installments payable over three, five
or ten years, paid or commencing at the time specified in the Participant's
payment election or, if earlier, following the Participant's termination of
Active Service. Subject to Sections 6.2(a) and 6.3 below, distributions of
applicable amounts determined under Section 6.2(c) shall be made from a
Participant's Deferred Compensation Accounts in accordance with each
payment election of the Participant hereunder.
(d) A Participant may change his or her payment election in accordance
with procedures determined by the Company, provided that any changed
election shall not be effective unless the Participant continues in Active
Service for a period of thirteen (13) months following the time of such
election and shall only apply after the end of such thirteen-month period.
If a Participant ceases Active Service prior to the end of the thirteen
months, then distributions shall be made in accordance with the
Participant's prior outstanding elections in effect.
(e) Subject to Section 5.7, no elections under this Section 6.1 may be
made or changed as to distributions from a Participant's Phantom Stock Unit
Account (if any), unless the Committee or the Board has approved in advance
such election or change of election in a manner that satisfies the
requirements for exemption of Phantom Stock Unit Account transactions under
Rule 16b-3 of the Exchange Act.
6.2 Retirement or Disability.
(a) If a Participant's Active Service with the Company ceases after
Retirement Age or by reason of long-term disability recognized as such by
the Company ("Disability"), the amounts then credited to a Participant's
Deferred Compensation Accounts shall be paid (or payment shall commence)
within a reasonable time following such event in the form of a lump sum or
substantially equal annual installment as provided in the Participant's
payment elections then in effect pursuant to Section 6.1. Any installment
payments that remain unpaid following earlier commencement shall continue
in accordance with the method in effect at such time.
(b) Any portions of a Participant's Deferred Compensation Accounts as
to which no payment election is in effect at the time a Participant's
Active Service ceases after Retirement Age or due to Disability shall be
paid in five substantially equal annual installments commencing within a
reasonable time following such termination of Active Service.
(c) The amount paid to a Participant pursuant to this Section 6.2
shall be as follows:
(1) For a Cash Account, the number of dollars equal to the Cash
Account balance as of the date of the cessation of Active Service.
(2) For a Phantom Stock Unit Account, the number of dollars equal
to the number of phantom stock units in the Phantom Stock Unit Account
of such Participant on the date of cessation of such Active Service,
multiplied by the Market Value of a share of Stock immediately
preceding the date of the cessation of such Active Service.
(3) If a Participant receives payment in installments, the
Company shall calculate and credit interest until each payment date on
the unpaid balance of such Participant's account at the rate specified
in Section 5.4; however, if the Participant has elected to receive
interest payments as provided in Section 5.4, such amount shall be
less any interest payments received.
(d) If a Participant whose Active Service ceased due to Disability
again commences Active Service with the Company, installment payments
pursuant to this Section 6.2 shall cease. The unpaid balance of the account
shall then be credited to a Cash Account or Phantom Stock Unit Account, as
elected by the Participant, which shall be maintained subject to the
provisions of the Plan as if Active Service had never ceased. The amount
credited to the Phantom Stock Unit Account shall be converted into a number
of phantom stock units based upon the amount to be credited divided by the
Market Value of a share of Stock immediately preceding the date of the
credit.
6.3 Early Termination of Active Service. Within a reasonable time following
the cessation of a Participant's Active Service with the Company prior to
Retirement Age for any reason other than Disability (including by reason of a
Participant's death), and notwithstanding any election which the Participant has
made under the Plan pursuant to Section 6.1, the Company will pay to such
Participant or to the Participant's Beneficiary all amounts then credited to the
Participant's Deferred Compensation Accounts (including any remaining unpaid
installments with respect to distributions that previously had commenced
pursuant to the Participant's payment elections under Section 6.1), in the form
of a single lump sum determined in accordance with Section 6.2(c).
6.4 Unforeseeable Hardship. Upon application by a Participant who is
receiving payments in the form of installments following separation from Active
Service on account of Disability, the Committee may direct payment in a lump sum
of all or a portion of the remaining amounts credited to the Deferred
Compensation Accounts of such Participant in the event of Unforeseeable
Hardship. Any such application must set forth the circumstances constituting
such Unforeseeable Hardship. Notwithstanding the foregoing, the Committee may
not direct payment of any amounts credited to the Deferred Compensation Accounts
of a Participant to the extent that such Unforeseeable Hardship is or may be
relieved (a) through reimbursement or compensation by insurance or otherwise;
(b) by liquidation of the Participant's assets, to the extent that such
liquidation would itself not cause severe financial hardship; or (c) by
cessation of deferrals under the Plan. Any distribution due to Unforeseeable
Hardship shall only be permitted to the extent reasonably needed to satisfy such
hardship, and shall be made in the sole discretion of the Committee, both with
respect to the determination as to whether an Unforeseeable Hardship exists and
as to the amount distributable. In all cases, the requirements and standards set
forth in Section 1.457-2(h) (4) and (5) of the Income Tax Regulations will
govern the determinations of a Participant's eligibility for and the amount of
any distributions under this Section 6.4.
6.5 Withholding. All payments made pursuant to this Section 6 shall be
reduced by the amount of any federal, state, or local income or other taxes
required to be withheld by the Company or other payor.
6.6 No Assignment or Alienation. The right to receive payment under this
Plan shall not be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge such right shall be void. No payment or right to
payment shall in any manner be liable for or subject to debts, contracts,
liabilities or torts of the Participant or the Participant's Beneficiary.
6.7 Change in Status. Notwithstanding the foregoing provisions of this
Section 6, if a Senior Executive ceases to be a Senior Executive or if a
Non-Employee Director ceases to be a Non-Employee Director (whether or not
cessation of Active Service occurs), the Committee may disregard such
Participant's payment election and may cause the amount credited to his Deferred
Compensation Accounts to be paid to the Participant in a lump sum; provided,
however, that the Participant shall have no right to receive payments under the
Plan prior to the time specified in his or her payment election or as otherwise
determined under Sections 6.1 through 6.4.
6.8 Certain Further Deferral of Payments. Notwithstanding any other
provisions of this Plan, to the extent that any amounts payable hereunder would
not be deductible by the Company for federal income tax purposes on account of
the limitations of Section 162(m) of the Internal Revenue Code, the Company may
defer payment of such amounts to the earliest one or more subsequent calendar
years in which the payment of such amounts would be deductible by the Company.
7. Administration
7.1 The Committee shall be the sole administrator of the Plan and will
administer the Plan and interpret, construe and apply its provisions in
accordance with its terms. The Committee shall further establish, adopt or
revise such rules and regulations as it may deem necessary or advisable for the
administration of the Plan. However, no member of the Committee shall have the
right to vote or decide upon any matter relating solely to himself or herself
under the Plan or to vote in any case in which his or her individual right to
claim any benefit under the Plan is particularly involved. In any case in which
a Committee member is so disqualified to act, and the remaining members cannot
agree, the Board shall decide the matter in which he or she is disqualified;
provided however, that if such disqualified Committee member is also a member of
the Board, he or she shall be similarly disqualified from voting on or deciding
the matter in his or her capacity as a member of the Incumbent Board.
7.2 Each Participant will receive quarterly statements in such form as the
Company deems desirable setting forth the balance standing to the credit of the
Participant's Deferred Compensation Accounts.
8. Beneficiary Designation
8.1 Each Participant shall have the right, at any time, to designate any
person or persons as Beneficiary or Beneficiaries (both primary as well as
contingent) to whom payment under this Plan shall be made in the event of the
Participant's death prior to complete distribution to the Participant of the
benefits due the Participant under the Plan. Each Beneficiary designation shall
become effective only when filed in writing with the Committee during the
Participant's lifetime on a form prescribed by the Committee with written
acknowledgement of receipt.
8.2 The filing of a new Beneficiary designation form will cancel all
Beneficiary designations previously filed. The spouse of a married Participant
domiciled in a community property jurisdiction shall join in any designation of
Beneficiary or Beneficiaries other than the spouse.
8.3 If a Participant fails to designate a Beneficiary as provided above, or
if all designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the Committee shall
direct the distribution of such benefits to the Participant's estate.
9. Claims, Inquiries and Appeals
9.1 Any application or request for benefits, inquiries about the Plan or
inquiries about present or future rights under the Plan must be submitted to the
Company at:
Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
Attention: Chief Human Resources Officer
9.2 In the event that any application for benefits is denied in whole or in
part, the Company shall notify the applicant, in writing, of the denial of the
application, and of the applicant's right to receive a review of such denial.
The written notice of denial will be set forth in a manner designed to be
understood by the individual, and will include specific reasons for the denial,
specific references to the Plan provision upon which the denial is based, a
description of any information or material necessary for the individual to
perfect the claim for benefits and an explanation of the Plan's review
procedure.
This written notice will be given to the individual within 90 days after
the Company receives the application, unless special circumstances require an
extension of time, in which case, the Company has up to an additional 90 days
for processing the application. If an extension of time for processing is
required, written notice of the extension will be furnished to the applicant
before the end of the initial 90-day period.
This notice of extension will describe the special circumstances
necessitating the additional time and the date by which the Company is to render
its decision on the application. If written notice of denial of the application
for benefits is not furnished within the specified time, the application shall
be deemed to be denied. The applicant will then be permitted to appeal the
denial in accordance with the review procedure described below.
9.3 Any person (or that person's authorized representative) for whom an
application for benefits is denied (or deemed denied), in whole or in part, may
appeal the denial by submitting a request for a review to the Committee within
60 days after the application is denied (or deemed denied). The Committee will
give the applicant (or his or her representative) an opportunity to review
pertinent documents in preparing a request for a review. A request for a review
shall be in writing and shall be addressed to the Committee at:
Human Resources Committee
c/o Chief Human Resources Officer
Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
A request for review must set forth all of the grounds on which it is based, all
facts in support of the request and any other matters that the applicant feels
are pertinent. The Committee may require the applicant to submit additional
facts, documents or other material as it may find necessary or appropriate in
making its review.
9.4 The Committee will act on each request for review within 60 days after
receipt of the request, unless special circumstances require an extension of
time (not to exceed an additional 60 days) for processing the request for a
review. If an extension for review is required, written notice of the extension
will be furnished to the applicant within the initial 60-day period. The
Committee will give prompt, written notice of its decision to the applicant. In
the event that the Committee confirms the denial of the application for benefits
in whole or in part, the notice will outline, in a manner calculated to be
understood by the applicant, the specific Plan provisions upon which the
decision is based. If written notice of the Committee's decision is not given to
the applicant within the time prescribed in this Section 9.4, the application
will be deemed denied on review.
9.5 The Committee may establish rules and procedures, consistent with the
Plan and with ERISA, as necessary and appropriate in carrying out its
responsibilities in reviewing benefit claims. The Committee may require an
applicant who wishes to submit additional information in connection with an
appeal from the denial (or deemed denial) of benefits to do so at the
applicant's own expense.
9.6 No legal action for benefits under the Plan may be brought until the
claimant (i) has submitted a written application for benefits in accordance with
the procedures described by Section 9.1 above, (ii) has been notified by the
Company that the application is denied (or the application is deemed denied due
to the Company's failure to act on it within the established time period), (iii)
has filed a written request for a review of the application in accordance with
the appeal procedure described in Section 9.3 above, and (iv) has been notified
in writing that the Committee has denied the appeal (or the appeal is deemed to
be denied due to the Committee's failure to take any action on the claim within
the time prescribed by Section 9.4 above).
10. Miscellaneous
10.1 This Plan shall be effective June 11, 1997, with continuation
thereafter contemplated, subject to review of its operation. However, this Plan
shall at all times remain subject to amendment, modification or termination by
action of the Committee or the Board; provided, however, in the event of
termination, any amount held in a Participant's Deferred Compensation Accounts
shall be distributed to the Participant in accordance with Section 6 hereof.
10.2 This Plan shall not be deemed to constitute a contract of employment
between the Company and any Participant. Nothing contained in this Plan shall be
deemed to give any Participant the right to be retained in the service of the
Company or to interfere with the right of the Company to discharge any
Participant at any time regardless of the effect which such discharge shall have
upon such individual as a Participant in the Plan.
10.3 This Plan shall be construed in accordance with and governed by the
laws of the State of California, except to the extent that such laws are
preempted by ERISA.
10.4 In the event any provision of this Plan is held invalid, void or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provisions of this Plan.
10.5 Any notice of filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, to the principal office of the Company,
directed to the attention of the chief human resources officer for the Company.
Such notice shall be deemed given as of the date of delivery or, the postmark on
the receipt for registration or certification.
10.6 This Plan shall be binding upon the Company and its successors and
assigns.
10.7 In the event that any Participants subsequently are found to be
ineligible under the Plan by reason of not being members of a select group of
management or highly compensated employees within the meaning of Section
401(a)(1) of ERISA, according to a determination made by the United States
Department of Labor, the Committee will take whatever steps it deems necessary,
in its sole discretion, to equitably protect the interests of the affected
Participants.
PROVIDIAN FINANCIAL CORPORATION
1999 NON-OFFICER EQUITY INCENTIVE PLAN
Adopted May 11, 1999
1. PURPOSES.
(a) Eligible Stock Award Recipients. The persons eligible to receive Stock
Awards are the Employees and Consultants of the Company and its Affiliates who
are not Officers, Directors or Affiliate Directors.
(b) Available Stock Awards. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Nonstatutory Stock Options, (ii) stock appreciation
rights, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) General Purpose. The Company, by means of the Plan, seeks to retain the
services of the group of persons eligible to receive Stock Awards, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "Affiliate Director" means any member of the Board of Directors of any
Affiliate.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Cause" means (i) conviction of, a guilty plea with respect to, or a
plea of nolo contendere to a charge that the Participant has committed a felony
under the laws of the United States or of any state or a crime involving moral
turpitude, including, but not limited to, fraud, theft, embezzlement or any
crime that results in or is intended to result in personal enrichment at the
expense of the Company or an Affiliate; (ii) material breach of any agreement
entered into between the Participant and the Company or an Affiliate that
impairs the Company's or the Affiliate's interest therein; (iii) willful
misconduct, significant failure by Participant to perform his or her duties, or
gross neglect by Participant of his or her duties; or (iv) engagement in any
activity that constitutes a material conflict of interest with the Company or
any Affiliate.
(f) "Committee" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(g) "Common Stock" means the common stock of the Company, $0.01 par value.
(h) "Company" means Providian Financial Corporation, a Delaware
corporation.
(i) "Consultant" shall mean any natural person, including an advisor or
other form of independent contractor, engaged by the Company or an Affiliate to
render consulting services and who is compensated for such services (provided
that such services are not in connection with the offer or sale of securities in
a capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the Company's securities), except that the term
"Consultant" shall not include Employees, Officers, Directors, Affiliate
Directors or stockholders beneficially owning ten percent (10%) or more of the
Company's Common Stock.
(j) "Continuous Service" means that the Participant's service with the
Company or an Affiliate, whether as an Employee or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee or
Consultant or a change in the entity for which the Participant renders such
service, provided that there is no interruption or termination of the
Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate will not constitute an
interruption of Continuous Service. The Board or the chief executive officer of
the Company, in that party's sole discretion, may determine whether Continuous
Service shall be considered interrupted in the case of any leave of absence
approved by that party, including sick leave, military leave or any other
personal leave.
(k) "Director" means a member of the Board of Directors of the Company.
(l) "Disability" means when a Participant is considered permanently
disabled under a disability insurance policy carried by the Company or an
Affiliate and under which the Participant is covered or, if the Participant is
not covered under such a policy, the permanent and total disability of a
Participant within the meaning of Section 22(e)(3) of the Code.
(m) "Employee" means any person employed full-time or part-time by the
Company or an Affiliate, provided that the term "Employee" shall not include
Directors, Affiliate Directors or Officers.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Fair Market Value" means, as of any applicable date, the mean between
the highest and lowest sale price of the Common Stock as reflected on the New
York Stock Exchange Composite Tape on such date or during such other relevant
period of trading days as determined by the Board or Committee, or, if no such
reported sale of the Common Stock shall have occurred on such date or during
such period, on the next preceding date on which there was such a reported sale.
If there shall be any material alteration in the present system of reporting
sale prices of the Common Stock, or if the Common Stock is not then listed on
the New York Stock Exchange, the fair market value of the Common Stock as of a
particular date shall be determined by such method as shall be determined by the
Board or Committee.
(p) "Nonstatutory Stock Option" means an option to purchase Common Stock
that is not intended to qualify as an incentive stock option within the meaning
of Section 422 of the Code and the regulations promulgated thereunder.
(q) "Officer" shall mean a person who is an officer of the Company
including any corporate officer with the title of vice president and above and
any other Employee of the Company whom the Board or the Committee classifies as
"Officer".
(r) "Option" means a Nonstatutory Stock Option granted pursuant to the
Plan.
(s) "Option Agreement" means a written agreement between the Company and an
Optionholder evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(t) "Optionholder" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.
(u) "Participant" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.
(v) "Plan" means this Providian Financial Corporation 1999 Non-Officer
Equity Incentive Plan.
(w) "Securities Act" means the Securities Act of 1933, as amended.
(x) "Stock Award" means any right granted under the Plan, including an
Option, a stock appreciation right, a stock bonus and a right to acquire
restricted stock.
(y) "Stock Award Agreement" means a written agreement between the Company
and a recipient of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(z) "Ten Percent Stockholder" means a person who owns (or is deemed to own
pursuant to Section 424(d) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
3. ADMINISTRATION.
(a) Administration by Board. The Board shall administer the Plan unless and
until the Board delegates administration to a Committee, as provided in
subsection 3(c). Any interpretation of the Plan by the Board and any decision by
the Board under the Plan shall be final and binding on all persons.
(b) Powers of Board. The Board shall have the power, subject to, and within
the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under
the Plan shall be granted Stock Awards; when and how each Stock Award shall
be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each
such person.
(ii) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award
Agreement, in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) Delegation to Committee.
(i) General. The Board may delegate administration of the Plan to a
Committee or Committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such
authority has been delegated. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration
of the Plan, the powers theretofore possessed by the Board, including the
power to delegate to a subcommittee any of the administrative powers the
Committee is authorized to exercise (and references in this Plan to the
Board shall thereafter be to the Committee or subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the
Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the
administration of the Plan.
(ii) Initial Delegation. By approval of this Plan as of the adoption
date set forth above, the Board delegates to the Human Resources Committee
of the Board the full power and authority of the Board to administer the
Plan and to otherwise act on behalf of the Board with respect to the Plan,
including (without limitation) the powers set forth in Sections 12 and 13.
4. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate two million five
hundred thousand (2,500,000) shares of Common Stock.
(b) Reversion of Shares to the Share Reserve. If any Stock Award shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full (or vested in the case of restricted stock), the shares
of Common Stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan. In addition, any unvested shares
repurchased by the Company pursuant to a repurchase right in favor of the
Company or otherwise forfeited by a Participant prior to vesting shall revert to
and again become available for issuance under the Plan. Shares subject to stock
appreciation rights exercised in accordance with the Plan shall not be available
for subsequent issuance under the Plan.
(c) Source of Shares. The shares of Common Stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Stock Awards may be granted only to Employees or Consultants who are
not, at the time of such grants, either (i) Directors, (ii) Affiliate Directors
or (iii) Officers.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted or such shorter or longer term as may be
provided in the Option Agreement.
(b) Exercise Price. The exercise price of each Option shall be determined
by the Board and shall be set forth in the Option Agreement.
(c) Consideration. The purchase price of Common Stock acquired pursuant to
an Option shall be paid in cash at the time the Option is exercised or, to the
extent set forth in the Option Agreement or otherwise specified by the Company
and if permitted by applicable statutes and regulations, either (i) pursuant to
a "cashless exercise" program operated in compliance with Regulation T or other
regulations or rules promulgated by the Federal Reserve Board that, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the proceeds of sale of shares of such Common
Stock, provided that at the time of exercise the Common Stock is publicly traded
and quoted regularly in The Wall Street Journal; (ii) in any other form of legal
consideration that may be acceptable to the Board in its sole discretion,
provided, however, that, at any time when the Company is incorporated in
Delaware, payment of the Common Stock's "par value" (as defined in the Delaware
General Corporation Law) shall be made in cash; or (iii) in any combination of
the foregoing forms of consideration permitted at the discretion of the Board.
In the case of any deferred payment arrangement, interest shall be payable at
least annually and shall be charged at the minimum rate of interest necessary to
avoid the treatment as interest, under any applicable provisions of the Code, of
any amounts other than amounts stated to be interest under the deferred payment
arrangement.
(d) Transferability. An Option shall be transferable to the extent provided
in the Option Agreement. If the Option does not provide for transferability,
then the Option shall not be transferable except by will or by the laws of
descent and distribution and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.
(e) Vesting Generally. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(e) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.
(f) Termination of Continuous Service. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death,
Disability or for Cause), the Optionholder may exercise his or her Option (to
the extent that the Optionholder was entitled to exercise such Option as of the
date of termination) but only within such period of time ending on the earlier
of (i) the date ninety (90) days following the termination of the Optionholder's
Continuous Service (or such longer or shorter period if so specified in the
Option Agreement), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate. In the event an Optionholder's Continuous
Service terminates for Cause, then his or her Option shall terminate immediately
upon such event.
(g) Extension of Termination Date. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death,
Disability or for Cause) would be prohibited at any time solely because the
issuance of shares of Common Stock would violate the registration requirements
under the Securities Act, then the Option shall terminate on the earlier of (i)
the expiration of the term of the Option set forth in subsection 6(a) or (ii)
the expiration of a period of ninety (90) days after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(h) Disability of Optionholder. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date -twelve (12)
months following such termination (or such longer or shorter period if so
specified in the Option Agreement) or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination of Continuous
Service, the Optionholder does not exercise his or her Option within the time
specified herein, the Option shall terminate.
(i) Death of Optionholder. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(d), but only
within the period ending on the earlier of (1) the date twelve (12) months
following the date of death (or such longer or shorter period if so specified in
the Option Agreement) or (2) the expiration of the term of such Option as set
forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.
(j) Early Exercise. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate.
7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) Stock Bonus Awards. Each stock bonus award shall be evidenced by a
stock bonus agreement, which shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. The terms and conditions of
stock bonus agreements may change from time to time, and the terms and
conditions of separate stock bonus agreements need not be identical, but each
stock bonus agreement shall include (through incorporation of provisions hereof
by reference in the agreement or otherwise) the substance of each of the
following provisions:
(i) Consideration. A stock bonus may be awarded in consideration for
any form of legal consideration provided by the Participant that may be
acceptable to the Board, including (without limitation) past services
actually rendered to the Company or an Affiliate for its benefit.
(ii) Vesting. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to forfeiture or to a share
repurchase option in favor of the Company in accordance with a vesting
schedule or such other conditions as may be determined by the Board.
(iii) Termination of Participant's Continuous Service. In the event a
Participant's Continuous Service terminates, the Company may reacquire any
or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) Transferability. Rights to acquire shares under the stock bonus
agreement shall be transferable by the Participant only upon such terms and
conditions as are set forth in the stock bonus agreement, as the Board
shall determine in its discretion, so long as Common Stock awarded under
the stock bonus agreement remains subject to the terms of the stock bonus
agreement.
(b) Restricted Stock Awards. Each award of rights to acquire restricted
stock shall be evidenced by a restricted stock purchase agreement, which shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. The terms and conditions of the restricted stock purchase
agreements may change from time to time, and the terms and conditions of
separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) Purchase Price. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement.
(ii) Consideration. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either:
(i) in cash at the time of purchase; (ii) at the discretion of the Board,
according to a deferred payment or other similar arrangement with the
Participant; (iii) in any other form of legal consideration that may be
acceptable to the Board in its discretion, including (without limitation)
past services actually rendered to the Company or an Affiliate; or (iv) in
any combination of the foregoing forms of consideration permitted by the
Board; provided that, in the case of any deferred payment arrangement,
interest shall be payable at least annually and shall be charged at the
minimum rate of interest necessary to avoid the treatment as interest,
under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement; and,
provided further that, at any time when the Company is incorporated in
Delaware, payment of the Common Stock's "par value" (as defined in the
Delaware General Corporation Law) shall not be made by deferred payment.
(iii) Vesting. Shares of Common Stock acquired under the restricted
stock purchase agreement may, but need not, be subject to forfeiture or to
a share repurchase option in favor of the Company in accordance with a
vesting schedule or such other conditions as may be determined by the
Board.
(iv) Termination of Participant's Continuous Service. In the event a
Participant's Continuous Service terminates, the Company may repurchase or
otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the
terms of the restricted stock purchase agreement.
(v) Transferability. Rights to acquire shares under the restricted
stock purchase agreement shall be transferable by the Participant only upon
such terms and conditions as are set forth in the restricted stock purchase
agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.
(c) Stock Appreciation Rights. Each stock appreciation right shall be
evidenced by a Stock Award Agreement, which shall contain terms and conditions
that are consistent with the applicable provisions set forth below with respect
to the types of stock appreciation rights authorized under the Plan and
otherwise shall be in such form as the Board shall deem appropriate. The terms
and conditions of stock appreciation rights may change from time to time, and
the terms and conditions of separate stock appreciation rights need not be
identical, but each Stock Award Agreement evidencing a stock appreciation right
shall include (through incorporation of provisions hereof by reference in the
Stock Award Agreement or otherwise) the substance of the following provisions as
are applicable:
(i) Authorized Rights. The following three types of stock appreciation
rights shall be authorized for issuance under the Plan:
(1) Tandem Rights. A "Tandem Right" means a stock appreciation
right granted appurtenant to an Option that is subject to the same
terms and conditions applicable to the particular Option grant to
which it pertains, with the following exceptions: The Tandem Right
shall require the holder to elect between the exercise of the
underlying Option for shares of Common Stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall
be in cash (or, if so provided in the Stock Award Agreement, in an
equivalent number of shares of Common Stock based on Fair Market Value
on the date of the Option surrender) in an amount up to the excess of
(A) the Fair Market Value, on the date of the Option surrender, of the
number of shares of Common Stock covered by that portion of the
surrendered Option in which the Optionholder is vested over (B) the
aggregate exercise price payable for such vested shares.
(2) Concurrent Rights. A "Concurrent Right" means a stock
appreciation right granted appurtenant to an Option that applies to
all or a portion of the shares of Common Stock subject to the
underlying Option and which is subject to the same terms and
conditions applicable to the particular Option grant to which it
pertains, with the following exceptions: A Concurrent Right shall be
exercised automatically at the same time the underlying Option is
exercised with respect to the particular shares of Common Stock to
which the Concurrent Right pertains. The appreciation distribution
payable on an exercised Concurrent Right shall be in cash (or, if so
provided in the Stock Award Agreement, in an equivalent number of
shares of Common Stock based on Fair Market Value on the date of the
exercise of the Concurrent Right) in an amount equal to such portion
as determined by the Board at the time of the grant of the excess of
(A) the aggregate Fair Market Value, on the date of the exercise of
the Concurrent Right, of the vested shares of Common Stock purchased
under the underlying Option which have Concurrent Rights appurtenant
to them over (B) the aggregate exercise price paid for such shares.
(3) Independent Rights. An "Independent Right" means a stock
appreciation right granted independently of any Option but which is
subject to the same terms and conditions applicable to an Option, with
the following exceptions: An Independent Right shall be denominated in
share equivalents. The appreciation distribution payable on the
exercised Independent Right shall be not greater than an amount equal
to the excess of (a) the aggregate Fair Market Value, on the date of
the exercise of the Independent Right, of a number of shares of
Company stock equal to the number of share equivalents in which the
holder is vested under such Independent Right, and with respect to
which the holder is exercising the Independent Right on such date,
over (b) the aggregate Fair Market Value, on the date of the grant of
the Independent Right, of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right
shall be in cash or, if so provided in the Stock Award Agreement, in
an equivalent number of shares of Common Stock based on Fair Market
Value on the date of the exercise of the Independent Right.
(ii) Exercise. To exercise any outstanding stock appreciation right,
the holder shall provide written notice of exercise to the Company in
compliance with the provisions of the Stock Award Agreement evidencing such
right. No limitation shall exist on the aggregate amount of cash payments
that the Company may make under the Plan in connection with the exercise of
a stock appreciation right.
8. COVENANTS OF THE COMPANY.
(a) Availability of Shares. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award, other than on Form S-8 under the Securities Act (if the
Company is eligible for the use of such form). If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such Stock
Awards unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) Acceleration of Exercisability and Vesting. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest in accordance
with the Plan, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Stockholder Rights. No Participant shall be deemed to be the holder of,
or to have any of the rights of a holder with respect to, any shares of Common
Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) No Employment or other Service Rights. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, or (ii) the service
of a Consultant pursuant to the terms of such Consultant's agreement with the
Company or an Affiliate.
(d) Investment Assurances. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or, as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(e) Withholding Obligations. To the extent provided by the terms of a Stock
Award Agreement, the Participant may satisfy any federal, state or local tax
withholding obligation relating to the exercise of or other acquisition of
Common Stock under a Stock Award by any of the following means (in addition to
the Company's right to withhold from any compensation paid to the Participant by
the Company) or by a combination of such means: (i) tendering a cash payment;
(ii) authorizing the Company to withhold shares of Common Stock from the shares
of Common Stock otherwise issuable to the Participant as a result of the
exercise of or other acquisition of Common Stock under the Stock Award; or (iii)
delivering to the Company owned and unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) Capitalization Adjustments. If any change is made in the Common Stock
subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a), and the outstanding Stock Awards will be
appropriately adjusted in the class(es) and number of securities and price per
share of Common Stock subject to such outstanding Stock Awards. The Board shall
make such adjustments, and its determination shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) Dissolution or Liquidation. Upon approval by the stockholders of the
Company of a complete dissolution or liquidation of the Company, all outstanding
Stock Awards shall become fully vested and immediately exercisable, and the
Stock Awards shall terminate if not exercised (if applicable) at or prior to the
consummation of such event.
(c) Asset Sale, Merger, Consolidation or Reverse Merger. In the event of
(i) a sale, lease or other disposition of all or substantially all of the assets
of the Company, (ii) a merger or consolidation in which the Company is not the
surviving corporation or (iii) a reverse merger in which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then any surviving
corporation or acquiring corporation may assume any Stock Awards outstanding
under the Plan or may substitute similar stock awards (including an award to
acquire the same consideration paid to the Company's stockholders in the
transaction described in this subsection 11(c)) for those outstanding under the
Plan. In the event any surviving corporation or acquiring corporation does not
assume such Stock Awards or substitute similar stock awards for those
outstanding under the Plan, then with respect to Stock Awards held by
Participants whose Continuous Service has not terminated, the vesting of such
Stock Awards (and, if applicable, the time during which such Stock Awards may be
exercised) shall be accelerated in full, and the Stock Awards shall terminate if
not exercised (if applicable) at or prior to such event. With respect to any
other Stock Awards outstanding under the Plan, such Stock Awards shall terminate
if not exercised (if applicable) prior to such event.
(d) Securities Acquisition. In the event of an acquisition (other than in a
transaction described in subsection 11(c) above) by any person, entity or group
within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or an Affiliate) of the beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act,
or comparable successor rule) of securities of the Company representing greater
than fifty percent (50%) of the combined voting power entitled to vote in the
election of directors, then any such acquiring person, entity or group may
assume any Stock Awards outstanding under the Plan or may substitute similar
stock awards (including an award to acquire the same consideration paid to the
Company's stockholders in the transaction described in this subsection 11(d))
for those outstanding under the Plan. In the event any such acquiring person,
entity or group does not assume such Stock Awards or does not substitute similar
stock awards for those outstanding under the Plan, then such Stock Awards shall
continue in full force and effect.
(e) Certain Change in Control Transactions. Unless otherwise specified in
the applicable Stock Award Agreement, in the event of the occurrence of a
transaction described in subsections 11(c) or 11(d) above (hereafter, a "Change
in Control") and provided that a Participant's Stock Award remains in effect
following such Change in Control or is assumed or substituted for any similar
stock award in connection with the Change in Control, then, if such
Participant's Continuous Service is terminated by the Company without Cause or
the Participant voluntarily terminates his or her Continuous Service due to a
Constructive Termination (as defined below) within one (1) month prior to the
effective date of the Change in Control or within six (6) months following the
effective date of the Change in Control, all Stock Awards held by such
Participant (or any substituted stock awards) shall, as of the date of such
termination of Continuous Service, vest in full and become fully exercisable (if
applicable) to the extent not previously vested or exercisable (if applicable).
For purposes of this subsection 11(e), "Constructive Termination" means
that a Participant voluntarily terminates his or her Continuous Service with the
Company after any of the following are undertaken without the Participant's
express written consent: (i) the assignment to the Participant of any duties or
responsibilities which result in a substantial diminution or significant adverse
change in the Participant's position, status or circumstances of employment as
in effect at the beginning of the one (1) month period immediately prior to a
Change in Control, except in connection with the termination of the
Participant's service on account of death, disability, retirement, for Cause, or
any voluntary termination of service by the Participant other than Constructive
Termination; (ii) a reduction in the Participant's annual base compensation by
more than ten percent (10%); (iii) a relocation of the Participant or the
Company's offices at which the Participant is employed to a location more than
forty-five (45) miles from the location at which the Participant performed his
or her duties prior to a Change in Control, (iv) any material breach by the
Company of any provision of an agreement between the Company and the
Participant, whether pursuant to this Plan or otherwise, other than a breach
which is cured by the Company within fifteen (15) days following notice by the
Company of such breach; or (v) any failure by the Company to obtain the
assumption of this Plan by any successor or assign of the Company.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) Amendment of Plan. The Board at any time, and from time to time, may
amend the Plan.
(b) No Impairment of Rights. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.
(c) Amendment of Stock Awards. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate when all shares of Common
Stock reserved for issuance under the Plan have been issued and all such issued
shares are no longer subject to a repurchase or reacquisition option in favor of
the Company or other form of forfeiture or vesting condition. No Stock Awards
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect, except with the written consent of the Participant.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as of May 11, 1999.
15. CHOICE OF LAW.
The law of the State of California shall govern all questions
concerning the construction, validity and interpretation of this Plan, without
regard to such state's conflict of laws rules.
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORP.
Select Financial Data
Three Months
Ended
March 31, Year Ended December 31
---------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995 1994
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
a. Ratio of Earnings to Fixed Charges
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes 189,192 490,563 311,300 257,251 214,863 175,203
Fixed charges 82,571 254,006 187,843 192,536 160,183 103,926
------------ ------- ------- ------- ------- -------
Earnings, for computation purposes 271,763 744,569 499,143 449,787 375,046 279,129
FIXED CHARGES:
Interest on borrowings 16,062 42,931 18,858 49,208 52,732 39,739
Interest on deposits 64,439 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of the interest 2,070 6,740 4,733 2,967 2,300 2,267
factor ------------ ------- ------- ------- ------- -------
Fixed charges, including interest on deposits,
for computation purposes 82,571 254,006 187,843 192,536 160,183 103,926
============ ======= ======= ======= ======= =======
Ratio of earnings to fixed charges, including
interest on deposits 3.29 2.93 2.66 2.34 2.34 2.69
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes 189,192 490,563 311,300 257,251 214,863 175,203
Fixed charges 18,132 49,671 23,591 52,175 55,032 42,006
------------ ------- ------- ------- ------- -------
Earnings, for computation purposes 207,324 540,234 334,891 309,426 269,895 217,209
============ ======= ======= ======= ======= =======
FIXED CHARGES:
Interest on borrowings 16,062 42,931 18,858 49,208 52,732 39,739
Portion of rents representative of the interest 2,070 6,740 4,733 2,967 2,300 2,267
factor ------------ ------- ------- ------- ------- -------
Fixed charges, excluding interest on deposits,
for computation purposes 18,132 49,671 23,591 52,175 55,032 42,006
============ ======= ======= ======= ======= =======
Ratio of earnings to fixed charges, excluding
interest on deposits 11.43 10.88 14.20 5.93 4.90 5.17
b. Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes 189,192 490,563 311,300 257,251 214,863 175,203
Fixed charges 82,571 254,006 187,843 192,536 160,183 103,926
------------- ------- ------- ------- ------- -------
Earnings, for computation purposes 271,763 744,569 499,143 449,787 375,046 279,129
============= ======= ======= ======= ======= =======
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings 16,062 42,931 18,858 49,208 52,732 39,739
Interest on deposits 64,439 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of the interest 2,070 6,740 4,733 2,967 2,300 2,267
factor ------------- ------- ------- ------- ------- -------
Fixed charges, including interest on deposits,
for computation purposes 82,571 254,006 187,843 192,536 160,183 103,926
Preferred stock dividend requirements - - 1,636 7,397 7,397 7,397
------------- ------- ------- ------- ------- -------
Fixed charges and preferred stock dividend requirements,
including interest on deposits, for
computation purposes 82,571 254,006 189,479 199,932 167,580 111,322
============= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges and preferred stock
dividend requirements, including interest on deposits 3.29 2.93 2.63 2.25 2.24 2.51
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes 189,192 490,563 311,300 257,251 214,863 175,203
Fixed charges 18,132 49,671 23,591 52,175 55,032 42,006
------------- ------- ------- ------- ------- -------
Earnings, for computation purposes 207,324 540,234 334,891 309,426 269,895 217,209
============= ======= ======= ======= ======= =======
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings 16,062 42,931 18,858 49,208 52,732 39,739
Portion of rents representative of the interest 2,070 6,740 4,733 2,967 2,300 2,267
factor ------------- ------- ------- ------- ------- -------
Fixed charges, excluding interest on deposits,
for computation purposes 18,132 49,671 23,591 52,175 55,032 42,006
Preferred stock dividend requirements - - 1,636 7,397 7,397 7,397
------------- ------- ------- ------- ------- --------
Fixed charges and preferred stock dividend requirements,
excluding interest on deposits, for
computation purposes 18,132 49,671 25,227 59,571 62,429 49,402
============= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges and preferred stock
dividend requirements, excluding interest on deposits 11.43 10.88 13.28 5.19 4.32 4.40
</TABLE>
<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 THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 123,331
<SECURITIES> 339,737
<RECEIVABLES> 6,843,602
<ALLOWANCES> 547,655
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 91,473
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 8,526,974
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 923,564
<TOTAL-LIABILITY-AND-EQUITY> 8,526,974
<SALES> 0
<TOTAL-REVENUES> 768,872
<CGS> 0
<TOTAL-COSTS> 317,106
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 182,073
<INTEREST-EXPENSE> 80,501
<INCOME-PRETAX> 189,192
<INCOME-TAX> 75,646
<INCOME-CONTINUING> 113,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,546
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.78
<FN>
<F1 Non-classified balance sheet>
<F2 PP&E shown net>
</FN>
</TABLE>
