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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number 1-12897
PROVIDIAN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2933952
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(State of incorporation) (I.R.S. Employer Identification No.)
201 Mission Street, San Francisco, California 94105
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(Address of principal executive offices) (Zip Code)
(415) 543-0404
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 12, 1999, 141,850,031 shares of the registrant's Common Stock were
outstanding, and the aggregate market value of the Common Stock held by non-
affiliates of the registrant was $16,103,762,541, calculated by reference to the
closing price of the registrant's Common Stock as reported on the New York Stock
Exchange. For purposes of such calculation, shares owned by directors and
executive officers of the registrant have been treated as owned by affiliates of
the registrant, although such treatment is not an admission of affiliate status
of any such person.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to stockholders for the year ended
December 31, 1998, are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 11, 1999 (to be filed pursuant to
Regulation 14A) are incorporated by reference into Part III of this Report.
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PROVIDIAN FINANCIAL CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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ITEM 1 Business........................................................................ 4
Executive Officers of the Registrant............................................ 16
ITEM 2 Properties...................................................................... 16
ITEM 3 Legal Proceedings............................................................... 17
ITEM 4 Submission of Matters to a Vote of Security Holders............................. 17
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters........... 17
ITEM 6 Selected Financial Data......................................................... 17
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 17
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk...................... 18
ITEM 8 Financial Statements and Supplementary Data..................................... 18
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 18
PART III
ITEM 10 Directors and Executive Officers of the Registrant.............................. 18
ITEM 11 Executive Compensation.......................................................... 18
ITEM 12 Security Ownership of Certain Beneficial Owners and Management.................. 19
ITEM 13 Certain Relationships and Related Transactions.................................. 19
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 19
Signatures................................................................................ 25
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PART I
ITEM 1. BUSINESS
GENERAL
Providian Financial Corporation (the "Company"), based in San Francisco,
California, was incorporated in Delaware in 1984 under the name "First Deposit
Corporation." The name of the Company was changed from First Deposit
Corporation to Providian Bancorp, Inc. in 1994 and to Providian Financial
Corporation in 1997. The Company conducted its operations as a wholly owned
subsidiary of Providian Corporation until June 10, 1997, when all of the then
outstanding shares of common stock of the Company were spun off to the
stockholders of Providian Corporation. The Company is listed on the New York
Stock Exchange and the Pacific Exchange under the symbol PVN.
The Company, operating through its subsidiaries, is a diversified consumer
lender, offering a range of loan products, including credit cards, revolving
lines of credit, home loans, secured credit cards, and fee-based products. The
Company also offers various deposit products. With over $14 billion in assets
under management and eight million customers, the Company ranks among the ten
largest bankcard issuers in the nation.
The Company conducts its business through its wholly owned subsidiaries.
Each subsidiary performs a particular role in support of the business, depending
in part on the powers granted to it by its chartering regulator or state of
incorporation. However, the Company's various business areas are generally
operated in a consolidated manner among the different legal entities. The
Company's lending activities are conducted primarily through Providian National
Bank ("PNB") and Providian Bank ("PB"). Providian Bancorp Services ("PBS")
performs a variety of servicing activities in support of its affiliates.
BUSINESS STRATEGY
The Company seeks to build shareholder value by generating profitable
growth in its core markets, developing unique marketing, credit, and
profitability management capabilities that provide competitive advantages, and
making acquisitions on an opportunistic basis. The Company's focus is on
increasing the profitability and persistency of each customer relationship as
well as the number of customer relationships and the number of markets served.
The Company uses a customer focused, return oriented and credit driven
approach, which the Company refers to as an "engineering approach." This
approach emphasizes market selection, customer targeting, customer acquisition
and profitability management. The Company segments consumer markets to identify
potential customers who meet the Company's profitability and risk guidelines,
and targets them with products tailored to their needs. The Company's customer
acquisition strategy focuses on meeting consumer needs by providing customized
products and services, with the goal of creating long-term, profitable customer
relationships. Profitability management is centered on balancing risk and
return to achieve targeted profits. The Company invests for long-term growth by
focusing on the areas that management views as having the highest value,
including the continuous improvement of operations, infrastructure and
technology.
The Company's engineering approach is technology and information intensive.
The Company has collected extensive data from its historical experience and test
programs, which it analyzes to identify and respond to consumer needs. Drawing
on its proprietary databases and analytical techniques, the Company has
developed targeting and credit models to identify potential customers. The
Company relies on internally developed technology to customize credit lines,
rates and terms. After an account is opened, account performance is monitored
and a variety of account management tools are used to build the customer
relationship. The Company combines pricing, credit and collections into one
integrated strategy
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for managing risk and return. Product pricing is based on an analysis of credit
risk, as well as on competitive factors and customer price sensitivity. Credit
analysis is continuously updated to reflect the Company's experience in managing
credit risk. Collections efforts focus on the action or inaction of the customer
("event driven"), rather than on the passage of time. Utilizing this engineering
approach, the Company has evolved from a one-market, one-product company in
1985, when it introduced its first product, to a multi-market, multi-product
provider of consumer financial services.
The Company markets its products to consumers nationwide, primarily through
the mail, telemarketing and other direct marketing channels. By using direct
marketing rather than a branch-based distribution system, the Company seeks to
avoid high overhead costs and maintain the flexibility to easily enter and exit
geographic markets.
PRODUCTS AND SERVICES
Credit Card Business
Through its Credit Card Business, the Company offers unsecured, secured and
partially secured credit card loans generated primarily through Visa and
MasterCard credit cards. This Business also includes a portfolio of unsecured
consumer revolving line of credit loans that are accessed by checks rather than
credit cards. As of December 31, 1998, the Company's Credit Card Business had
$12.1 billion of managed loans outstanding (of which $5.1 billion were on-
balance sheet).
The Company serves a broad spectrum of customers with its credit card
products, which range from higher line platinum and gold cards to lower line
classic and secured credit cards. Under the Company's "primary lender" strategy
for qualified consumers, the Company makes "universal" offers and customizes
specific product terms at the time of sale. Subject to the Company's risk
parameters, the Company seeks to meet as many of the customer's credit needs as
possible. Consumers who qualify for gold or platinum credit cards may receive a
credit line of $5,000 or more, based on their borrowing needs, interest at fixed
or variable rates, and other special features and services.
The Company's lower line products are designed to serve individuals who
have limited access to credit and are underserved by traditional financial
institutions due primarily to a lack of credit history or past credit problems.
Through its proprietary targeting and credit risk models, the Company has been
able to identify customers in this population that it believes will have
significantly lower default rates than the average for such population
generally, allowing the Company to offer a prudent mix of product features
designed to meet the customer's needs, consistent with the Company's
profitability and risk guidelines. Products offered to this population
generally have processing and/or annual membership fees, lower credit limits,
and pricing that reflects the higher operating costs and delinquencies
associated with these products. Through these products, the Company provides
consumers access to the credit card payment system and an opportunity to
establish or reestablish their credit standing.
The credit process for the products offered by the Credit Card Business
generally begins with a "prescreening" review to identify creditworthy consumers
who are likely to be interested in and eligible for an account, based on
proprietary credit and targeting criteria. The Company establishes pricing and
credit limits based on the customer's credit profile, loan feature preferences
and price sensitivity and on the Company's profitability and risk guidelines.
The Company monitors customers' risk profiles continually and may adjust product
features and/or pricing as the relationship evolves. For example, the Company
periodically adjusts credit limits based on its evaluation of a customer's
credit behavior, thereby strengthening profitable relationships and reducing
loss exposure over time, and interest rates may increase if the customer fails
to comply with the account agreement. The Company typically charges late fees,
returned check fees and overlimit fees, and may charge other fees it considers
appropriate, pursuant to the terms of the account agreement. The Company
reserves the right to change or terminate any terms,
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conditions, services or features of the account (including increasing or
decreasing periodic finance charges, other charges or minimum payment
requirements).
Under current collections policy for the Credit Card Business, the Company
uses risk assessment and segmentation to determine when to contact a customer
whose account balance has become past due, with an emphasis on early
intervention and telephone contact. Arrangements may be made with customers to
extend or change payment schedules. Because collections efforts are event-
driven, accounts are suspended, closed, and, if appropriate, referred for legal
collection based on customer behavior rather than the passage of time. Legally
permissible collections activities continue after an account is charged off.
For a discussion of the Company's charge-off policy, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
Quality."
The Company has developed a number of fee-based products that are marketed
to customers of the Credit Card Business as add-ons to existing credit products.
These products, which focus on broad themes--home, health, credit, auto and
travel--generally offer a package of benefits or services that the Company
assembles from internal sources or third-party vendors. They include Providian
Health Advantage, DrivePro, PricePro, Credit Protection and Home Protection/1/.
Providian Health Advantage offers emergency credit, prescription and other
health-related discounts and referrals. DrivePro offers emergency credit,
emergency towing service, auto maintenance discounts and other auto- and travel-
related benefits. PricePro offers shopping-related discounts. Credit
Protection offers nonaccrual of interest and deferral of payments on the
Company's credit card loans, and Home Protection offers a standby loan to assist
with mortgage or rent payments, in case of unemployment, disability or
hospitalization. New fee-based products and channels of distribution for such
products continue to be developed. See "Cautionary Statements--Growth, Product
Development and Acquisitions."
During 1998, the Company acquired three credit card portfolios consisting
of approximately $2.5 billion in credit card assets and representing
approximately 1.7 million customer accounts. In January 1999, the Company
purchased a credit card portfolio consisting of approximately $150 million in
credit card assets and 120,000 customer accounts. The accounts acquired in such
portfolio acquisitions undergo a conversion process, in which account histories,
servicing records and account terms are converted to the Company's computer
systems. Following conversion, the Company utilizes its segmentation, account
management, and risk management capabilities in an effort to improve the
performance of the acquired portfolios.
Home Loan Business
The Company's Home Loan Business products, which are currently offered to
targeted individuals in over 40 states, consist of home equity lines of credit
and home equity loans. As of December 31, 1998, the Company's Home Loan
Business had $1.1 billion of managed home loans outstanding (of which $606.7
million were on-balance sheet).
The primary focus of the Home Loan Business is to target homeowners with
high levels of unsecured debt and offer them an opportunity to consolidate their
debt through a home equity line of credit or home equity loan. Customers are
able to consolidate their debt and enjoy a lower interest rate than would be
available through their credit card, and may also gain tax advantages.
The Company's Home Loan Business strategy focuses on the following: (i)
evaluating the customer's credit history in addition to the real estate which
secures the loan; (ii) marketing directly to customers, which permits both
customer and regional selectivity and allows the Company to react quickly to
local economic and real estate market changes; (iii) utilizing a two-step
process of lead generation and
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/1/ Providan Health Advantage, DrivePro, PricePro and Home Protection are
registered service marks of the Company.
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lead conversion with a universal offer and customization of loan terms; and (iv)
establishing primary lender relationships by successfully targeting customers
likely to consolidate debt. Many of the skills used by the Company to execute
its Home Loan Business strategy were originally developed for the Credit Card
Business. These skills, including database marketing, customer targeting and
risk management, have been adapted by the Company specifically for its Home Loan
Business.
Consistent with its "primary lender" strategy, the Company customizes
specific account terms at the time of sale. The Company determines credit
lines, interest rates, fees, loan-to-value ratios, and other account terms based
on the customer's credit profile, loan feature preferences and other risk
parameters. The Company offers home equity lines of credit and home equity
loans with higher loan-to-value ratios, which may exceed 100%, when the Company
considers such offers prudent based on the customer's credit quality and other
factors. Credit risk models are focused primarily on the customer's credit
history and ability to pay rather than the value of the real estate securing the
loan. In general, the home equity lines of credit are structured as 15-year
loans, with a 10-year revolving period followed by a five-year amortization
period. Interest rates on the home equity lines of credit are generally
variable and are indexed based on the prime rate. The home equity loans are
structured as fixed rate loans that amortize fully over a 15-year period.
Collections efforts in the Home Loan Business are internally managed, from
the initial contacts with the borrower to the time that an account is referred
to outside counsel for foreclosure or other legal action when appropriate.
Home Loan Business customers are offered a fee-based product called Home
Protection as an add-on to existing loan products. Home Protection provides for
nonaccrual of interest and deferral of payments on the Company's loans in case
of unemployment, disability or hospitalization.
Other Businesses
During 1998, the Company established a new wholly owned subsidiary, First
Select Corporation ("FSC"). FSC purchases charged-off credit card assets from
other financial institutions, with special emphasis on credit card accounts that
have been recently charged off. FSC purchases the assets with the expectation
that it will be able to use its collections and account management capabilities
to increase their value. See "Cautionary Statements--Growth, Product
Development and Acquisitions." In 1998, FSC purchased charged-off credit card
assets having a pre-charge-off face amount of approximately $136 million,
representing approximately 30,000 customer accounts. FSC currently has
commitments for up to $500 million in face amount of charged-off credit card
assets to be sold to FSC in 1999.
In February 1999, the Company acquired GetSmart.com, an online referral
service for consumer borrowing, which provides loan information and lender
connections through proprietary search and application technology. In
connection with the acquisition, the Company also announced the centralization
of various E-commerce initiatives being developed across its business lines,
including internet-generated retail deposits and credit card applications.
The Company expects to begin originating loans in the United Kingdom in the
first half of 1999 through a London-based international branch of PNB.
GEOGRAPHIC DIVERSITY
The Company's loan portfolios are geographically diverse, with no
significant regional concentration of credit risk. See Note 8 to Consolidated
Financial Statements on page 54 of the Company's Annual Report to stockholders
for the year ended December 31, 1998.
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SEGMENT INFORMATION
For financial information about the Company's primary segments, see Note 20
to Consolidated Financial Statements on pages 65 and 66 of the Company's Annual
Report to stockholders for the year ended December 31, 1998.
COMPETITION
The Company faces intense and increasing competition from other consumer
lenders. In particular, the Company's Credit Card Business competes with
national, regional and local bankcard issuers and with other general purpose
credit card issuers. The Company also competes, to a lesser extent, with
issuers of single purpose cards, such as department stores and oil companies.
There has also been a trend toward consolidation in the industry as major
issuers increase the size of their credit card businesses through acquisitions
and mergers. This trend has accelerated in recent years, and large issuers may
compete with the Company by leveraging their size, brand names and vendor
relationships to gain market share. In addition, competitors are continually
introducing new techniques to attract and retain customers. Some of the most
heavily used techniques are advertising, target marketing, balance transfers,
price competition, including "teaser" rates, incentive programs and co-branding
(for example, using the name of a sports team or a professional association on
credit cards). Competition for customers in the lower line credit card market
has also increased as additional lenders have been attracted to this market
opportunity.
The Company's Home Loan Business also faces intense competition. More
competitors are now employing direct marketing programs to attract home loan
customers. These competing programs include some that are similar to the
programs and strategies that the Company has used to attract new home loan
customers and encourage borrowings by those customers.
In addition to competition for customers, the Company faces competition
when it seeks to obtain funds to use in its business. This competition comes
from banks, savings institutions, money market funds, credit unions and a wide
variety of other entities that take deposits, sell debt securities or sell
securities backed by assets such as loan receivables.
FUNDING AND LIQUIDITY
Through its banking subsidiaries, the Company offers deposit products
directly to consumers. These deposit products include money market deposit
accounts and certificates of deposit ("CDs") ranging in term from three months
to five years. The Company markets its retail deposits primarily by submitting
its offered rates to national surveys, providing toll-free numbers for potential
and existing customers to obtain rate quotes, and providing rates and
fulfillment materials on the Company's website. The Company also maintains
relationships with national broker-dealer networks which offer retail CDs to
their customers under master CD structures. In addition, the Company's banking
subsidiaries offer directly-placed and broker-placed wholesale CDs and
negotiable CDs to institutional investors.
The Company has also obtained funding through term federal funds,
uncommitted overnight federal funds lines, a committed revolving credit facility
(currently $1 billion) and bank notes under a program launched in February 1998.
Under the bank note program, PNB issued $400 million of medium-term bank notes
in 1998 and $550 million of medium-term bank notes in the first quarter of 1999.
The Company also obtained funding through the issuance of $160 million of
mandatorily redeemable capital securities in 1997 and is a party to several
short-term credit facilities totaling $275 million.
The Company obtains a significant portion of its funding through
securitizations. A securitization generally involves the transfer by the
Company to a trust or other special purpose entity of loan receivables
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generated by a pool of accounts. The trust or special purpose entity may issue
either certificates representing undivided ownership interests in the pool of
transferred loan receivables or notes collateralized by the loan receivables.
The securitization generally results in the removal of the loan receivables from
the Company's balance sheet for financial and regulatory accounting purposes.
For tax purposes, the investor certificates and any notes are generally
characterized as indebtedness of the Company. The primary objectives of the
Company's securitization activities are to diversify its funding sources and
obtain an efficient all-in cost of funds, including the cost of capital. For
further discussion of the Company's funding and liquidity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Funding and Liquidity."
ORGANIZATIONAL STRUCTURE
The Company operates principally through the following wholly owned
subsidiaries:
Providian National Bank. Headquartered in Tilton, New Hampshire, PNB is a
national banking association organized under the laws of the United States and
is a member of the Federal Deposit Insurance Corporation (the "FDIC"). PNB was
originally organized as a state bank in 1853 and converted to a national bank
charter in 1865. It changed its name from First Deposit National Bank ("FDNB")
on January 1, 1998, when the former Providian National Bank, then an affiliate
of FDNB, merged with and into FDNB.
Providian Bank. Headquartered in Salt Lake City, Utah, PB is an industrial
loan corporation organized under the laws of Utah and is a member of the FDIC.
Providian Bancorp Services. Headquartered in San Francisco, California, PBS
provides legal and human resources support, accounting and finance services,
data processing, loan and deposit processing, credit card account opening,
customer service, collections, and related services for its affiliates on a cost
reimbursement basis.
EMPLOYEES
As of December 31, 1998, the Company (on a consolidated basis) had 6,110
employees and a total workforce, including temporaries and contract employees,
of 6,847.
REGULATORY MATTERS
As a national bank, PNB is subject to regulation by its primary regulator,
the Office of the Comptroller of the Currency (the "Comptroller"). The deposits
of PNB are insured up to applicable limits by the Bank Insurance Fund (the
"BIF") of the FDIC. Accordingly PNB is subject to assessment for deposit
insurance premiums and to certain regulations of the FDIC. As a member of the
Federal Reserve System, PNB is also subject to regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board").
The operations of PNB's international branch in London, England will be
subject to regulation and supervision by the Financial Services Authority of the
United Kingdom (the "FSA") and the Comptroller. PNB has received approval from
the Federal Reserve Board and conditional approval from the FSA to establish
such international branch.
As an FDIC-insured Utah industrial loan corporation that is not a member of
the Federal Reserve System, PB is subject to regulation by its primary federal
regulator, the FDIC, and by the Utah Department
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of Financial Institutions. The deposits of PB are insured up to applicable
limits by the BIF. Accordingly PB is subject to assessment for deposit insurance
premiums and to certain regulations of the FDIC. PB is also subject to limited
regulation by the Federal Reserve Board with respect to reserves it must
maintain against its transaction accounts and certain other deposits.
Holding Company Status
Although the Company is the holding company of PNB and PB, it is not
required to register as a bank holding company under the BHCA. PNB is a national
banking association, but prior to 1987 it was not a "bank" under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), because it did not both
accept demand deposits and make commercial loans. PNB is a "bank" under the
BHCA, as amended by the Competitive Equality Banking Act of 1987 ("CEBA"), which
revised the definition of "bank" to include generally all FDIC-insured
institutions. However, CEBA grandfathered the ownership of "nonbank banks" that
existed on March 5, 1987, subject to certain restrictions. These restrictions
include prohibitions on new activities and on affiliate overdrafts and
limitations on PNB's ability to cross-market its products and services with
products and services of its affiliates. PB is not a "bank" as defined in the
BHCA because it qualifies for an exemption under CEBA as an industrial loan
corporation organized under the laws of Utah and acquired by the Company on or
before August 10, 1987.
The Company could be required to register as a bank holding company under
the BHCA if PNB ceases to observe the CEBA restrictions or if the Company or any
of its affiliates acquires an additional insured depository institution
(excluding exempt institutions such as credit card banks) or a significant
portion of such an institution's assets. If the Company were required to
register as a bank holding company, it would be subject to the restrictions set
forth in the BHCA, which, among other things, would limit the Company's
activities to those deemed by the Federal Reserve Board to be closely related to
banking and a proper incident thereto; however, such restrictions, if they were
to apply to the Company, would not have a material adverse effect on the
Company's business as currently conducted. While CEBA has imposed regulatory
burdens on the Company, it has had no material effect on the Company's ability
to execute its business plan.
Investment in the Company and its Subsidiary Banks
Each of PNB and PB is an "insured depository institution" within the
meaning of the Change in Bank Control Act of 1978 (the "CIBC Act").
Consequently, written approval of the applicable primary federal regulator is
required before an individual or entity may acquire "control," as such term is
defined in the CIBC Act, of the Company. A change in control of PB would also
require approval from the Utah Commissioner of Financial Institutions under the
Utah Financial Institutions Act.
For purposes of the BHCA, an individual or entity may not acquire "control"
of the Company, and a bank holding company may not directly or indirectly
acquire ownership or control of more than 5% of the voting shares of the
Company, without the prior written approval of the Federal Reserve Board.
Because the Company's CEBA grandfather rights are nontransferable, if an
individual or entity acquired "control" of the Company or if a bank holding
company acquired ownership or control of more than 5% of the voting shares of
the Company, the Company would be required to limit its activities and its non-
banking subsidiaries' activities to those deemed by the Federal Reserve Board to
be closely related to banking and a proper incident thereto.
Dividends and Transfers of Funds
A primary source of funds for the Company is dividends from its banking
subsidiaries. Federal law limits the extent to which PNB or PB can supply funds
to the Company and its affiliates through dividends, loans or otherwise. These
limitations include minimum regulatory capital requirements, restrictions
concerning the payment of dividends, and Sections 23A and 23B of the Federal
Reserve Act of 1913 governing transactions between a financial institution and
its affiliates. In addition, PNB and PB are subject to federal regulatory
oversight to assure safety and soundness. In general, federal banking laws
prohibit an insured depository institution from making dividend distributions if
such distributions are not paid out of available earnings or would cause the
institution to fail to meet applicable capital adequacy
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standards. See "--Capital Requirements." PB is subject to similar Utah laws
governing industrial loan corporations and the general supervision of the Utah
Department of Financial Institutions.
Capital Requirements
PNB is subject to risk-based capital guidelines adopted by the Comptroller,
and PB is subject to risk-based capital guidelines adopted by the FDIC. Risk-
based capital ratios are determined by allocating assets and specified off-
balance sheet commitments to several weighted categories, with higher levels of
capital being required for the categories perceived as representing greater
risk. For a discussion of these guidelines, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Capital Adequacy."
Under current guidelines, institutions are required to maintain a minimum
total risk-based capital ratio (total Tier 1 and Tier 2 capital to risk-weighted
assets) of 8%, and a Tier 1 risk-based capital ratio (Tier 1 capital to risk-
weighted assets) of 4%. The Comptroller and the FDIC may, however, set higher
capital requirements when an institution's particular circumstances warrant.
The Comptroller and the FDIC have established guidelines prescribing a minimum
"leverage ratio" (Tier 1 capital to adjusted total assets as specified in the
guidelines) of 3% for institutions that meet certain criteria, including the
requirement that they have the highest regulatory rating, and a minimum of 4%
for institutions that do not meet the criteria. Institutions experiencing or
anticipating significant growth are expected to maintain capital ratios well
above the minimum. As of December 31, 1998, PNB had a total risk-based capital
ratio of 10.08%, a Tier 1 risk-based capital ratio of 9.06% and a leverage ratio
of 11.06%, and PB had a total risk-based capital ratio of 10.58%, a Tier 1 risk-
based capital ratio of 9.22% and a leverage ratio of 6.85%.
In 1995, the Comptroller and the FDIC amended the risk-based capital
standards pertaining to asset transfers in which an institution retains recourse
risk but contractually limits its exposure. Under the "low level recourse"
regulation that was adopted, the amount of risk-based capital required in
connection with such asset transfers will not exceed the institution's maximum
contractual liability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Adequacy." In addition, in
November 1997 the federal banking regulators proposed for comment regulations
establishing new risk-based capital requirements for recourse arrangements and
direct credit substitutes. If adopted, these regulations may increase the cost
of credit enhancement provided by banks in connection with the securitization of
consumer loan receivables while possibly reducing the cost of senior securities
issued in such transactions. The Company is unable at this time to assess the
impact this proposal would have on its business.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") expanded the powers of federal bank regulatory authorities to take
corrective action with respect to banks that do not meet minimum capital
requirements. For these purposes, FDICIA established five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under regulations adopted by
the Comptroller and the FDIC, an institution is generally considered to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater; "adequately capitalized" if it has a total risk-based capital ratio of
8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and,
generally, a leverage ratio of 4% or greater; and "undercapitalized" if it does
not meet any of the "adequately capitalized" tests. An institution is deemed to
be "significantly undercapitalized" if it has a total risk-based capital ratio
under 3% and "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%.
An "adequately capitalized" institution is permitted to accept brokered
deposits only if it receives a waiver from the FDIC and pays interest on
deposits at a rate that is not more than 75 basis points higher than the
prevailing rate in its market. Undercapitalized institutions cannot accept
brokered deposits, are subject to growth limitations and must submit a capital
restoration plan. "Significantly undercapitalized" institutions may be subject
to a number of additional requirements and restrictions. "Critically
undercapitalized" institutions are subject to appointment of a receiver or
conservator and, beginning 60 days after becoming "critically undercapitalized,"
may not make any payment of principal or interest on their subordinated debt
(subject to certain exceptions).
As of December 31, 1998, each of PNB and PB met the requirements to be
considered a "well capitalized" institution. Under the regulatory definition of
brokered deposits, as of December 31, 1998, PNB had brokered deposits of $1.5
billion.
FDICIA also required federal banking agencies to revise their risk-based
capital standards to adequately address concentration of credit risk, interest
rate risk and risk arising from non-traditional
11
<PAGE>
activities. The Comptroller and the FDIC have identified these risks and an
institution's ability to manage them as important factors in assessing overall
capital adequacy, but have not quantified them for use in formula-based capital
calculations. The Comptroller and the FDIC have further revised their risk-based
capital rules to address market risk. Financial institutions with 10% of total
assets in trading activity, or $1 billion in trading, are required to use
internal risk measurement models to calculate their capital exposure and to hold
capital in support of that exposure. The level of the Company's trading activity
is currently below these thresholds.
Deposit Insurance Assessments
Under the FDIC's risk-based insurance assessment system, each insured
institution is placed in one of nine risk categories, based on its level of
capital, supervisory evaluations, and other relevant information. The
assessment rate applicable to PNB and PB depends in part on the risk assessment
classification assigned to them by the FDIC and in part on the BIF assessment
schedule adopted by the FDIC. BIF-insured institutions are currently assessed
premiums at an annual rate between 0% to 0.27% of eligible deposits. PNB and PB
are currently assessed at the 0% rate. PNB and PB are also subject to
assessment for payment of Financing Corporation ("FICO") bonds issued in the
1980s as part of the resolution of the problems of the savings and loan
industry. FICO assessment rates are currently 0.01176% and may be adjusted
quarterly to reflect a change in assessment base for the BIF. Beginning January
1, 2000, BIF-insured deposits are required to be assessed at one-fifth the rate
assessed on deposits insured by the Savings Association Insurance Fund.
Consumer Protection Laws
The relationship of the Company's lending subsidiaries and their customers
is extensively regulated by federal and state consumer protection laws. The
most significant laws include the Truth-in-Lending Act of 1968, Equal Credit
Opportunity Act of 1974, Fair Credit Reporting Act of 1970, Truth-in-Savings Act
of 1991, Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and
Electronic Funds Transfer Act of 1978. These statutes, among other things,
impose disclosure requirements when a consumer credit loan is advertised, when
the account is opened and when monthly billing statements are sent. In
addition, these statutes limit the liability of credit card holders for
unauthorized use, prohibit discriminatory practices in extending credit, and
impose limitations on the types of charges that may be assessed and on the use
of consumer credit reports.
The National Bank Act of 1864 authorizes national banks to charge customers
interest at the rates allowed by the laws of the state in which the bank is
located, regardless of an inconsistent law of the state in which the bank's
customers are located. PNB relies on this ability to "export" rates to
facilitate its nationwide credit card and consumer lending businesses. State
institutions such as PB enjoy a similar right under the Depository Institutions
Deregulation and Monetary Control Act of 1980. In 1996, the United
States Supreme Court held that late payment fees are "interest" and therefore
can be "exported" under the National Bank Act, deferring to the Comptroller's
interpretation that interest includes late payment fees, insufficient funds
fees, overlimit fees and certain other fees and charges associated with
12
<PAGE>
credit card accounts. This decision does not directly apply to state
institutions such as PB. Although several courts have upheld the ability of
state institutions to export certain types of fees, a number of lawsuits have
been filed alleging that the laws of certain states prohibit the imposition of
late fees. It is impossible to determine whether courts will follow existing
precedents, and if not, what impact it will have on PB's ability to impose
certain fees.
Legislative Developments
Various legislative proposals have been introduced in Congress in recent
years. These include proposals imposing a statutory cap on credit card interest
rates and fees, substantially revising the laws governing consumer bankruptcy,
requiring additional disclosures and prohibiting certain practices with respect
to open-end credit plans, protecting consumer privacy by limiting the use of
social security numbers and the transfer of personal information, permitting
affiliations between banks and commercial, insurance or securities firms, and
other regulatory restructuring proposals. In recent years state legislatures
have entertained similar proposals, as well as proposals to restrict
telemarketing activities and to expand consumer protection laws. Neither the
outcome of these proposals nor their impact on the Company, should they become
law, can be predicted with certainty.
Several states have passed legislation to tax the income of out of state
lenders derived from loans, including credit card loans, made to residents of
such states. This development has not materially affected the Company's
business results.
Members of Congress and government officials have from time to time
suggested the full or partial elimination of the mortgage interest deduction for
federal income tax purposes. Since the interest paid on the Company's Home Loan
Business products is generally deductible under current law, the reduction or
elimination of this tax benefit could have a material adverse effect on the
demand for those products.
CAUTIONARY STATEMENTS
Certain statements contained herein are 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 the "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. 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.
The risks and uncertainties that could cause actual results to differ from
those in the forward-looking statements include the following:
Intense Competition
The Company faces intense and increasingly aggressive competition from
other consumer lenders in all of its product lines. Many of the Company's
competitors are substantially larger and have greater financial resources than
the Company, and customer loyalty is often limited. Competitive practices, such
as the offering of lower interest rates and fees and the offering of incentives
to customers, could hurt the Company's ability to attract and retain customers.
The Company's success has also attracted new lenders to traditionally
underserved markets such as the lower line credit card market, resulting in
increased
13
<PAGE>
competition. As a result, the rate at which new loans are originated may
decrease, or the rate at which customers repay their loans may increase, which
could hurt the Company's profitability.
In October 1998, the U.S. Justice Department filed a complaint against
MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International,
Inc., asserting that duality (the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks) restrains
competition between Visa and MasterCard in the market for general purpose card
products and networks in violation of the antitrust laws. The government seeks
as relief that only member banks "dedicated" to one association be permitted to
participate in the governance of that association. In addition, the complaint
challenges the rules adopted by both MasterCard and Visa that restrict member
banks from joining American Express, Discover/Novus or other competitive
networks. MasterCard and Visa have stated that they consider the suit without
merit, and intend to deny the allegations of the complaint. Neither the
ultimate outcome of this litigation nor its effect on the competitive
environment in the credit card industry if the lawsuit succeeds can be predicted
with any certainty.
Increased Delinquencies and Credit Losses
The delinquency rate on the Company's consumer loans has increased in
recent years. The rate at which the Company's consumer loans are charged off as
uncollectible, referred to as the credit loss rate, has also increased in recent
years. These increases reflect a number of factors, including (i) an increase in
balances outstanding under lower line credit card products, which generally
experience higher delinquency and credit loss rates, (ii) the Company's
acquisition of loan portfolios from third parties, which have generally
experienced higher delinquency and credit loss rates compared to loans
originated by the Company, and (iii) an increase in the number of customers
seeking protection under the bankruptcy laws. Increased delinquencies and credit
losses could occur in the future in the event of a national or regional economic
downturn or recession, or for other reasons. Delinquency and credit loss rates
also generally increase as the average age of a loan portfolio, referred to as
"seasoning," increases. Increased credit loss rates could result if the
proportion of younger loans in the Company's total portfolio is reduced due to
slower growth in new loan originations, an increase in acquisitions of seasoned
portfolios, and the normal seasoning of the Company's rapidly growing lower line
credit card portfolio.
Vendor Relationships
The Company's business depends on a number of services provided by third
parties, including nationwide credit bureaus, postal and telephone service
providers, bankcard associations and providers of transaction processing
services. A major disruption in one or more of these services could
significantly hurt the Company's operations.
Interest Rate Changes
The rate of interest the Company pays on its borrowings may increase if
market interest rates rise. If the rate of interest the Company earns on its
loans does not increase by the same amount, the Company's earnings could be
reduced. The Company's earnings could also be hurt in a period of falling
interest rates if the rates on its consumer loans fall faster than those on its
borrowings or if customers prepay fixed rate loans in order to refinance them at
lower rates. The Company seeks to manage these risks through the use of
measurement, monitoring and hedging techniques. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Asset/Liability
Risk Management."
14
<PAGE>
Cost and Availability of Funding
The Company obtains funding for its lending operations primarily from
depositors, institutional investors, commercial lenders and securitizations.
Changes in the credit market or the securitization market could make one or more
of these funding sources more expensive or unavailable. These changes could
result from changes in the regulatory, tax and accounting environment,
competition for funds, events that disrupt capital markets, or other reasons
beyond the Company's control. Competition for funding sources comes from a wide
variety of institutions, many of which have greater resources and higher
financial ratings than those of the Company.
Government Policy and Regulation
Federal and state laws significantly limit the types of activities in which
the Company's banking subsidiaries may engage. In addition, federal and state
consumer protection and debtor relief laws limit the manner in which the Company
may offer, extend, manage and collect loans. Congress and the states may enact
new laws and amendments to existing laws that further restrict consumer lending,
including changes to the laws governing bankruptcy, which could make it more
difficult or expensive for the Company to collect its loans, or impose limits on
the interest and fees that the Company may charge its customers. The Company's
earnings could also be hurt by changes in government fiscal or monetary
policies, including changes in the Company's rate of taxation, and by changes in
general social and economic conditions.
Growth, Product Development and Acquisitions
A major contributor to the Company's recent growth and increase in earnings
has been the development and expansion of fee-based products and lower line
credit card products. Competition in these markets is likely to intensify.
There can be no assurance that recent rates of growth in these products will
continue, or that the Company will be able to develop new products and services
that will enable it to sustain its recent rates of earnings growth. In
addition, a portion of the Company's recent growth in managed loans and
customer accounts resulted from portfolio acquisitions. There can be no
assurance that the acquired portfolios will perform as expected, that the
Company will continue to acquire loan portfolios, or that such acquisitions will
be profitable.
Management and Operations
The Company's growth and profitability depend on its ability to retain key
executives and managers, attract capable employees, maintain and develop the
systems necessary to operate its businesses and control the rate of growth of
its expenses. Expenses could significantly increase due to acquisition-related
conversion costs and other acquisition-related expenses, new product
development, increased funding or staffing costs and other internal and external
factors.
Other Industry Risks
The Company faces the risk of fraud by accountholders and third parties, as
well as the risk that increased criticism from consumer advocates and the media
could hurt consumer acceptance of its products. There is also a risk of
litigation, including class action litigation, challenging the Company's product
terms, rates, disclosures, collections or other practices, under state and
federal consumer protection statutes and other laws.
Year 2000 Readiness
The Company is heavily dependent on computer systems for its operations.
The Company processes data through its own information technology systems and
those of third party vendors and providers. Computer errors with respect to the
Year 2000 could cause system failures and disrupt the Company's operations.
Although the Company has taken steps to identify and correct potential Year 2000
15
<PAGE>
problems, there can be no guarantee that the Company's efforts to address Year
2000 issues will be successful. Specific factors that might affect the outcome
of such efforts include 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Non-Interest Expense--Impact of
Year 2000" for a discussion of the Company's efforts to address this problem.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Age Principal Occupation and Business Experience
- ------------ --------------------------------------------
<S> <C>
Shailesh J. Mehta Chief Executive Officer of the Company since 1988 and
Age: 49 Chairman of the Board and President of the Company since
June 1997. Mr. Mehta was President and Chief Operating
Officer of Providian Corporation, the Company's former
parent, from December 1994 to June 1997.
Seth A. Barad Executive Vice President of the Company since January 1997,
Age: 43 with responsibility for the management of marketing and
operations for lower line credit card products. Mr. Barad
joined the Company as Senior Vice President in October 1994.
Prior to working at the Company, he spent one year at GE
Capital, a financial services company, where he was
responsible for managing corporate card and purchasing card
products.
David Alvarez Executive Vice President of the Company since June 1997,
Age: 30 responsible for the management of marketing and operations
for higher line credit card products. Mr. Alvarez was
Senior Vice President of the Company from November 1995 to
June 1997, with responsibilities for credit card and home
loan marketing. He was Vice President, Marketing from June
1993 to November 1995. Mr. Alvarez joined the Company in
1990.
Ellen Richey Executive Vice President, General Counsel and Secretary of
Age: 50 the Company since June 1997. Ms. Richey was Senior Vice
President, General Counsel and Secretary of the Company from
January 1995 to June 1997, and Deputy General Counsel from
January to December 1994. Ms. Richey joined the Company in
1994.
David J. Petrini Executive Vice President, Chief Financial Officer and
Age: 38 Treasurer of the Company since December 1998. Mr. Petrini
was Senior Vice President and Chief Financial Officer of the
Company from January 1997 to December 1998, Senior Vice
President and Senior Financial Officer of the Company from
December 1994 to January 1997 and Vice President of the
Company from 1990 to December 1994. Mr. Petrini joined the
Company in 1986.
</TABLE>
ITEM 2. PROPERTIES
The Company leases its executive offices at 201 Mission Street, San
Francisco, California, currently consisting of approximately 133,250 square
feet. The initial lease term, which is renewable, expires on July 31, 2001.
The Company owns its processing center at 4900, 4920, 4940, 5020 and 5040
Johnson Drive, Pleasanton, California, consisting of approximately 282,420
square feet. PNB's offices are located at 295 Main Street, Tilton, New
Hampshire, which is owned, and at 44 Main Street, Belmont, New
16
<PAGE>
Hampshire, and MacMillan House, 96 Kensington High Street, London, England,
which are leased. PB's offices are located at 5215 Wiley Post Way, Salt Lake
City, Utah, and are leased.
Significant operations centers are located at the following leased
premises: 150 Spear Street, San Francisco, California (130,629 square feet); 160
Spear Street, San Francisco, California (60,713 square feet); and 2700 Gateway
Oaks Drive, Sacramento, California (91,174 square feet). New operations centers
are scheduled to open at 1333 Broadway Street, Oakland, California, 3801 South
Collins Boulevard, Arlington, Texas, and 4450 Rosewood Drive, Pleasanton,
California, in the second quarter of 1999. Additional leased support premises
are located at 53 and 54 Regional Drive, Concord, New Hampshire; 10400 Linn
Station Road, Louisville, Kentucky; 435 Executive Court North, Fairfield,
California; and 5215 Wiley Post Way, Salt Lake City, Utah.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in various legal actions arising
in the ordinary course of the Company's business. In the opinion of the
Company, any liability that is likely to arise with respect to these actions
will not have a material adverse effect on the consolidated financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the market for the registrant's common equity and
related stockholder matters is incorporated by reference to the information
under the caption "Common Stock Price Ranges and Dividends," on page 73 of the
registrant's Annual Report to stockholders for the year ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
Information concerning selected financial data is incorporated by reference
to the information under the caption "Selected Financial Data," on pages 20 and
21 of the registrant's Annual Report to stockholders for the year ended December
31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information concerning management's discussion and analysis of financial
condition and results of operations is incorporated by reference to the
information under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 22 through 41 of the registrant's
Annual Report to stockholders for the year ended December 31, 1998.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning quantitative and qualitative disclosures about
market risk is incorporated by reference to the information under the caption
"Asset/Liability Risk Management," on pages 39 through 41 of the registrant's
Annual Report to stockholders for the year ended December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning financial statements and supplementary data is
incorporated by reference to the information under the captions "Consolidated
Statements of Financial Condition," on page 44, "Consolidated Statements of
Income," on page 45, "Consolidated Statements of Changes in Shareholders'
Equity," on page 46, "Consolidated Statements of Cash Flows," on page 47, "Notes
to Consolidated Financial Statements," on pages 48 through 71, "Report of
Independent Auditors," on page 43, and "Quarterly Data," on page 72, of the
registrant's Annual Report to stockholders for the year ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and compliance with Section 16(a) of the
Exchange Act is incorporated by reference to the information under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
Information concerning executive officers of the Company may be found in
Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
to the information under the captions "Directors' Compensation," "Executive
Compensation and Other Information," "Option Grants," "Option Exercises and
Holdings," "Executive Employment and Change in Control Agreements,"
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions" and "Human Resources Committee Executive Compensation Report" in
the registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
18
<PAGE>
ITEM l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the information under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference to the information under the caption "Compensation
Committee Interlocks and Insider Participation and Certain Transactions" in the
registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following Report of Independent Auditors and consolidated financial
statements of Providian Financial Corporation and subsidiaries,
including the notes thereto, included on pages 43 through 71 of the
Annual Report to stockholders for the year ended December 31, 1998, are
incorporated by reference herein:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 43
Consolidated Statements of Financial Condition 44
December 31, 1998 and 1997
Consolidated Statements of Income 45
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity 46
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows 47
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 48-71
</TABLE>
(a)(2) Financial Statement Schedules.
None.
19
<PAGE>
(a) (3) List and Index of Exhibits
The following exhibits are incorporated by reference or filed herewith.
References to the 1997 Form 10 are to the Company's Registration Statement on
Form 10 effective April 18, 1997.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
2 Agreement and Plan of Distribution, dated as of December 28, 1996, between
Providian Corporation and the Company (incorporated by reference to Exhibit
2.1 to the 1997 Form 10).
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997).
3.2 Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.1 Rights Agreement, dated as of June 1, 1997, between the Company and First
Chicago Trust Company of New York (incorporated by reference to Exhibit 10.1
to the Company's quarterly report on Form 10-Q for the quarter ended June
30, 1997), as amended by Amendment No. 1 to Rights Agreement dated February
17, 1999 (incorporated by reference to Exhibit 4 to the Company's report on
Form 8-K filed on March 26, 1999).
4.2 Certificate of Designation of Series A Junior Participating Preferred Stock,
dated June 1, 1997 (incorporated by reference to Exhibit 4.1 to the
Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997).
4.3 Certificate of Trust of Providian Capital I, dated as of January 21, 1997
(incorporated by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
4.4 Amended and Restated Trust Agreement, dated as of February 4, 1997, among
the Company, as Depositor, The Bank of New York, as Property Trustee, and
The Bank of New York (Delaware), as Delaware Trustee (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
4.5 Junior Subordinated Indenture, dated as of February 4, 1997, between the
Company and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.6 Guarantee Agreement, dated as of February 4, 1997, between the Company, as
Guarantor, and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1* Employment Agreement, dated as of March 27, 1997, between the Company and
Shailesh J. Mehta (incorporated by reference to Exhibit 10.1 to the 1997
Form 10).
10.2* Form of Change of Control Employment Agreement, as entered into between the
Company and each of the following executive officers of the Company on the
dates indicated: Seth A. Barad, David B. Smith, and David Alvarez, August
19, 1997; Ellen Richey, August 29, 1997 (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.3* Supplemental Compensation Agreement, dated as of August 25, 1997, between
the Company and David B. Smith (incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.4* Providian Financial Corporation 1997 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on Form
S-8, File Number 333-28767).
10.5* Providian Financial Corporation Management Incentive Plan (incorporated by
reference to the form of such Management Incentive Plan filed as Exhibit
10.3 to the 1997 Form 10).
10.6* Providian Financial Corporation Deferred Compensation Plan for Senior
Executives and Directors, as amended and restated effective June 1, 1999.
10.7* Providian Financial Corporation Stock Ownership Plan, as amended and
restated June 23, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
and Appendixes A and B to Providian Financial Corporation Stock Ownership
Plan, as amended on October 21, 1998 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.8* Providian Financial Corporation 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 to the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 1997).
10.9 Trademark License Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.3 to the 1997 Form 10).
10.10 General Intellectual Property Assignment and Renunciation, dated as of June
10, 1997, between Providian Corporation and the Company (incorporated by
reference to the form of such agreement filed as Exhibit 2.4 to the 1997
Form 10).
10.11 Short-Form Assignment, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.5 to the 1997 Form 10).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12 Transition Services Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.6 to the 1997 Form 10).
10.13 Tax Disaffiliation Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.7 to the 1997 Form 10).
10.14 Guarantee Agreement, dated as of June 10, 1997, among AEGON USA, Inc.,
Providian Corporation and the Company (incorporated by reference to the form
of such agreement filed as Exhibit 2.8 to the 1997 Form 10).
10.15 Employee Benefits Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.9 to the 1997 Form 10).
10.16 Credit Agreement, dated as of January 12, 1999, among Providian National
Bank and Providian Bank, as Borrowers, Providian Financial Corporation, as
Guarantor, the Lenders named therein, the Syndication Agents named therein,
and The Chase Manhattan Bank, as Administrative Agent.
10.17 Pooling and Servicing Agreement, dated as of June 1, 1993, among First
Deposit National Bank, as Seller and Servicer, First Deposit National Credit
Card Bank, as Seller, and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to First Deposit Master Trust's Registration
Statement on Form S-3, File Number 33-84844).
10.18 Amendment No. 1, dated as of August 1, 1994, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer, First
Deposit National Credit Card Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.3 to First Deposit Master
Trust's Registration Statement on Form S-3, File Number 33-84844).
10.19 Amendment No. 2, dated as of June 1, 1995, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the First Deposit Master
Trust's report on Form 8-K filed on June 24, 1995).
10.20 Amendment No. 3, dated as of March 1, 1997, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Providian Master Trust's
report on Form 8-K filed on March 17, 1997).
10.21 Amendment No. 4, dated as of June 1, 1998, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.6 to the Providian Master Trust's
Amendment No. 1 to Form S-3 filed on July 17, 1998).
</TABLE>
22
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<TABLE>
<CAPTION>
<S> <C>
10.22 Amendment No. 5, dated as of August 1, 1998, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Providian Master Trust's
report on Form 8-K filed on September 8, 1998).
10.23 Supplemental Agreement No. 1, dated as of January 1, 1998, to the Pooling
and Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 99.1 to the Providian Master
Trust's report on Form 8-K filed on January 9, 1998).
10.24 Series 1995-1 Supplement, dated as of June 1, 1995, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.2 to the First Deposit
Master Trust's report on Form 8-K filed on July 24, 1995).
10.25 Series 1996-1 Supplement, dated as of June 1, 1996, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the First Deposit
Master Trust's report on Form 8-K filed on July 16, 1996).
10.26 Series 1997-1 Supplement, dated as of March 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on March 2, 1997).
10.27 Series 1997-2 Supplement, dated as of March 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.2 to the Providian Master
Trust's report on Form 8-K filed on March 2, 1997).
10.28 Series 1997-3 Supplement, dated as of June 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on June 23, 1997).
10.29 Series 1997-4 Supplement, dated as of November 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on December 4, 1997).
10.30 Distribution Agreement, dated as of February 20, 1998, between the Company
and the Agents named therein (incorporated by reference to Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.31 Issuing and Paying Agency Agreement, dated as of February 20, 1998, between
the Company and The First National Bank of Chicago (incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividend Requirements
13 Portions incorporated herein of the Annual Report to stockholders for the
year ended December 31, 1998.
21 Subsidiaries of the Company.
23 Consent of independent auditors.
27 Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
<TABLE>
<CAPTION>
<S> <C>
(b) Reports on Form 8-K.
None.
(e) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Year Ended December 31
--------- ----------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits 10.88 14.20 5.93 4.90 5.17
Including interest on deposits 2.93 2.66 2.34 2.34 2.69
EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK:
Excluding interest on deposits 10.88 13.28 5.19 4.32 4.40
Including interest on deposits 2.93 2.63 2.25 2.24 2.51
</TABLE>
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999 PROVIDIAN FINANCIAL CORPORATION
By /s/ Shailesh J. Mehta
------------------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ----------------------------------------- ------------------
<S> <C> <C>
/s/ Shailesh J. Mehta Chairman, President and Chief March 31, 1999
- -------------------------- Executive Officer and Director
Shailesh J. Mehta
/s/ David J. Petrini Executive Vice President, Chief March 31, 1999
- -------------------------- Financial Officer and Treasurer
David J. Petrini (Principal Financial Officer)
/s/ Daniel Sanford Senior Vice President and March 31, 1999
- ------------------------- Controller (Principal Accounting
Daniel Sanford Officer)
/s/ Christina L. Darwall Director March 31, 1999
- -------------------------
Christina L. Darwall
/s/ James V. Elliott Director March 31, 1999
- --------------------------
James V. Elliott
/s/ Lyle Everingham Director March 31, 1999
- -------------------------
Lyle Everingham
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ J. David Grissom Director March 31, 1999
- -------------------------
J. David Grissom
/s/ F. Warren McFarlan Director March 31, 1999
- --------------------------
F. Warren McFarlan
/s/ Ruth M. Owades Director March 31, 1999
- -------------------------
Ruth M. Owades
/s/ Larry D. Thompson Director March 31, 1999
- -------------------------
Larry D. Thompson
/s/ John L. Weinberg Director March 31, 1999
- -------------------------
John L. Weinberg
</TABLE>
26
<PAGE>
EXHIBIT 10.6
PROVIDIAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
FOR SENIOR EXECUTIVES AND DIRECTORS
As Amended and Restated Effective June 1, 1999
<PAGE>
<TABLE>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
1. Purpose......................................................... 1
2. Definitions..................................................... 1
3. Participation in the Plan....................................... 4
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................................................... 17
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
FOR SENIOR EXECUTIVES AND DIRECTORS
As Amended and Restated Effective June 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 pursuant to
which a Participant's Deferred Compensation shall be credited with interest as
provided in Section 5.4 hereof.
1.
<PAGE>
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
2.
<PAGE>
(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.
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 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 discontinue any Deferred Compensation
Accounts 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.
3.
<PAGE>
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
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 "Salary" means the base salary of a Participant who is a Senior
Executive.
2.26 "Senior Executive" means an officer or other key employee who is a
top-level executive of the Company, as determined by the Committee.
2.27 "Stock" shall mean common stock, par value $.01 per share, of the
Company.
2.28 "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
4.
<PAGE>
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
4.5.
(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
5.
<PAGE>
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 4.5. 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 4.5. 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).
6.
<PAGE>
4.4 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.
4.5 All Deferred Compensation shall be withheld and deducted from the
Participant's Salary, Retainer or Incentive Award (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, 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
7.
<PAGE>
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
8.
<PAGE>
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
9.
<PAGE>
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
10.
<PAGE>
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 or Section
4.3, to defer receipt of a portion of his or her Retainer or Incentive Award for
the succeeding Board Cycle or Fiscal Year (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
11.
<PAGE>
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
attaining normal retirement age for purposes of the Company's retirement plan
("Normal 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 attaining Normal 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.
12.
<PAGE>
(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 attaining Normal Retirement Age or incurring 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.
13.
<PAGE>
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
14.
<PAGE>
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,
15.
<PAGE>
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
16.
<PAGE>
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 Incumbent 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.
17.
<PAGE>
EXHIBIT 16
$1,000,000,000
CREDIT AGREEMENT
Dated as of January 12, 1999
among
PROVIDIAN NATIONAL BANK,
and
PROVIDIAN BANK,
as Borrowers,
PROVIDIAN FINANCIAL CORPORATION,
as Guarantor,
THE LENDERS NAMED HEREIN,
as Lenders
and
THE CHASE MANHATTAN BANK
as Administrative Agent
and
NATIONSBANC MONTGOMERY SECURITIES LLC
CITICORP USA, INC.
CREDIT SUISSE FIRST BOSTON
as Syndication Agents
CHASE SECURITIES INC.
as Lead Arranger and Book Manager
<PAGE>
TABLE OF CONTENTS
-----------------
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience of reference only.
<TABLE>
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Page
<S> <C>
Section 1. Definitions................................................................ 1
1.02 Other Definitional Provisions.................................................... 17
Section 2. Amount and Terms of Commitments............................................ 17
2.01 Syndicated Loan Commitments................................................. 17
2.02 Procedure for Syndicated Loan Borrowing..................................... 18
2.03 Competitive Bid Option Loans................................................ 18
2.05 Changes of Commitments...................................................... 24
2.06 Fees........................................................................ 25
2.07 Lending Offices............................................................. 25
2.08 Several Obligations......................................................... 25
2.09 Evidence of Indebtedness.................................................... 26
2.10 Optional Prepayments and Conversions or Continuations
of Eurodollar Loans....................................................... 26
2.11 Mandatory Prepayments and Reductions of Commitments......................... 27
2.12 Extension of Termination Date............................................... 28
2.13 New Lenders................................................................. 29
2.14 Increases in Commitments.................................................... 30
Section 3. Payments of Principal and Interest......................................... 30
3.01 Repayment of Loans.......................................................... 30
3.02 Interest.................................................................... 31
Section 4. Payments; Pro Rata Treatment; Computations; Etc............................ 32
4.01 Payments.................................................................... 32
4.02 Pro Rata Treatment.......................................................... 32
4.03 Computations................................................................ 33
4.04 Minimum Amounts............................................................. 33
4.05 Certain Notices............................................................. 33
4.06 Non-Receipt of Funds by the Administrative Agent............................ 34
4.07 Sharing of Payments, Etc.................................................... 35
Section 5. Yield Protection, Etc...................................................... 36
5.01 Additional Costs............................................................ 36
5.02 Limitation on Types of Loans................................................ 38
5.03 Illegality.................................................................. 39
</TABLE>
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ii
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<S> <C>
5.04 Treatment of Affected Loans................................................. 39
5.05 Compensation................................................................ 39
5.06 U.S. Taxes.................................................................. 40
Section 6. Conditions Precedent....................................................... 43
6.01 Effective Date.............................................................. 43
Section 7. Representations and Warranties............................................. 45
7.01 Financial Condition......................................................... 45
7.02 No Change................................................................... 46
7.03 Corporate Existence; Compliance with Law.................................... 46
7.04 Corporate Power; Authorization; Enforceable Obligations..................... 46
7.05 No Legal Bar................................................................ 47
7.06 No Material Litigation...................................................... 47
7.07 No Default.................................................................. 47
7.08 Ownership of Property; Liens................................................ 47
7.09 Taxes....................................................................... 47
7.10 Federal Regulations......................................................... 47
7.11 ERISA....................................................................... 48
7.12 Investment Company Act; Other Regulations................................... 48
7.13 Subsidiaries................................................................ 48
7.14 Purpose of Loans............................................................ 49
7.15 True and Complete Disclosure................................................ 49
7.16 Public Utility Holding Company Act......................................... 49
7.17 Year 2000 Matters........................................................... 49
Section 8. Certain Covenants of Each Obligor.......................................... 49
8.01 Financial Statements, Etc................................................... 49
8.02 Litigation.................................................................. 51
8.03 Existence, Etc.............................................................. 51
8.04 Insurance................................................................... 52
8.05 Notices..................................................................... 52
8.06 Limitation on Fundamental Changes........................................... 55
8.07 Limitation on Sale of Assets................................................ 55
8.08 Limitation on Liens......................................................... 56
8.09 Limitation on Transactions with Affiliates.................................. 57
Section 9. Additional Obligor-Specific Covenants...................................... 58
9.01 Guarantor Covenants......................................................... 58
9.02 Covenants of the Borrowers.................................................. 58
Section 10. Guarantee................................................................. 58
10.01 Guarantee.................................................................. 58
10.02 Right of Set-off........................................................... 59
</TABLE>
<PAGE>
iii
<TABLE>
<CAPTION>
<S> <C>
10.03 Waiver of Subrogation...................................................... 59
10.04 Amendments, etc. re Obligations; Waiver of Rights.......................... 60
10.05 Guarantee Absolute and Unconditional....................................... 60
10.06 Reinstatement.............................................................. 61
Section 11. Events of Default......................................................... 61
Section 12. The Administrative Agent.................................................. 64
12.01 Appointment, Powers and Immunities ........................................ 64
12.02 Reliance by Administrative Agent........................................... 65
12.03 Defaults................................................................... 65
12.04 Rights as a Lender......................................................... 66
12.05 Indemnification............................................................ 66
12.06 Non-Reliance on Administrative Agent and Other Lenders..................... 66
12.07 Failure to Act............................................................. 67
12.08 Resignation of Administrative Agent........................................ 67
12.09 Syndication Agents......................................................... 67
Section 13. Miscellaneous............................................................. 68
13.01 Waiver..................................................................... 68
13.02 Notices.................................................................... 68
13.03 Expenses, Etc.............................................................. 68
13.04 Amendments, Etc............................................................ 69
13.05 Successors and Assigns..................................................... 70
13.06 Assignments and Participations............................................. 70
13.07 Survival................................................................... 73
13.08 Captions................................................................... 73
13.09 Counterparts............................................................... 74
13.10 Independence of Covenants.................................................. 74
13.11 Severability............................................................... 74
13.12 Integration................................................................ 74
13.13 Governing Law.............................................................. 74
13.14 Submission to Jurisdiction; Waivers........................................ 74
13.15 Waivers of Jury Trial...................................................... 75
</TABLE>
<PAGE>
iv
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SCHEDULE I - Subsidiaries
SCHEDULE II - Section 8.08(d) Existing Liens
EXHIBIT A - Form of Assignment and Acceptance
EXHIBIT B - Form of CBO Quote Request
EXHIBIT C - Form of CBO Quote
EXHIBIT D-1 - Form of Notice of Borrowing of CBO Loans
EXHIBIT D-2 - Form of Notice of Borrowing of Syndicated Loans
EXHIBIT D-3 - Form of Notice of Borrowing of Swing Line Loans
EXHIBIT E-1 - Form of Opinion of Orrick, Herrington & Sutcliffe LLP, Counsel to the Obligors
EXHIBIT E-2 - Form of Opinion of Ellen Richey, general counsel to the Obligors
EXHIBIT F-1 - Form of Syndicated Note
EXHIBIT F-2 - Form of Competitive Bid Note
EXHIBIT G - Form of Additional Lender Addendum
EXHIBIT H - Form of Increased Commitment Addendum
EXHIBIT I - Form of Opinion of Counsel to the Lenders
</TABLE>
<PAGE>
CREDIT AGREEMENT, dated as of January 12, 1999 among PROVIDIAN NATIONAL
BANK, a national banking association incorporated, organized and existing under
the laws of the United States of America ("PNB"), PROVIDIAN BANK, a corporation
---
organized and existing under the laws of the State of Utah ("PB"; together with
--
PNB, the "Borrowers"); PROVIDIAN FINANCIAL CORPORATION, a corporation organized
---------
and existing under the laws of the State of Delaware (the "Guarantor"; together
---------
with the Borrowers, the "Obligors"); the several banks and other financial
--------
institutions or entities from time to time party hereto (individually, a
"Lender" and, collectively, the "Lenders"); and THE CHASE MANHATTAN BANK, a New
------ -------
York banking corporation, as Administrative Agent for the Lenders (in such
capacity, together with any successor appointed pursuant to Section 12.08, the
"Administrative Agent") and NATIONSBANC MONTGOMERY SECURITIES LLC, CITICORP USA,
- ---------------------
INC. and CREDIT SUISSE FIRST BOSTON (collectively, the Syndication Agents).
------------------
AGREEMENT
The parties hereto agree as follows:
Section 1. Definitions.
-----------
1.01 Defined Terms. As used in this Agreement, the following terms
-------------
shall have the following meanings:
"ABR": for any day, a rate per annum equal to the greater of (a) the
---
Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on
such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate
----------
of interest per annum publicly announced from time to time by the Reference
Lender as its prime rate in effect at its principal office in New York City (the
Prime Rate not being intended to be the lowest rate of interest charged by the
Reference Lender in connection with extensions of credit to debtors). Any
change in the ABR due to a change in the Prime Rate or the Federal Funds Rate
shall be effective as of the opening of business on the effective day of such
change in the Prime Rate or the Federal Funds Rate, respectively.
"ABR Loans": Loans the rate of interest applicable to which is based
---------
upon the ABR.
"Additional Lender Addendum": an agreement, substantially in the form
--------------------------
attached hereto as Exhibit G, made by a financial institution becoming a
"Lender" hereunder and accepted by the Borrowers and the Administrative Agent
in accordance with Section 2.13.
"Administrative Agent": as defined in the preamble.
--------------------
"Affiliate": as to any Person, any other Person which, directly or
---------
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this
<PAGE>
2
definition, "control" of a Person means the power, directly or indirectly,
either (a) to vote 10% or more of the securities having ordinary voting power
for the election of directors of such Person or (b) to direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.
"Agreement": this Credit Agreement, as amended, supplemented or
---------
otherwise modified from time to time.
"Applicable Lending Office": for each Lender and for each Type of
-------------------------
Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
office of such Lender (or of an affiliate of such Lender) as such Lender may
from time to time specify to the Administrative Agent and each Borrower as the
office at which its Loans of such Type are to be made and maintained.
"Applicable Margin": on any date, with respect to Eurodollar Loans or
-----------------
ABR Loans, the applicable percentage set forth below based upon the lower of the
highest two ratings (or if neither of such highest two ratings is lower, the
highest rating) assigned by S&P, Moody's and D&P, respectively, applicable on
such date to senior unsecured indebtedness of PNB:
<TABLE>
<CAPTION>
Applicable Rating Eurodollar Margin ABR Margin
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BBB+ or higher by S&P or
D&P .225% 0%
Baa1 or higher by Moody's
- ----------------------------------------------------------------------------------------------------------
BBB by S&P or D&P
Baa2 by Moody's .350% 0%
- ----------------------------------------------------------------------------------------------------------
BBB- by S&P or D&P
Baa3 by Moody's .450% 0%
- ----------------------------------------------------------------------------------------------------------
BB+ by S&P or D&P
Ba1 by Moody's .750% 0%
- ----------------------------------------------------------------------------------------------------------
BB by S&P or D&P
Ba2 by Moody's 1.125% .125%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
"Assignment and Acceptance": an assignment and acceptance,
-------------------------
substantially in the form attached hereto as Exhibit A, made by a Lender and an
assignee of such Lender and
<PAGE>
3
accepted by the Guarantor and the Administrative Agent in accordance with and to
the extent required by Section 13.06(b).
"Available Commitment": as to any Lender at any time, an amount equal
--------------------
to such Lender's Commitment Percentage of the excess, if any, of (a) the
aggregate Commitments over (b) the aggregate principal amount of all Loans then
outstanding.
"Bankruptcy Code": the Federal Bankruptcy Code of 1978, as amended
---------------
from time to time.
"Borrowing Date": any Business Day specified in a notice pursuant to
--------------
Section 2.02, 2.03 or 2.04 as a date on which a Borrower requests the Lenders to
make Loans hereunder.
"Business Day": any day on which (a) commercial banks are not
------------
authorized or required to close in New York City or San Francisco or the State
of New Hampshire and (b) if such day relates to the giving of notices or quotes
in connection with a LIBOR Auction or to a borrowing of, a payment or prepayment
of principal of or interest on, a Conversion of or into, or an Interest Period
for, a Eurodollar Loan or a LIBOR Market Loan or a notice by any Borrower with
respect to any such borrowing, payment, prepayment, Conversion or Interest
Period, dealings in Dollar deposits are carried out in the London interbank
market.
"Capital Securities": in the case of the Guarantor, cumulative
------------------
preferred stock or similar securities issued by a special purpose subsidiary of
the Guarantor that would be given Tier 1 Capital status under the Federal
Reserve Board's risk-based capital guidelines (regardless of whether the
Guarantor is then required to comply with such guidelines).
"Capital Stock": any and all shares, interests, participations or
-------------
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation)
and any and all warrants or options to purchase any of the foregoing.
"CBO Quote": an offer in accordance with Section 2.03(c) by a Lender
---------
to make a Competitive Bid Option Loan with one single specified interest rate.
"CBO Quote Request": as defined in Section 2.03(b).
-----------------
"Chase": The Chase Manhattan Bank a New York banking corporation.
-----
"Class": as to any Loan, its nature as a Competitive Bid Option Loan,
-----
a Swing Line Loan or a Syndicated Loan.
"Code": the Internal Revenue Code of 1986, as amended from time to
----
time.
<PAGE>
4
"Commitment": as to any Lender, the obligation of such Lender to make
----------
Syndicated Loans in an aggregate amount at any one time outstanding up to but
not exceeding the amount set opposite the name of such Lender on the signature
pages hereof under the caption "Commitment", or if such Lender has entered into
an Increased Commitment Addendum or one or more Assignment and Acceptances, and
with respect to each Lender that becomes a Lender pursuant to an Assignment and
Acceptance or an Additional Lender Addendum, as set forth in such Increased
Commitment Addendum, Assignment and Acceptance or Additional Lender Addendum (as
the same may be reduced from time to time pursuant to Section 2.05). The
original aggregate principal amount of the Commitments is $1,000,000,000.
"Commitment Percentage": as to any Lender at any time, the percentage
---------------------
which such Lender's Commitment then constitutes of the aggregate Commitments
(or, at any time after the Commitments shall have expired or terminated, the
percentage which the aggregate principal amount of such Lender's Loans then
outstanding (plus, in the case of each Lender, such Lender's participation in
Unrefunded Swing Line Loans made by any other Swing Line Lenders, and minus, in
the case of any Swing Line Lender, the aggregate participations of the Lenders
in its Unrefunded Swing Line Loans) constitutes of the aggregate principal
amount of the Loans then outstanding).
"Commitment Period": the period from and including the date hereof to
-----------------
but not including the Termination Date or such earlier date on which the
Commitments shall terminate as provided herein.
"Commonly Controlled Entity": with respect to any Obligor, an entity,
--------------------------
whether or not incorporated, which is under common control with such Obligor
within the meaning of Section 4001 of ERISA or is part of a group which includes
such Obligor and which is treated as a single employer under Section 414 of the
Code.
"Competitive Bid Option Loans": loans provided for in Section 2.03.
----------------------------
"Consolidated Net Income": for any period, the consolidated net
-----------------------
income (or loss) of the Guarantor and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP, provided that there shall be
--------
excluded (a) the income (or deficit) of any Person accrued prior to the date it
becomes a Subsidiary of the Guarantor or is merged into or consolidated with the
Guarantor or any of its Subsidiaries, (b) the income (or deficit) of any Person
(other than a Subsidiary of the Guarantor) in which the Guarantor or any of its
Subsidiaries has an ownership interest, except to the extent that any such
income is actually received by the Guarantor or such Subsidiary in the form of
dividends or similar distributions and (c) the undistributed earnings of any
Subsidiary of the Guarantor to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary is not at the time
permitted by the terms of any contractual obligation (other than under this
Agreement or any other credit agreement to which such Subsidiary is a party) or
requirement of law applicable to such Subsidiary.
<PAGE>
5
"Consolidated Shareholders' Equity" : as of any date of determination, with
---------------------------------
respect to any Person, the consolidated total stockholders' equity of such
Person and its Consolidated Subsidiaries.
"Consolidated Subordinated Debt" : as of any date of determination,
------------------------------
with respect to any Person, the Subordinated Debt of such Person and its
Consolidated Subsidiaries.
"Consolidated Subsidiary" : as of any date of determination, with
-----------------------
respect to any Person, each Subsidiary of such Person (whether now existing or
hereafter created or acquired) the financial statements of which shall or should
be consolidated with the financial statements of such Person.
"Consolidated Tangible Capital" : as of any date of determination,
-----------------------------
with respect to any Person, (a) Consolidated Shareholders' Equity of such Person
less (i) goodwill and identifiable intangibles of such Person (other than
identified intangible assets consisting of mortgage and non-mortgage servicing
assets and purchased credit card relationships to the extent that such
intangibles are not required to be deducted from such Person's capital under the
applicable regulator's risk-based capital guidelines, with any limitations
thereunder determined on a consolidated basis) and (ii) unrealized gains or
losses on available for sale debt securities plus (b) Consolidated Subordinated
Debt and Capital Securities of such Person minus (c) the excess, if any, of (i)
Consolidated Subordinated Debt and Capital Securities of such Person over (ii)
25% of the amount calculated pursuant to clauses (a) and (b) of this definition.
"Continue", "Continuation" and "Continued" shall refer to the
-------- ------------ ---------
continuation pursuant to Section 2.10 of a Eurodollar Loan as a Eurodollar Loan
from one Interest Period to the next Interest Period.
"Continuing Directors": the directors of the Guarantor on the Closing
--------------------
Date, and each other director, if, in each case, such other director's
nomination for election to the board of directors of the Guarantor is
recommended by (or in the case of a vacancy filled by the board of directors,
such other director is appointed by) at least a majority of the then Continuing
Directors.
"Contractual Obligation": as to any Person, any provision of any
----------------------
security issued by such Person or of any material agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Convert", "Conversion" and "Converted" shall refer to a conversion
------- ---------- ---------
pursuant to Section 2.10 of one Type of Syndicated Loan into another Type of
Syndicated Loan, which may be accompanied by the transfer by a Lender (at its
sole discretion but subject to the proviso in the first sentence of (S) 5.01(c))
of a Loan from one Applicable Lending Office to another.
"Credit Documents": this Agreement and the Fee Letter.
----------------
"D&P": Duff & Phelps Credit Rating Co.
---
<PAGE>
6
"Default": any of the events specified in Section 11, whether or not
-------
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Dollars" and "$": dollars in lawful currency of the United States of
------- -
America.
"Effective Date": as defined in Section 6.01.
--------------
"ERISA": the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"ERISA Affiliate": with respect to any Obligor, any corporation or
---------------
trade or business that is a member of any group of organizations (i) described
in Section 414(b) or (c) of the Code and the regulations issued thereunder of
which such Obligor is a member and (ii) solely with respect to potential
liability under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code or
the lien created under Section 302(f) of ERISA or Section 412(n) of the Code,
described in Section 414(m) or (o) of the Code and the regulations issued
thereunder of which such Obligor is a member.
"ERISA Multiemployer Plan": with respect to any Obligor, a
------------------------
multiemployer plan as defined in Section 3(37) of ERISA to which such Obligor or
any of its ERISA Affiliates has an obligation to contribute.
"ERISA Pension Plan": with respect to any Obligor, an employee pension
------------------
benefit plan as defined in Section 3(2) of ERISA, other than a Multiemployer
Plan, which is maintained by such Obligor or any of its ERISA Affiliates.
"ERISA Plan": an ERISA Pension Plan or an ERISA Welfare Plan.
----------
"ERISA Welfare Plan": with respect to any Obligor, an employee welfare
------------------
benefit plan as defined in Section 3(1) of ERISA, other than a Multiemployer
Plan, which is maintained by such Obligor or any of its ERISA Affiliates.
"Eurocurrency Reserve Requirements": for any day as applied to a
---------------------------------
Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as
a decimal fraction) of reserve requirements in effect on such day (including,
without limitation, basic, supplemental, marginal and emergency reserves under
any regulations of the Board of Governors of the Federal Reserve System or other
Governmental Authority having jurisdiction with respect thereto) dealing with
reserve requirements prescribed for eurocurrency funding (currently referred to
as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a
member bank of such System with deposits exceeding $1 billion in respect of
eurodollar currency funding liabilities.
<PAGE>
7
"Eurodollar Base Rate": with respect to each day during each Interest
--------------------
Period pertaining to a Eurodollar Loan, the rate per annum determined on the
basis of the rate for deposits in Dollars for a period equal to such Interest
Period commencing on the first day of such Interest Period appearing on Page
3750 of the Bridge Telerate screen as of 11:00 A.M., London time, two Business
Days prior to the beginning of such Interest Period. In the event that such
rate does not appear on Page 3750 of the Bridge Telerate screen (or otherwise on
such screen), the "Eurodollar Base Rate" shall be determined by reference to
--------------------
such other comparable publicly available service for displaying eurodollar rates
as may be selected by the Administrative Agent or, in the absence of such
availability, by reference to the rate at which the Administrative Agent is
offered Dollar deposits at or about 11:00 A.M., New York City time, two Business
Days prior to the beginning of such Interest Period in the interbank eurodollar
market where its eurodollar and foreign currency and exchange operations are
then being conducted for delivery on the first day of such Interest Period for
the number of days comprised therein.
"Eurodollar Loans": Syndicated Loans the interest rates on which are
----------------
determined on the basis of the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each Interest
---------------
Period pertaining to a Eurodollar Loan, a rate per annum determined for such day
in accordance with the following formula (rounded upward to the nearest 1/100th
of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Event of Default": any of the events specified in Section 11,
----------------
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Existing Agreement": the Amended and Restated Credit Agreement dated
------------------
as of May 14, 1996 (as amended) among PNB, PB and Providian Credit Corporation,
as Borrowers, the Guarantor, as Guarantor, the Lenders named therein and The
Chase Manhattan Bank, as Administrative Agent.
"Extended Termination Date": the fifth (5th) anniversary date of the
-------------------------
Effective Date, provided that if such date is not a Business Day, the Extended
Termination Date shall be the next preceding Business Day.
"Facility Fee": as defined in Section 2.06(a).
------------
"Facility Fee Rate": on any date, the applicable percentage set forth
-----------------
below based upon the lower of the highest two ratings (or if neither of such
highest two ratings is lower, the highest rating) assigned by S&P, Moody's and
D&P, respectively, applicable on such date to senior unsecured indebtedness of
PNB:
<PAGE>
8
<TABLE>
<CAPTION>
Applicable Rating Facility Fee Rate
- -----------------------------------------------------------------
<S> <C>
BBB+ or higher by S&P or
D&P .125%
Baa1 or higher by Moody's
- -----------------------------------------------------------------
BBB by S&P or D&P
Baa2 by Moody's .150%
- -----------------------------------------------------------------
BBB- by S&P or D&P
Baa3 by Moody's .175%
- -----------------------------------------------------------------
BB+ by S&P or D&P
Ba1 by Moody's .250%
- -----------------------------------------------------------------
BB by S&P or D&P
Ba2 by Moody's .375%
- -----------------------------------------------------------------
</TABLE>
"FDIA": the Federal Deposit Insurance Act, as amended, or any
----
successor statute.
"FDIC": the Federal Deposit Insurance Corporation.
----
"Federal Funds Rate": for any day, the rate per annum (rounded
------------------
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers on such day, as published on
the next succeeding Business Day by the Federal Reserve Bank of New York,
provided that (a) if the day for which such rate is to be determined is not a
- --------
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Business Day as so published on the next
succeeding Business Day and (b) if such rate is not so published for any
Business Day, the Federal Funds Rate for such Business Day shall be the
arithmetic mean of three rates quoted by Federal funds brokers to the Reference
Lender on such Business Day on such transactions as determined by the
Administrative Agent.
"Fee Letter": the letter dated October 20, 1998 between the Obligors
----------
and the Administrative Agent relating to certain agency and other fees in
respect of the credit facilities provided hereunder.
"Financing Lease": any lease of property, real or personal, the
---------------
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
<PAGE>
9
"First Scheduled Termination Date": the fourth (4th) anniversary date
--------------------------------
of the Effective Date, provided that if such date is not a Business Day, the
--------
First Scheduled Termination Date shall be the preceding Business Day.
"GAAP": generally accepted accounting principles in the United States
----
of America in effect from time to time, consistent with those used in the
preparation of the audited financial statements referred to in Section 7.01 and
8.01.
"Governmental Authority": any nation or government, any state or
----------------------
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantee Obligation": as to any Person (the "guaranteeing person"),
-------------------- -------------------
any obligation of the guaranteeing person guaranteeing or intended to guarantee
any Indebtedness (the "primary obligations") of any other Person (the "primary
------------------- -------
obligor") in any manner, whether directly or indirectly, including, without
- -------
limitation, any obligation of the guaranteeing person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (ii) to advance or supply
funds (1) for the purchase or payment of any such primary obligation or (2) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation or (iv) otherwise to assure or hold harmless
the owner of any such primary obligation against loss in respect thereof;
provided, however, that the term Guarantee Obligation shall not include
- -------- -------
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by
such guaranteeing person in good faith.
"Guarantor": as defined in the preamble.
---------
"Increased Commitment Addendum": an agreement, substantially in the
-----------------------------
form attached hereto as Exhibit H, made by a Lender and accepted by the Obligors
and the Administrative Agent in accordance with Section 2.14.
"Indebtedness": of any Person at any date, (a) all indebtedness of
------------
such Person for borrowed money (including, without limitation, deposits but
excluding non-interest bearing deposits classified as official checks of such
Person) or for the deferred purchase price of property or services (other than
trade liabilities and other current or accrued liabilities arising in
<PAGE>
10
the ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by a
note, bond, debenture, credit agreement or similar instrument, (c) all
obligations of such Person under Financing Leases, (d) all obligations of such
Person in respect of acceptances issued or created for the account of such
Person and (e) all indebtedness for borrowed money secured by any Lien on any
property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof; provided, however, that the
-------- -------
term Indebtedness shall not include any repurchase obligation of such Person
with a term of no more than three months with respect to book-entry U.S.
Government securities where the repurchase obligation matures no later than the
maturity of underlying government securities and where such Person owns the
corresponding underlying government securities.
"Insured Depository Institution": an "insured depository institution"
------------------------------
as defined in the FDIA, 12 U.S.C.A. (S) 1813(c)(2) (or any successor provision
of the FDIA).
"Interest Period":
---------------
(a) with respect to any Eurodollar Loan, each period commencing on
the date such Eurodollar Loan is made or Converted from a Loan of another
Type or the last day of the next preceding Interest Period for such Loan
and ending on (1) the numerically corresponding day in the first, second,
third or sixth calendar month thereafter, as the Borrower may select as
provided in Section 4.05, except that each Interest Period that commences
on the last Business Day of a calendar month (or on any day for which there
is no numerically corresponding day in the appropriate subsequent calendar
month) shall end on the last Business Day of the appropriate subsequent
calendar month or (2) for any period of less than one month or more than
six months selected by the Borrower and acceptable to each Lender as
provided in Section 4.05, the last day of such period;
(b) with respect to any Set Rate Loan, the period commencing on the
date such Set Rate Loan is made and ending on any Business Day at least
seven days thereafter, as the Borrower may select as provided in Section
2.03(b); and
(c) with respect to any LIBOR Market Loan, the period commencing on
the date such LIBOR Market Loan is made and ending on the numerically
corresponding day in that number of calendar months thereafter as the
Borrower may select as provided in
Section 2.03(b), except that each such Interest Period that commences on
the last Business Day of a calendar month (or any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar
month.
Notwithstanding the foregoing: (i) if any Interest Period for any Eurodollar
Loan or Competitive Bid Option Loan would otherwise end after the Termination
Date, such Interest Period shall, subject to clause (iii) below, end on the
Termination Date; (ii) subject to clause (i) above, each Interest Period that
would otherwise end on a day which is not a Business Day shall end on the
<PAGE>
11
next succeeding Business Day (or, in the case of an Interest Period for a
Eurodollar Loan or a LIBOR Market Loan, if such next succeeding Business Day
falls in the next succeeding calendar month, on the next preceding Business
Day); and (iii) subject to clause (ii) above, except as permitted in Section
4.05, no Interest Period for any Loan (other than a Set Rate Loan or a Swing
Line Loan) shall have a duration of less than one month (in the case of a
Eurodollar Loan or a LIBOR Market Loan) and, if the Interest Period for any
Eurodollar Loan or LIBOR Market Loan would otherwise be a shorter period, a
Eurodollar Loan or LIBOR Market Loan shall not be available hereunder for such
period.
"Lenders": as defined in the preamble.
-------
"LIBO Margin": as defined in Section 2.03(c)(ii)(C).
-----------
"LIBO Rate": for any LIBOR Market Loan, a rate per annum equal to the
---------
Eurodollar Rate for the Interest Period for such Loan.
"LIBOR Auction": a solicitation of CBO Quotes setting forth LIBO
-------------
Margins based on the LIBO Rate pursuant to Section 2.03.
"LIBOR Market Loans": Competitive Bid Option Loans interest rates on
------------------
which are determined on the basis of LIBO Rates pursuant to a LIBOR Auction.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Financing Lease
having substantially the same economic effect as any of the foregoing).
"Loan": any loan made by any Lender pursuant to this Agreement.
----
"Majority Lenders": at any time, Lenders the Commitment Percentages
----------------
of which aggregate more than 50%.
"Managed Receivables" : as of any date of determination, with respect
-------------------
to the Guarantor, the aggregate of Receivables consisting of (a) on-balance
sheet Receivables (including secured credit card Receivables) of the Guarantor
and its Consolidated Subsidiaries (but excluding any charged-off Receivables
owned or acquired by the Guarantor or its Consolidated Subsidiaries) and (b)
Receivables (including secured credit card Receivables) transferred or pledged
by the Guarantor or any of its Consolidated Subsidiaries in a Securitization
(but excluding any charged-off Receivables owned or acquired by the Guarantor or
its Consolidated Subsidiaries prior to such transfer).
"Material Adverse Effect": with respect to any Obligor, a material
-----------------------
adverse effect on (a) the financial condition of such Obligor and its
Subsidiaries taken as a whole, (b) the ability
<PAGE>
12
of such Obligor to perform its material obligations under any of the Credit
Documents to which it is a party, (c) the validity or enforceability of any
material provisions of the Credit Documents or (d) the rights and remedies of
the Lenders and the Administrative Agent under any of the Credit Documents.
"Material Subsidiary": as to any Person, a Subsidiary, in which (a)
-------------------
such Person's and its other Subsidiaries' proportionate share of the total
assets (after intercompany eliminations) of such Subsidiary exceeds 10 percent
of the total assets of such Person and its Subsidiaries consolidated as of the
end of the most recently completed fiscal year; or (b) such Person's and its
other Subsidiaries' equity in the income from continuing operations before
income taxes, extraordinary items, and the cumulative effect of a change in
accounting principles of such Subsidiary exceeds 10 percent of such income of
such Person and its Subsidiaries consolidated for the most recently completed
fiscal year.
"Moody's": Moody's Investors Service, Inc.
-------
"New Lender": as defined in Section 2.13.
----------
"Non-Performing Assets": as of any date of determination, with respect
---------------------
to the Guarantor, the sum (determined with respect to the Guarantor and its
Subsidiaries on a consolidated basis without duplication in accordance with
GAAP) of (a) all Managed Receivables the minimum payments on which are at least
91 days overdue on such date plus (b) all other Managed Receivables which are on
----
a non-accrual basis; provided that Managed Receivables that are credit card
--------
loans, whether or not at least 91 days overdue, shall not constitute "Non-
Performing Assets" to the extent of any deposit balance maintained by the
account debtor with the creditor or an affiliate of such creditor (but only to
the extent such creditor is entitled under an agreement governing such credit
card loan to set-off such deposit balance against the obligations of the account
debtor under such loan and to the extent such balances are not subject to any
other set-off or deduction by such creditor or any of its affiliates against
another matured obligation owing by such debtor).
"Obligations": the collective reference to the unpaid principal of
-----------
and interest on the Loans and all other amounts owing by the Borrowers to the
Administrative Agent and the Lenders (including, without limitation, interest
accruing at the then applicable rate provided in this Agreement after the
maturity of the Loans and interest accruing at the then applicable rate provided
in this Agreement after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
any Borrower whether or not a claim for post-filing or post-petition interest is
allowed in such proceeding), whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred under this Agreement
or any other Credit Document, in each case whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses or
otherwise (including, without limitation, all fees and disbursements of counsel
to the Administrative Agent or to the Lenders that are required to be paid by
the Borrowers pursuant to the terms of this Agreement).
<PAGE>
13
"Obligors": as defined in the preamble.
--------
"OCC": the United States Office of the Comptroller of Currency.
---
"Participants": as defined in Section 13.06(c).
------------
"PB": as defined in the preamble.
--
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
----
to Subtitle A of Title IV of ERISA, or any successor thereto.
"Person" shall mean an individual, partnership, corporation, business
------
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which is
----
covered by ERISA and in respect of which a Borrower or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"PNB": as defined in the preamble.
---
"Post-Default Rate": in respect of any principal of or interest on
-----------------
any Loan or any other amount under this Agreement or any other Credit Document
that is not paid when due, after giving effect to any applicable grace period
(whether at stated maturity, by acceleration, by mandatory prepayment or
otherwise), a rate per annum during the period from and including the due date
to but excluding the date on which such amount is paid in full equal to 2% plus
----
the ABR as in effect from time to time (provided that, if the amount so in
--------
default is principal of a Eurodollar Loan or a Competitive Bid Option Loan and
the due date thereof is a day other than the last day of the Interest Period
therefor, the "Post-Default Rate" for such principal shall be, for the period
from and including such due date to but excluding the last day of the Interest
Period,
2% plus the interest rate for such Loan as provided in Section 3.02 and,
----
thereafter, the rate provided for above in this definition).
"Principal Office": the principal office of Chase, located on the date
----------------
hereof at 270 Park Avenue, New York, New York 10017, Attention: Financial
Institutions Division, 36th Floor.
"Quarterly Dates": the last day of March, June, September and December
---------------
in each year; provided that if any such day is not a Business Day, then such
--------
Quarterly Date shall be the next preceding Business Day.
"Quotation Date": as defined in Section 2.03(b).
--------------
<PAGE>
14
"Receivable": any amount owing, from time to time, with respect to a
----------
credit card, consumer revolving or consumer installment loan account, home
equity line of credit or residential mortgage loan account or other consumer
receivable owned by a Borrower, including without limitation, amounts owing for
payment of goods and services, cash advances, convenience checks, annual
membership fees, finance charges, late charges, credit insurance premiums and
cash advance fees and fees relating to additional consumer products.
"Reference Lender": Chase or any successor designated pursuant to
----------------
Section 2.05(c).
"Register": as defined in Section 13.06(h).
--------
"Regulation U": Regulation U of the Board of Governors of the Federal
------------
Reserve System as in effect from time to time.
"Regulatory Change": with respect to any Lender, any change after the
-----------------
date of this Agreement in Federal, state or foreign law or regulations (other
than a voluntary change by such Lender of its status from a national bank to a
state bank or thrift or vice versa) or the adoption or making after such date of
any interpretation, directive or request applying to a class of banks or
financial institutions including such Lender of or under any Federal, state or
foreign law or regulations (whether or not having the force of law and whether
or not failure to comply therewith would be unlawful) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Requirement of Law": as to any Person, the Certificate of
------------------
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Responsible Officer": with respect to any Obligor, the chairman of
-------------------
the board, the chief executive officer, president, chief financial officer,
treasurer, vice president, funding, or
any executive vice president or senior vice president of such Obligor or, with
respect to financial matters, the chief financial officer, treasurer, vice
president, funding, or controller of such Obligor; provided, that the term
--------
Responsible Officer shall also include any officer of such Obligor having a
different title but performing the same or similar functions as the above-
designated officers.
"S&P": Standard & Poor's Ratings Services.
---
"Securitization": the transfer or pledge of assets or interests in
--------------
assets to a trust, partnership, corporation or other entity, which transfer or
pledge is funded by such entity in whole or in part by the issuance of
instruments or securities that are paid principally from the cash flow derived
from such assets or interests in assets.
<PAGE>
15
"Set Rate": as defined in Section 2.03(c)(ii)(D).
--------
"Set Rate Auction": a solicitation of CBO Quotes setting forth Set
----------------
Rates pursuant to Section 2.03.
"Set Rate Loans": Competitive Bid Option Loans the interest rates on
--------------
which are determined on the basis of Set Rates pursuant to a Set Rate Auction.
"Subordinated Debt" : with respect to any Person, any unsecured
-----------------
indebtedness of such Person the payment of the principal of and interest on
which by its terms is specifically subordinate and junior in right of payment to
the Loans in the event of any liquidation or dissolution of such Person or any
distribution of the assets of such Person upon bankruptcy, reorganization,
receivership or similar proceeding.
"Subsidiary" : as to any Person, a corporation, partnership or other
----------
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person.
"Swing Line Amount": $100,000,000.
-----------------
"Swing Line Base Rate Loans": Swing Line Loans that bear interest at
--------------------------
rates based upon the ABR.
"Swing Line Commitment": the obligation of the Swing Line Lenders to
---------------------
make, on a pro rata basis, Swing Line Loans in an aggregate amount at any one
time outstanding up to but not exceeding the Swing Line Amount.
"Swing Line Lenders": Chase, NationsBank, N.A., Citicorp USA, Inc. and
------------------
Credit Suisse First Boston.
"Swing Line Loans": as defined in Section 2.04(a).
----------------
"Swing Line Federal Funds Loans": Swing Line Loans that bear interest
------------------------------
at rates based upon the Swing Line Federal Funds Rate.
"Swing Line Federal Funds Rate": the Federal Funds Rate in effect on
-----------------------------
such day plus 3/4 of 1%.
"Syndicated Loans": as defined in Section 2.01.
----------------
<PAGE>
16
"Syndication Agents": NationsBanc Montgomery Securities LLC, Citicorp
------------------
USA, Inc. and Credit Suisse First Boston.
"Termination Date": (i) (A) the First Scheduled Termination Date or
----------------
(B) if the Termination Date has been extended pursuant to Section 2.12, the
Extended Termination Date, or (ii) such earlier date as the Commitments shall be
terminated pursuant to Section 2.05(b) or 11.
"Tier 1 Capital": as of any date of determination, with respect to
--------------
the Guarantor, the amount of Tier 1 Capital of the Guarantor and its
Consolidated Subsidiaries, as determined in accordance with applicable
regulatory risk-based capital guidelines (regardless of whether the Guarantor is
then required to comply with such guidelines).
"Tier 1 Capital to Managed Receivables Ratio" : as of any date of
-------------------------------------------
determination, with respect to the Guarantor, the ratio of (a) Tier 1 Capital,
to (b) Managed Receivables on such date.
"Type": as to any Loan, its nature as an ABR Loan, a Eurodollar Loan,
----
a Swing Line Base Rate Loan, a Swing Line Federal Funds Loan, a LIBOR Market
Loan or a Set Rate Loan.
"Unrefunded Swing Line Loans": as defined in Section 2.04(d).
---------------------------
"Utilization Fee": as defined in Section 2.06(b).
---------------
"Utilization Fee Rate": on any date, the applicable percentage set
--------------------
forth below based upon the lower of the highest two ratings (or if neither of
such highest two ratings is lower, the highest rating) assigned by S&P, Moody's
and D&P, respectively, applicable on such date to senior unsecured indebtedness
of PNB:
<TABLE>
<CAPTION>
Applicable Rating Utilization Fee
- -----------------------------------------------------------------
<S> <C>
BBB+ or higher by S&P or D&P .050%
Baa1 or higher by Moody's
- -----------------------------------------------------------------
BBB by S&P or D&P
Baa2 by Moody's .100%
- -----------------------------------------------------------------
BBB- by S&P or D&P
Baa3 by Moody's .125%
- -----------------------------------------------------------------
BB+ by S&P or D&P
Ba1 by Moody's .250%
- -----------------------------------------------------------------
BB by S&P or D&P
Ba2 by Moody's .250%
- -----------------------------------------------------------------
</TABLE>
<PAGE>
17
1.02 Other Definitional Provisions.
-----------------------------
(a) Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in any certificate or other
document made or delivered pursuant hereto.
(b) As used herein, and any certificate or other document made or
delivered pursuant hereto, accounting terms relating to the Obligors and their
respective Subsidiaries not defined in Section 1.01 and accounting terms partly
defined in Section 1.01, to the extent not defined, shall have the respective
meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, Schedule and
Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
Section 2. Amount and Terms of Commitments.
-------------------------------
2.01 Syndicated Loan Commitments.
---------------------------
(a) Subject to the terms and conditions hereof, each Lender severally
agrees to make Syndicated Loans ("Syndicated Loans") to any and each Borrower
----------------
severally and not jointly from time to time during the Commitment Period on any
Business Day in an aggregate principal amount at any one time outstanding not to
exceed the amount of such Lender's Commitment; provided that the aggregate
--------
principal amount of all Syndicated Loans, together with the aggregate principal
amount of all Competitive Bid Option Loans and all Swing Line Loans at any one
time outstanding to all the Borrowers shall not exceed an amount equal to the
aggregate amount of the Commitments in effect at such time. During the
Commitment Period each Borrower may use the Commitments by borrowing, prepaying
the Syndicated Loans in whole or in part, reborrowing, Converting Syndicated
Loans of one Type into Syndicated Loans of another Type or Continuing Syndicated
Loans of one Type as Syndicated Loans of the same Type, all in accordance with
the terms and conditions hereof.
(b) The Syndicated Loans may from time to time be (i) Eurodollar
Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the
applicable Borrower and notified to the Administrative Agent in accordance with
Sections 2.02 and 2.10, provided that no Syndicated Loan shall be made as a
--------
Eurodollar Loan after the day that is one month prior to the Termination Date.
(c) The Competitive Bid Option Loans and Swing Line Loans made by a
Lender shall not reduce the Commitment of such Lender to make Syndicated Loans,
except to the extent that the aggregate principal amount of all Syndicated
Loans, together with the aggregate
<PAGE>
18
principal amount of all Competitive Bid Option Loans and all Swing Line Loans at
any one time outstanding to all the Borrowers shall exceed an amount equal to
the aggregate amount of the Commitments in effect at such time.
2.02 Procedure for Syndicated Loan Borrowing. Each Borrower may
---------------------------------------
borrow under the Commitments during the Commitment Period on any Business Day,
provided that each Borrower shall give the Administrative Agent irrevocable
- --------
notice prior to 11:00 A.M., New York City time, (a) three Business Days prior
to the requested Borrowing Date, if all or any part of the requested Syndicated
Loans are to be initially Eurodollar Loans, or (b) on the requested Borrowing
Date, otherwise, specifying (i) the amount to be borrowed, (ii) the requested
Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR
Loans or a combination thereof and (iv) if the borrowing is to be entirely or
partly of Eurodollar Loans, the amount of such Type of Loan and the length of
the initial Interest Period therefor. Each borrowing under the Commitments
shall be in an amount equal to (x) in the case of ABR Loans, at least $5,000,000
(or, if the then Available Commitments are less than $5,000,000, such lesser
amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple
of $1,000,000 in excess thereof. Upon receipt of any such notice from a
Borrower, the Administrative Agent shall promptly notify each Lender thereof.
Each Lender will make the amount of its pro rata share of each borrowing
--- ----
available to the Administrative Agent for the account of such Borrower at
account number 323-506569 maintained by the Administrative Agent with Chase at
the Principal Office prior to 1:00 P.M., New York City time, on the Borrowing
Date requested by such Borrower in funds immediately available to the
Administrative Agent. Such borrowing will then be made available to such
Borrower by the Administrative Agent by depositing the aggregate of the amounts
made available to the Administrative Agent by the Lenders, in like funds as
received by the Administrative Agent, in the account of such Borrower at such
office, or in another account designated by such Borrower in a notice to the
Administrative Agent hereunder.
2.03 Competitive Bid Option Loans.
----------------------------
(a) Subject to the terms and conditions of this Agreement, any
Borrower may request the Lenders to make offers to make Competitive Bid Option
Loans to such Borrower from time to time during the Commitment Period on any
Business Day. The Lenders may, but shall have no obligation to, make such
offers and such Borrower may, but shall have no obligation to, accept any such
offers in the manner set forth in this Section 2.03. Competitive Bid Option
Loans may be LIBOR Market Loans or Set Rate Loans, provided that the aggregate
--------
principal amount of all Competitive Bid Option Loans, together with the
aggregate principal amount of all Syndicated Loans and all Swing Line Loans, at
any one time outstanding to all Borrowers shall not exceed an amount equal to
the aggregate amount of the Commitments at such time.
(b) When any Borrower wishes to request offers to make Competitive
Bid Option Loans, it shall give the Administrative Agent (which shall promptly
notify the Lenders) notice (a "CBO Quote Request") no later than 11:00 a.m., New
-----------------
York City time, on (x) the fourth Business Day prior to the date of borrowing
proposed therein, in the case of a LIBOR Auction or (y) the
<PAGE>
19
Business Day next preceding the date of borrowing proposed therein, in the case
of a Set Rate Auction (or, in any such case, such other time and date as such
Borrower and the Administrative Agent, with the consent of the Majority Lenders,
may agree). Each Borrower may request offers to make Competitive Bid Option
Loans for up to three different Interest Periods in a single notice (for which
purpose Interest Periods in different lettered clauses of the definition of the
term "Interest Period" shall be deemed to be different Interest Periods even if
they are coterminous); provided that the request for each separate Interest
--------
Period shall be deemed to be a separate CBO Quote Request for a separate
borrowing (a "Competitive Bid Option Borrowing"). Each such notice shall be
--------------------------------
substantially in the form of Exhibit B hereto and shall specify as to each
Competitive Bid Option Borrowing:
(i) the proposed date of such borrowing, which shall be a Business
Day;
(ii) the aggregate amount of such Competitive Bid Option Borrowing,
which shall be at least $5,000,000 (or a larger whole multiple of
$1,000,000) but shall not cause the limit specified in Section 2.03(a) to
be violated;
(iii) the duration of the Interest Period applicable thereto,
provided that, in the case of LIBOR Market Loans, such Interest Period may
--------
not be more than six months;
(iv) whether the CBO Quotes requested for a particular Interest
Period are for LIBOR Market Loans or Set Rate Loans; and
(v) if the CBO Quotes requested are for Set Rate Loans, the date
on which the CBO Quotes are to be submitted if it is before the proposed
date of borrowing (the date on which such CBO Quotes are to be submitted is
called the "Quotation Date").
--------------
(c)(i) Each Lender may submit one or more CBO Quotes, each containing
an offer to make a Competitive Bid Option Loan in response to any CBO Quote
Request; provided that, if a Borrower's request under Section 2.03(b) specified
--------
more than one Interest Period, such Lender may make a single submission
containing one or more CBO Quotes for each such Interest Period. Each CBO Quote
must be submitted to the Administrative Agent not later than (x) 2:30 p.m., New
York City time, on the fourth Business Day prior to the proposed date of
borrowing, in the case of a LIBOR Auction or (y) 9:45 a.m., New York City time,
on the Quotation Date, in the case of a Set Rate Auction (or, in any such case,
such other time and date as the Borrower requesting such bids and the
Administrative Agent, with the consent of the Majority Lenders, may agree);
provided that any CBO Quote may be submitted by the Administrative Agent (or its
- --------
Applicable Lending Office) only if the Administrative Agent (or such Applicable
Lending Office) notifies the requesting Borrower of the terms of the offer
contained therein not later than (x) 2:15 p.m., New York City time, on the
fourth Business Day prior to the proposed date of borrowing, in the case of a
LIBOR Auction or (y) 9:30 a.m., New York City time, on the Quotation Date, in
the case of a Set Rate Auction. Subject to Sections 5.03, 6.02 and 11 hereof,
any CBO Quote so made shall be irrevocable except with the consent of the
Administrative Agent given on the instructions of the requesting Borrower.
<PAGE>
20
(ii) Each CBO Quote shall be substantially in the form of Exhibit C
hereto and shall specify:
(A) the proposed date of borrowing (which shall be a Business Day)
and the Interest Period therefor;
(B) the principal amount of the Competitive Bid Option Loan for
which each such offer is being made, which principal amount shall be at
least $5,000,000 (or a larger whole multiple of $1,000,000); provided that
--------
the aggregate principal amount of all Competitive Bid Option Loans for
which a Lender submits CBO Quotes (x) may be greater or less than the
Available Commitment of such Lender but (y) may not exceed the principal
amount of the Competitive Bid Option Borrowing for a particular Interest
Period for which offers were requested;
(C) in the case of a LIBOR Auction, the margin above or below the
applicable LIBO Rate (the "LIBO Margin") offered for each such Competitive
-----------
Bid Option Loan, expressed as a percentage (rounded, if necessary, to the
nearest 1/10,000th of 1%) to be added to or subtracted from the applicable
LIBO Rate;
(D) in the case of a Set Rate Auction, the rate of interest per
annum (rounded, if necessary, to the nearest 1/10,000th of 1%) offered for
each such Competitive Bid Option Loan (the "Set Rate"); and
--------
(E) the identity of the quoting Lender.
Unless otherwise agreed by the Administrative Agent and the requesting Borrower,
no CBO Quote shall contain qualifying, conditional or similar language or
propose terms other than or in addition to those set forth in the applicable CBO
Quote Request (other than a condition limiting the aggregate amount of
Competitive Bid Option Loans for which such CBO Quote may be accepted) and, in
particular, no CBO Quote may be conditioned upon acceptance by such Borrower of
all (or some specified minimum other than set forth herein) of the principal
amount of the Competitive Bid Option Loans for which such CBO Quote is being
made.
(d) The Administrative Agent shall (x) in the case of a Set Rate
Auction, as promptly as practicable after the CBO Quote is submitted (but in any
event not later than 10:15 a.m., New York City time, on the Quotation Date) or
(y) in the case of a LIBOR Auction, by 4:00 p.m., New York City time, on the day
a CBO Quote is submitted, notify the requesting Borrower of the terms (i) of any
CBO Quote submitted by a Lender in accordance with Section 2.03(c) and (ii) of
any CBO Quote that amends, modifies or is otherwise inconsistent with a previous
CBO Quote submitted by such Lender with respect to the same CBO Quote Request.
Any such subsequent CBO Quote shall be disregarded by the Administrative Agent
unless such subsequent CBO Quote is submitted solely to correct a manifest error
in such former CBO Quote. The Administrative Agent's notice to the requesting
Borrower shall specify (A) the aggregate principal amount of the Competitive Bid
Option Borrowing for which offers have been
<PAGE>
21
received and (B) the respective principal amounts and LIBO Margins or Set Rates,
as the case may be, so offered by each Lender (identifying the Lender that made
each CBO Quote).
(e) Not later than (x) 10:00 a.m., New York City time, on the
third Business Day prior to the proposed date of borrowing, in the case of a
LIBOR Auction or (y) 11:00 a.m., New York City time, on the Quotation Date, in
the case of a Set Rate Auction (or, in any such case, such other time and date
as the requesting Borrower and the Administrative Agent, with the consent of the
Majority Lenders, may agree), the requesting Borrower shall notify the
Administrative Agent of its acceptance or nonacceptance of the offers so
notified to it pursuant to Section 2.03(d) (and the failure of the requesting
Borrower to give such notice by such time shall constitute nonacceptance) and
the Administrative Agent shall promptly notify each affected Lender. In the case
of acceptance, such notice shall be in substantially the form of Exhibit D-1
hereto and shall specify the aggregate principal amount of offers that are
accepted for each Interest Period. The requesting Borrower may accept any CBO
Quote in whole or in part (provided that any CBO Quote accepted in part shall be
--------
at least $5,000,000 or a larger whole multiple of $1,000,000, but provided,
--------
further, that the CBO Quote with the highest LIBO Margin or Set Rate of the CBO
- -------
Quotes that are accepted for each Competitive Bid Option Borrowing may be
accepted in part for less than $5,000,000, but shall be for at least $1,000,000
or a larger whole multiple thereof); provided that:
--------
(i) the aggregate principal amount of each Competitive Bid Option
Borrowing may not exceed the applicable amount set forth in the related CBO
Quote Request;
(ii) the aggregate principal amount of each Competitive Bid Option
Borrowing shall be at least $5,000,000 (or a larger whole multiple of
$1,000,000) but shall not cause the limits specified in Section 2.03(a) to
be violated;
(iii) acceptance of offers may be made only in ascending order of
LIBO Margins or Set Rates, as the case may be, in each case beginning with
the lowest rate so offered; and
(iv) the requesting Borrower may not accept any offer where the
Administrative Agent has advised such Borrower that such offer fails to
comply with Section 2.03(c)(ii) or otherwise fails in any material respect
to comply with the requirements of this Agreement (including, without
limitation, Section 2.03(a)).
If offers are made by two or more Lenders with the same LIBO Margins or Set
Rates, as the case may be, for a greater aggregate principal amount than the
amount in respect of which offers are accepted for the related Interest Period,
the principal amount of Competitive Bid Option Loans in respect of which such
offers are accepted shall be allocated by the requesting Borrower among such
Lenders as nearly as possible (in amounts of at least $5,000,000 or larger whole
multiples of $1,000,000, except that if such Lenders' LIBO Margins or Set Rates
are the highest of those accepted, such Borrower may allocate Competitive Bid
Option Loans to such Lenders in amounts of less than $5,000,000, but such Loans
shall be for at least $1,000,000 or a larger whole multiple thereof) in
proportion to the aggregate principal amount of such offers.
<PAGE>
22
Determinations by the requesting Borrower of the amounts of Competitive Bid
Option Loans shall be conclusive in the absence of manifest error.
Notwithstanding anything else herein to the contrary, the requesting Borrower
shall not be obligated to accept any CBO Quote unless it shall have delivered a
notice of acceptance as provided in this Section 2.03(e).
(f) Any Lender whose offer to make any Competitive Bid Option Loan
has been accepted shall, not later than 1:00 p.m., New York City time, on the
date specified for the making of such Loan, make the amount of such Loan
available to the Administrative Agent at account number 323-506569 maintained by
the Administrative Agent with Chase at the Principal Office in immediately
available funds, for account of the requesting Borrower. Such borrowing will
then be made available to such Borrower by the Administrative Agent by
depositing the aggregate of the amounts made available to the Administrative
Agent by the Lenders, in like funds as received by the Administrative Agent, in
the account of such Borrower at such office, or in another account designated by
such Borrower in a notice to the Administrative Agent hereunder.
(g) Except for the purpose and to the extent expressly stated in
Section 2.05(b) and Section 2.06(b), the amount of any Competitive Bid Option
Loan made by any Lender shall not constitute a utilization of such Lender's
Commitment.
(h) Promptly following each Competitive Bid Option Borrowing, the
Administrative Agent shall notify each Lender of the ranges of bids submitted
and the highest and lowest bids accepted for each Interest Period requested by
the requesting Borrower and the aggregate amount borrowed pursuant to such
Competitive Bid Option Borrowing.
(i) Each Borrower which makes a Competitive Bid Loan request shall
pay to the Administrative Agent an administrative fee of $1,000 (regardless of
the number of Interest Periods in such request).
2.04 Swing Line Loans.
----------------
(a) Each Borrower may request the Swing Line Lenders to make, on a
pro rata basis, and the Swing Line Lenders agree, upon the terms and subject to
- --- ----
the conditions hereof, to make, on a pro rata basis, loans (each, a "Swing Line
--- ---- ----------
Loan") to such Borrower from time to time during the Commitment Period on any
- ----
Business Day in an aggregate amount not to exceed at any time outstanding the
Swing Line Commitment in effect at such time; provided, that (i) the aggregate
--------
principal amount of all Swing Line Loans, together with the aggregate principal
amount of all Competitive Bid Option Loans and all Syndicated Loans at the time
outstanding to all Borrowers shall not exceed an amount equal to the aggregate
amount of the Commitments in effect at such time, and (ii) the aggregate
principal amount of all Swing Line Loans made by such Swing Line Lender,
together with the aggregate principal amount of all Syndicated Loans made by
such Swing Line Lender at the time outstanding to all Borrowers, shall not
exceed the greater of such Swing Line Lender's Commitment or such Swing Line
Lender's pro rata share of the Swing Line Commitment in effect at such time.
--------
Each borrowing of Swing Line Loans shall be in an amount not less than
$2,500,000 and in integral multiples of $500,000 in excess thereof,
<PAGE>
23
and shall bear interest as provided in Section 3.02. On the terms and subject to
the conditions of this Agreement, each Borrower may borrow under this Section
2.04, repay pursuant to Section 3.01 or prepay and reborrow under this Section
2.04.
(b) Each borrowing of Swing Line Loans shall be made on notice, given
not later than 3:00 p.m., New York City time, on the date of the proposed
borrowing, by the Borrower requesting such Swing Line Loan to the Administrative
Agent. The Administrative Agent shall give prompt notice thereof to each of the
Swing Line Lenders. Each such notice of a borrowing of Swing Line Loans shall
be substantially in the form of Exhibit D-3 hereto (a "Notice of Swing Line
--------------------
Borrowing") and shall be by telephone (promptly confirmed in writing by
- ---------
telecopy), telecopy or delivered by hand, specifying therein (i) the requested
date of such borrowing; (ii) the requested amount of such borrowing and (iii)
whether the Swing Line Loans requested by such notice will bear interest at the
Swing Line Federal Funds Rate or the ABR. The Swing Line Lender will make such
borrowing available to the Administrative Agent within two (2) hours after
receipt of such notice of such borrowing at account number 323-506569 maintained
by the Administrative Agent with Chase at the Principal Office in immediately
available funds, for account of the requesting Borrower. Such borrowing will
then be made available to such Borrower by the Administrative Agent by
depositing the aggregate of the amounts made available to the Administrative
Agent by the Swing Line Lenders, in like funds as received by the Administrative
Agent, in the account of such Borrower at such office, or in another account
designated by such Borrower in a notice to the Administrative Agent hereunder.
(c) The amount of each Swing Line Loan shall be payable on the
seventh (7th) Business Day following the making of such Loan and in any event on
the Termination Date. A Borrower may prepay any Swing Line Loan on any Business
Day only upon notice, which shall be irrevocable, to the Administrative Agent,
received by the Administrative Agent not later than 12:00 noon, New York City
time, on such Business Day and otherwise given in accordance with Section 4.05.
Notwithstanding the occurrence of any Default or Event of Default or
noncompliance with the conditions precedent set forth in Section 6, if any Swing
Line Loans shall remain outstanding at 10:00 A.M., New York City time, on the
seventh Business Day following the Borrowing Date thereof and if by such time on
such seventh Business Day the Administrative Agent shall have received neither
(i) a notice of borrowing delivered pursuant to Section 2.02 requesting that
Loans be made pursuant to Section 2.01 on such Business Day in an amount at
least equal to the aggregate principal amount of such Swing Line Loans, nor (ii)
any other notice indicating the related Borrower's intent to repay such Swing
Line Loans with funds obtained from other sources, the Administrative Agent
shall be deemed to have received a Notice of Borrowing from such Borrower
pursuant to Section 2.02 requesting that ABR Loans be made pursuant to Section
2.01 on such Business Day in an amount equal to the aggregate amount of such
Swing Line Loans, and the procedures set forth in Section 2.02 shall be followed
in making such ABR Loans. The proceeds of such ABR Loans shall be applied to
repay such Swing Line Loans.
(d) If, for any reason, ABR Loans may not be made pursuant to
paragraph (c) of this Section 2.04 to repay Swing Line Loans as required by such
paragraph, effective on the date such ABR Loans would otherwise have been made,
each Lender severally agrees that it shall
<PAGE>
24
unconditionally and irrevocably, without regard to the occurrence of any Default
or Event of Default, to the extent of such Lender's Commitment Percentage,
purchase a participating interest in such Swing Line Loans ("Unrefunded Swing
----------------
Line Loans"). Each Lender will transfer to the Administrative Agent, in
- ----------
immediately available funds, the amount of its participation, and the proceeds
of such participation shall be distributed by the Administrative Agent to the
relevant Swing Line Lender in such amount as will reduce the amount of the
participating interest retained by such Swing Line Lender in its Swing Line
Loans to its Commitment Percentage of the ABR Loans which were to have been made
pursuant to paragraph (c) of this Section 2.04. Each Lender shall share on a pro
---
rata basis (calculated by reference to its participating interest in such Swing
- ----
Line Loans) in any interest which accrues thereon and in all repayments thereof.
All payments in respect of Unrefunded Swing Line Loans and participations
therein shall be made in accordance with Section 4.02.
2.05 Changes of Commitments.
----------------------
(a) The aggregate amount of the Commitments and the Swing Line
Commitments shall be automatically reduced to zero on the Termination Date.
(b) The Borrowers shall have the right at any time or from time to
time (i) so long as no Swing Line Loans, Syndicated Loans or Competitive Bid
Option Loans are outstanding, to terminate the Commitments and (ii) to reduce
the aggregate unused amount of the Commitments (for which purpose use of the
Commitments shall be deemed to include the aggregate principal amount of all
Swing Line Loans, Competitive Bid Option Loans and Syndicated Loans); provided
--------
that (x) the Borrowers shall give notice of each such termination or reduction
as provided in Section 4.05 and (y) each partial reduction shall be in an
aggregate amount at least equal to $10,000,000 or in whole multiples of
$1,000,000 in excess thereof or, if less, the amount of the Available
Commitments.
(c) Provided that no Default or Event of Default shall have occurred
and be continuing, the Borrowers, may, at any time, replace any Lender that has
requested compensation from any Borrower pursuant to Section 5.01 or 5.06 or
whose obligations in respect of Eurodollar Loans or LIBOR Market Loans have been
suspended pursuant to Section 5.03 by giving not less than ten (10) Business
Days' prior notice to the Administrative Agent (which shall promptly notify such
Lender) that it intends to replace such Lender with respect to its Commitment
with one or more banks or financial institutions (including, but not limited to,
any other Lender under this Agreement) selected by the Borrowers and acceptable
to the Administrative Agent (which acceptance shall not be unreasonably
withheld). Upon the effective date of any replacement under this Section
2.05(c) and as a condition to such replacement, (i) the replacement bank or
financial institution shall purchase the Loans of the Lender being replaced and
such Lender's rights hereunder for a purchase price equal to the outstanding
principal amount of the Loans payable to such Lender plus accrued and unpaid
interest on such Loans and accrued and unpaid Facility Fees or Utilization Fees
and any other amounts payable to such Lender hereunder and (ii) an Assignment
and Acceptance shall be executed and delivered by such Lender and replacement
bank or financial institution at the expense of the Borrowers and accepted by
the Administrative Agent as provided in Section 13.06(b), whereupon such
<PAGE>
25
replacement bank or financial institution shall become a "Lender" for all
purposes of this Agreement having a Commitment in the amount of such Lender's
Commitment assumed by it, and such Commitment of the Lender being replaced shall
be terminated upon such effective date and all of such Lender's rights and
obligations under this Agreement shall terminate (provided that the obligations
--------
of the Borrowers under Sections 5.01, 5.05, 5.06 and 13.03 to such Lender shall
survive such replacement as provided in Section 13.07). If the Commitment of
the Reference Lender shall terminate (other than pursuant to Section 11 hereof)
such Reference Lender shall thereupon cease to be the Reference Lender and the
Administrative Agent (with the approval of the Borrowers, such approval not to
be unreasonably withheld) shall, by notice to the Borrowers and the Lenders,
designate another Lender as the Reference Lender, so that there shall at all
times be a Reference Lender.
(d) The Commitments once terminated or reduced may not be reinstated.
2.06. Fees.
----
(a) The Borrowers jointly and severally agree to pay to the
Administrative Agent for the account of each Lender a fee (a "Facility Fee") on
------------
the average daily amount of such Lender's Commitment (whether or not such
Commitment has been used, in whole or in part, by the making of Loans hereunder)
for the period from and including the date of this Agreement to but not
including the earlier of the date such Commitment is terminated and the
Termination Date, at a rate per annum equal to the Facility Fee Rate in effect
from time to time. Accrued Facility Fees shall be payable in arrears on each
Quarterly Date and on the earlier of the date the Commitments are terminated and
the Termination Date.
(b) For any day on which the aggregate principal amount of all Loans
outstanding on such day equals or exceeds an amount equal to 50% of the total
Commitments in effect on such day, each Borrower agrees to pay to the
Administrative Agent for the account of the Lenders a fee (a "Utilization Fee")
---------------
on such Borrower's proportionate share (based on the Loans outstanding to both
Borrowers) of the Loans outstanding on such day, at a rate per annum equal to
the Utilization Fee Rate in effect on such date. Accrued Utilization Fees, if
any, shall be payable in arrears on each Quarterly Date and on the earlier of
the date the Commitments are terminated and the Termination Date.
(c) The Borrowers jointly and severally agree to pay to the
Administrative Agent an annual administration fee pursuant to the terms of the
Fee Letter.
2.07 Lending Offices. The Loans of each Type made by each Lender
---------------
shall be made and maintained at such Lender's Applicable Lending Office for
Loans of such Type.
2.08 Several Obligations. The failure of any Lender to make any Loan
-------------------
to be made by it on the date specified therefor shall not relieve any other
Lender of its obligation to make its Loan on such date, but neither any Lender
nor the Administrative Agent shall be responsible for the failure of any other
Lender to make a Loan to be made by such other Lender, and no Lender shall have
any obligation to the Administrative Agent or any other Lender for the
<PAGE>
26
failure by such Lender to make any Loan required to be made by such Lender. The
amounts payable by any Borrower at any time hereunder to each Lender shall be
separate and independent debts.
2.09 Evidence of Indebtedness.
------------------------
(a) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrowers to the
Applicable Lending Office of such Lender resulting from each Loan made by such
Applicable Lending Office of such Lender from time to time, including amounts of
principal and interest payable and paid to such Applicable Lending Office of
such Lender from time to time under this Agreement.
(b) The Administrative Agent shall maintain the Register pursuant to
Section 13.06(h), and a subaccount for each Lender, in which Register and
subaccount (taken together) shall be recorded (i) the amount of each Loan made
hereunder, the Borrower of each Loan, the Type and Class of each Loan made and
the Interest Period applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from each Borrower to each
Lender hereunder and (iii) the amount of any sum received by the Administrative
Agent hereunder from each Borrower and any Lender's share thereof.
(c) The entries made in the Register and accounts maintained pursuant
to paragraphs (a) and (b) of this Section 2.09 shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrowers therein recorded; provided, however, that the
-------- -------
failure of any Lender or the Administrative Agent to maintain such account, such
Register or such subaccount, as applicable, or any error therein, shall not in
any manner affect the obligation of each Borrower to repay (with applicable
interest) the Loans made to such Borrower by such Lender in accordance with the
terms of this Agreement.
2.10 Optional Prepayments and Conversions or Continuations of
--------------------------------------------------------
Eurodollar Loans. Subject to Sections 4.04, 5.01, 5.02 and 5.03, each Borrower
- ----------------
shall have the right to prepay, in whole or in part, Syndicated Loans, or to
Convert Syndicated Loans of one Type into Syndicated Loans of another Type or
Continue Syndicated Loans of one Type as Syndicated Loans of the same Type, at
any time or from time to time, without premium or penalty (but without limiting
the obligations of such Borrower under Section 5.05), provided that: (a) the
--------
Borrower shall give the Administrative Agent notice of each such prepayment,
Conversion or Continuation as provided in Section 4.05 hereof (and, upon the
date specified in any such notice of prepayment, the amount to be prepaid shall
become due and payable hereunder), and (b) upon any prepayment of any Eurodollar
Loan prior to the last day of the Interest Period applicable thereto, the
Borrower shall pay to each Lender, in addition to any other amounts payable by
the Borrower hereunder in connection with such prepayment, any amounts payable
to such Lender pursuant to Section 5.05(a). Notwithstanding the foregoing, and
without limiting the rights and remedies of the Lenders under Section 11 hereof,
in the event that any Event of Default shall have occurred and be continuing,
the Administrative Agent may (and at the request of the Majority Lenders shall)
suspend the right of any Borrower to Convert any Loan into a Eurodollar
<PAGE>
27
Loan, or to Continue any Loan as a Eurodollar Loan, in which event all
Syndicated Loans shall be Converted (on the last day(s) of the respective
Interest Periods therefor) or Continued, as the case may be, as ABR Loans. No
Borrower shall have any right to prepay Competitive Bid Option Loans without the
consent of the relevant Lender (unless the right to prepay was specified in the
applicable CBO Quote).
2.11 Mandatory Prepayments and Reductions of Commitments.
---------------------------------------------------
(a) If, at any time, the aggregate principal amount of Loans
outstanding exceeds the aggregate amount of the Commitments, the Borrowers will,
within one (1) Business Day, prepay an amount of Loans (together with accrued
interest thereon and amounts payable pursuant to Section 5.05) such that, after
giving effect thereto, the aggregate principal amount of Loans outstanding to
all Borrowers does not exceed such aggregate amount of the Commitments.
(b) The Borrowers shall repay the aggregate principal amount of all
Loans to the Borrowers hereunder (together with accrued interest thereon) and
any other amounts owing to any Lender that shall have declined to extend the
Termination Date as set forth in Section 2.12 on the Termination Date in effect
with respect to such Lender without giving effect to such extension.
(c) If, on any Business Day, the aggregate principal amount of Swing
Line Loans outstanding to the Swing Line Lenders exceeds the Swing Line
Commitment in effect on such Business Day the Borrowers shall, within one (1)
Business Day after notice thereof delivered by the Administrative Agent to the
Borrowers, prepay an amount of the Swing Line Loans (together with accrued
interest thereon and amounts payable pursuant to Section 5.05) such that, after
giving effect thereto, the aggregate principal amount of the Swing Line Loans
does not exceed the Swing Line Commitment.
(d) If, on any Business Day on which any Syndicated Loans are made or
are to be made to any Borrower, the effect of the making of any
such Loan is or would be to cause the aggregate amount of the
Syndicated Loans and the Swing Line Loans of any Swing Line
Lender to exceed the greater of such Swing Line Lender's
Commitment or such Swing Line Lender's pro rata share of the
--- ----
Swing Line Commitment in effect on such Business Day after
giving effect to the making of such Loan, such Borrower shall, on
such Business Day, apply such portion of the proceeds of such
Syndicated Loans as is required to prepay an amount of Swing Line
Loans (together with accrued interest thereon and amounts payable
pursuant to Section 5.05) such that, after giving effect thereto,
the aggregate principal amount of the Syndicated Loans and Swing
Line Loans of such Swing Line Lender does not exceed the greater
of such Swing Line Lender's Commitment or such Swing Line
Lender's pro rata share of the Swing Line Commitment in
--- ----
effect at such time. Each Borrower hereby irrevocably authorizes
and directs the Administrative Agent to apply such portion of the
proceeds of such Syndicated Loans, otherwise payable to such
Borrower's account pursuant to Section 2.02, to such Swing Line
Lender in
<PAGE>
28
satisfaction of such Borrower's
prepayment obligation under this Section 2.11(d).
2.12 Extension of Termination Date.
-----------------------------
(a) The Borrowers may, by notice given to the Administrative Agent
(which shall promptly deliver a copy thereof to the Lenders) not less than sixty
(60) days prior to the first, second or third anniversaries of the Effective
Date request that the Termination Date for all Lenders be extended for one
additional year; provided that the Borrowers may obtain only one such extension.
--------
Not later than thirty (30) days after the Borrowers shall have made such
request, each Lender, acting in its sole discretion, shall notify the
Administrative Agent of its response to such request; provided that any Lender
--------
which fails to respond to any such request shall be deemed to have denied such
request. Such extension shall be effective as to each Lender agreeing to such
extension when (i) each Borrower shall have delivered a certificate to the
Administrative Agent to the effect that no Default or Event of Default shall
have occurred and be continuing with respect to such Borrower either on the date
of the notice requesting such extension or the last date for the Lenders'
responses, (ii) each Obligor shall have delivered a certificate to the
Administrative Agent to the effect that each of the representations and
warranties of such Obligor set forth herein or in any Credit Document shall be
true and complete in all material respects on and as of each of the date of such
notice and the last date for the Lenders' responses with the same force and
effect as if made on and as of each such date (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as of such
specific date) and (iii) Lenders having not less than 50% of the Commitments as
in effect at such time shall have agreed to such extension. Each Lender shall
make its own independent decision upon a request for extension of the
Termination Date and no Lender shall be bound by the decision of any other
Lender. The Administrative Agent shall give each Lender notice of the responses
of all of the Lenders within 45 days of receipt of such request from the
Borrowers. In connection with any extension of the Termination Date, the
aggregate amount of the Commitments shall be permanently reduced on the First
Scheduled Termination Date by the aggregate amount of the Commitments of all
Lenders electing not to extend the Termination Date for an additional year from
such date which have not been replaced pursuant to paragraph (b) of this Section
2.12.
(b) If the Borrowers shall have requested an extension of the
Termination Date pursuant to paragraph (a) of this Section 2.12, and Lenders
having not less than 50% of the Commitments shall agree to such extension
pursuant thereto, the Borrowers shall have the right on or before the First
Scheduled Termination Date to replace any Lender which has not agreed to extend
the Termination Date beyond such date with, and otherwise add to this Agreement,
one or more other banks or financial institutions (which may include any Lender)
with the consent of the Administrative Agent (which consent shall not be
unreasonably withheld), each of which additional banks or financial institutions
shall have entered into an Assignment and Acceptance pursuant to which such
additional bank or financial institution shall accept an assignment of such
replaced Lender's Loans and shall undertake a Commitment (and, if any such
additional bank or financial institution is a Lender, the Commitment so
undertaken shall be in addition to such
<PAGE>
29
Lender's existing Commitment hereunder on such date), provided that the
--------
Commitments so undertaken shall not exceed the aggregate Commitments of
all non-extending Lenders. If the Termination Date has been extended to the
Extended Termination Date pursuant to this Section 2.12, on the First Scheduled
Termination Date, (i) the Borrowers shall repay in full all Loans outstanding on
such date made by any Lender which has not agreed to extend the Termination Date
beyond such date and all other amounts owed to such Lender, and (ii) each Lender
that has increased its Commitment and each additional bank or financial
institution undertaking a Commitment shall make Loans hereunder to the Borrowers
in such amounts as shall be necessary to cause the outstanding amount of such
existing Lender's or additional bank's or financial institution's share of the
Syndicated Loans of all Lenders, expressed as a percentage, to be equal to such
existing Lender's or such additional bank's or financial institution's
Commitment Percentage (after giving effect to such increase in any such existing
Lender's Commitment). The proceeds of such Loans shall be applied by the
Administrative Agent on behalf of the Borrowers to the partial repayment of the
other Lenders' Loans (including Loans of existing Lenders that have increased
their Commitments) to the extent necessary to effect such proration (and the
prorating and sharing provisions of Section 4.02 shall not be applicable to such
payment).
2.13 New Lenders. At any time prior to the Termination Date with the
-----------
consent of the Borrowers and upon notification to and with consent of the
Administrative Agent (which consent shall not be unreasonably withheld), one or
more additional banks or financial institutions may become a party to this
Agreement by executing an addendum hereto with the Obligors and the
Administrative Agent, substantially in the form of Exhibit G, whereupon such
bank or financial institution (each, a "New Lender") shall become a Lender for
----------
all purposes and to the same extent as if originally a party hereto and shall be
bound by and entitled to the benefits of this Agreement, provided that, after
--------
giving effect to such addition, (i) the aggregate Commitments shall not exceed
$1,500,000,000 and (ii) no Lender shall have a Commitment which equals or
exceeds 25% of the aggregate Commitments. Effective as of the date on which any
such New Lender becomes a Lender pursuant to the provisions of this Section
2.13, the aggregate Commitments shall be increased by the amount of such New
Lender's Commitment. Each New Lender undertaking a Commitment shall make Loans
hereunder to the Borrowers in such amounts as shall be necessary to cause the
outstanding amount of such New Lender's share of the Syndicated Loans of all
Lenders, expressed as a percentage, to be equal to such New Lender's Commitment
Percentage. The proceeds of such Loans shall be applied by the Administrative
Agent on behalf of the Borrowers to the partial repayment of the other Lenders'
Loans to the extent necessary to effect such proration (and the prorating and
sharing provisions of Section 4.02 shall not be applicable to such payment).
Notwithstanding anything herein to the contrary, if there are Eurodollar Loans
outstanding to any Borrower, a financial institution that becomes a New Lender
will make Eurodollar Loans to such Borrower (pro rata according to its
--- ----
Commitment Percentage) having Interest Periods corresponding to the then
unexpired portions of the respective Interest Periods of such Eurodollar Loans
and bearing interest at a rate equal to the respective interest rates then
applicable to such Eurodollar Loans. Promptly following the addition of a New
Lender hereunder, the Administrative Agent shall advise the Lenders of such
addition, of the amount of its Commitment and of the amount of any borrowing
from it hereunder made simultaneously upon its addition.
<PAGE>
30
2.14 Increases in Commitments. At any time prior to the Termination
------------------------
Date at the request of the Borrowers and upon notification to the Administrative
Agent, any Lender may increase the amount of its Commitment by executing an
addendum hereto with the Obligors and the Administrative Agent, substantially in
the form of Exhibit H, whereupon such Lender shall be bound by and entitled to
the benefits of this Agreement with respect to the full amount of its Commitment
as so increased, provided that, after giving effect to any such increase, (i)
--------
the aggregate Commitments shall not exceed $1,500,000,000 and (ii) no Lender
shall have a Commitment which equals or exceeds 25% of the aggregate
Commitments. Effective as of the date on which any such Lender increases its
Commitment pursuant to the provisions of this Section 2.14, the aggregate
Commitments shall be increased by the amount of such Lender's additional
Commitment. If on the date upon which such Lender increases its Commitment
pursuant to this Section 2.14 there is an unpaid principal amount of Syndicated
Loans under Section 2.01, each Borrower to whom Syndicated Loans are outstanding
shall borrow from such Lender through the Administrative Agent, subject to
Section 6, an amount determined by multiplying the amount of the increase in
such Lender's Commitment by a fraction, the numerator of which shall be the then
unpaid principal amount of the Syndicated Loans outstanding under Section 2.01
and the denominator of which shall be the aggregate Commitments of the Lenders
other than the amount of the additional Commitment of such Lender.
Notwithstanding anything herein to the contrary, if there are Eurodollar Loans
outstanding to any Borrower, such Lender may increase its Commitment and make
Eurodollar Loans to such Borrower having Interest Periods corresponding to the
then unexpired portions of the respective Interest Periods of such Eurodollar
Loans and bearing interest at a rate equal to the respective interest rates then
applicable to such Eurodollar Loans. The Administrative Agent shall advise the
Lenders of such increase in the Commitment of a Lender and of the amount of any
borrowing from it hereunder made simultaneously upon such increase.
Section 3. Payments of Principal and Interest.
----------------------------------
3.01 Repayment of Loans.
------------------
(a) Each Borrower hereby promises to pay to the Administrative Agent
for the account of each Lender the entire outstanding principal amount of such
Lender's Syndicated Loans to such Borrower, and each such Syndicated Loan shall
mature and be payable in full, on the Termination Date.
(b) Each Borrower hereby promises to pay to the Administrative Agent
for the account of each Lender that makes any Competitive Bid Option Loan to
such Borrower the entire principal amount of such Competitive Bid Option Loan,
and such Competitive Bid Option Loan shall mature and be payable in full, on the
last day of the Interest Period for such Competitive Bid Option Loan.
(c) Each Borrower hereby promises to pay to the Administrative Agent
for the account of the Swing Line Lenders the entire outstanding principal
amount of the Swing Line Loans, and such Swing Line Loans shall mature and be
payable in full, on the seventh (7th)
<PAGE>
31
Business Day following the date each such Loan is made and in any event on the
Termination Date.
3.02 Interest. Each Borrower hereby promises to pay to the
--------
Administrative Agent for account of each Lender interest on the unpaid principal
amount of each Loan made by such Lender to the Borrower for the period from and
including the date of the Loan to but excluding the date such Loan shall be paid
or prepaid in full, at the following rates per annum:
(a) during such periods as such Loan is an ABR Loan, the ABR (as in
effect from time to time) plus the Applicable Margin for ABR Loans;
(b) during such periods as such Loan is a Eurodollar Loan, for each
Interest Period relating thereto, the Eurodollar Rate for such Loan for
such Interest Period plus the Applicable Margin for Eurodollar Loans;
(c) if such Loan is a LIBOR Market Loan, the LIBO Rate for such Loan
for the Interest Period therefor plus (or minus) the LIBO Margin quoted by
---- -----
the Lender making such Loan in accordance with Section 2.03;
(d) if such Loan is a Set Rate Loan, the Set Rate for such Loan for
the Interest Period therefor quoted by the Lender making such Loan in
accordance with Section 2.03;
(e) if such Loan is a Swing Line Federal Funds Loan, the Swing Line
Federal Funds Rate; and
(f) if such Loan is a Swing Line Base Rate Loan, the ABR (as in
effect from time to time).
Notwithstanding the foregoing, so long as any Event of Default consisting of a
failure to pay any amount due hereunder shall have occurred and be continuing
with respect to a Borrower, such Borrower hereby promises to pay to the
Administrative Agent for the account of each Lender interest at the applicable
Post-Default Rate (but not in excess of that permitted by applicable law) on any
principal of and interest on any Loan made by such Lender to such Borrower and
on any other amount owing by such Borrower hereunder or under any other Credit
Document. Accrued interest on each Loan shall be payable (i) in the case of an
ABR Loan, quarterly on the Quarterly Dates, (ii) in the case of a Eurodollar
Loan or a Competitive Bid Option Loan, on the last day of the Interest Period
therefor and, in addition, if such Interest Period is longer than three months,
on each Quarterly Date, and (iii) in the case of any Loan, upon the payment or
prepayment thereof or the Conversion of such Loan to a Loan of another Type (but
only on the principal amount so paid, prepaid or Converted), except that
interest payable at the Post-Default Rate shall be payable from time to time on
demand. Promptly after the determination of any interest rate provided for
herein or any change therein, the Administrative Agent shall give notice thereof
to the Lenders to which such interest is payable and to the Borrowers.
<PAGE>
32
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
------------------------------------------------
4.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by any Obligor under this
Agreement, and, except to the extent otherwise provided therein, all payments to
be made by any Obligor under any other Credit Document, shall be made in
Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at account number 323-506569
maintained by the Administrative Agent with Chase at the Principal Office, not
later than 2:00 p.m., New jYork City time, on the date on which such payment
shall become due (each such payment made after such time on such due date to be
deemed to have been made on the next succeeding Business Day).
(b) Each Obligor shall, at the time of making each payment under
this Agreement, specify to the Administrative Agent (which shall so notify the
intended recipient(s) thereof) the Loans or other amounts payable by such
Obligor hereunder to which such payment is to be applied (and in the event that
such Obligor fails to so specify, or if an Event of Default has occurred and is
continuing, the Administrative Agent may distribute such payment to the Lenders
for application in accordance with Section 4.02 or in such manner as the
Majority Lenders may determine to be appropriate).
(c) Each payment received by the Administrative Agent under this
Agreement for account of any Lender shall be paid by the Administrative Agent
promptly to such Lender, in immediately available funds, for account of such
Lender's Applicable Lending Office for the Loan or other obligation in respect
of which such payment is made.
(d) If the due date of any payment under this Agreement would
otherwise fall on a day that is not a Business Day, such date shall be extended
to the next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
4.02 Pro Rata Treatment. Except to the extent otherwise provided
------------------
herein: (a) each borrowing of Syndicated Loans from the Lenders under Section
2.01 shall be made from the Lenders, each payment of a Facility Fee under
Section 2.06 and each payment of a Utilization Fee under Section 2.06 in respect
of Commitments and Loans, respectively, shall be made for account of the
Lenders, and each termination or reduction of the amount of the Commitments
under Section 2.05 shall be applied to the respective Commitments of the
Lenders, pro rata according to the amounts of their respective Commitments; (b)
--- ----
the making, Conversion and Continuation of Syndicated Loans of a particular Type
(other than Conversions provided for by Section 5.04) shall be made pro rata
--- ----
among the Lenders according to the amounts of their Commitments (in the case of
making of Syndicated Loans) or their respective Syndicated Loans (in the case of
Conversions and Continuations of Loans) and the Interest Period for each Loan of
such Type at the time of the making, Conversion or Continuation thereof shall be
coterminous with the Interest Period of each other Loan of such Type made,
Converted or Continued at such time (other than Loans of such Type for which a
different Interest Period has been chosen in
<PAGE>
33
accordance with the terms of this Agreement); (c) each payment or prepayment of
principal of Syndicated Loans by any Borrower shall be made for account of the
Lenders pro rata in accordance with the respective unpaid principal
--- ----
amounts of the Syndicated Loans held by them, provided that if immediately prior
--------
to giving effect to any such payment in respect of any Syndicated Loans
the outstanding principal amount of the Syndicated Loans shall not be held by
the Lenders pro rata in accordance with their respective Commitments in
--- ----
effect at the time such Loans were made (by reason of a failure of a Lender to
make a Loan hereunder in the circumstances described in the last paragraph of
Section 13.04), then such payment shall be applied to the Syndicated Loans in
such manner as shall result, as nearly as is practicable, in the outstanding
principal amount of the Syndicated Loans being held by the Lenders pro rata in
--- ----
accordance with their respective Commitments; (d) each payment of
interest on Syndicated Loans by any Borrower shall be made for account of the
Lenders pro rata in accordance with the amounts of interest on such Loans
--- ----
then due and payable to the respective Lenders; and (e) each payment or
prepayment of principal of Loans by any Borrower shall be made for account of
the Lenders pro rata in accordance with the respective unpaid principal
--- ----
amounts of each Loan then due and payable.
4.03 Computations. Facility Fees, Utilization Fees and interest on
------------
Competitive Bid Option Loans, Swing Line Base Rate Loans and Eurodollar Loans
shall be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which payable and interest on ABR Loans shall be computed on the basis of a year
of 365 or 366 days, as the case may be, and actual days elapsed (including the
first day but excluding the last day) occurring in the period for which payable.
Notwithstanding the foregoing, for each day that the ABR is calculated by
reference to the Federal Funds Rate, interest on ABR Loans shall be computed on
the basis of a year of 360 days and actual days elapsed.
4.04 Minimum Amounts. Except as provided in Section 2.02 and 2.04(a)
---------------
and except for mandatory prepayments made pursuant to Section 2.11 and
Conversions or prepayments made pursuant to Section 5.04, each borrowing,
Conversion and partial prepayment of principal of Loans shall be in an aggregate
amount at least equal to $5,000,000 or in whole multiples of $1,000,000 in
excess thereof (borrowings, Conversions or prepayments of or into Loans of
different Types or, in the case of Eurodollar Loans, having different Interest
Periods at the same time hereunder to be deemed separate borrowings, Conversions
and prepayments for purposes of the foregoing, one for each Type or Interest
Period). Anything in this Agreement to the contrary notwithstanding, the
aggregate principal amount of Eurodollar Loans having the same Interest Period
shall be in an amount at least equal to $5,000,000 or in whole multiples of
$1,000,000 in excess thereof.
4.05 Certain Notices. Except as otherwise provided in Section 2.03
---------------
with respect to the borrowing of Competitive Bid Option Loans and in Section
2.04 with respect to the borrowing of Swing Line Loans, notices by any Borrower
to the Administrative Agent of terminations or reductions of the Commitments, of
borrowings, Conversions, Continuations and optional prepayments of Loans and of
Classes and Types of Loans and of the duration of Interest Periods shall be
irrevocable and shall be effective only if received by the Administrative Agent
<PAGE>
34
not later than 11:00 a.m., New York City time, on the number of Business Days
prior to the date of the relevant termination, reduction, borrowing, Conversion,
Continuation or prepayment or the first day of such Interest Period specified
below:
<TABLE>
<CAPTION>
Number of
Notice Business Days Prior
<S> <C>
Termination or reduction of Commitments 3
Borrowing or prepayment of, or Conversions into, 0
ABR Loans
Borrowing or prepayment of, Conversions into, 3
Continuations as, or duration of Interest
Period for, Eurodollar Loans
Duration of Interest Period for Eurodollar Loans 4
of less than one month or more than six months
</TABLE>
Each such notice of termination or reduction shall specify the amount of the
Commitments to be terminated or reduced. Each such notice of borrowing of
Syndicated Loans shall be in substantially the form of Exhibit D-2 hereto,
specifying the amount (subject to Section 4.04) and Type of each Loan to be
borrowed and the date of borrowing. Each such notice of Conversion,
Continuation or optional prepayment shall specify the Type of Loans to be
borrowed, Converted, Continued or prepaid and the amount (subject to Section
4.04) (and, in the case of a Conversion, the Type of Loan to result from such
Conversion) and the date of Conversion, Continuation or optional prepayment
(which shall be a Business Day). Each such notice of the duration of an
Interest Period shall specify the Loans to which such Interest Period is to
relate. The Administrative Agent shall promptly notify the Lenders of the
contents of each such notice. In the event that such notice from the Borrower
requests a borrowing or Continuation of, or a Conversion into, a Eurodollar Loan
specifying an Interest Period of less than one month or more than six months,
each Lender shall notify the Administrative Agent not later than 11:00 a.m., New
York City time, one Business Day after such Lender's receipt of such notice as
to whether funds are available to such Lender in the amount and for the Interest
Period requested. Unless such funds are so available to each Lender, in its
sole discretion, such notice (requesting an Interest Period of less than one
month or more than six months) from the Borrower shall be deemed to be canceled.
In the event that the Borrower fails to select the Type of Loan, or the duration
of any Interest Period for any Eurodollar Loan, within the time period and
otherwise as provided in this Section 4.05, such Loan (if outstanding as a
Eurodollar Loan) will be automatically Converted into a ABR Loan on the last day
of the then current Interest Period for such Loan or (if outstanding as a ABR
Loan) will remain as, or (if not then outstanding) will be made as, a ABR Loan.
4.06 Non-Receipt of Funds by the Administrative Agent. Unless the
------------------------------------------------
Administrative Agent shall have been notified by a Lender or any Borrower (the
"Payor") prior to the date on which the Payor is to make payment to the
- ------
Administrative Agent of (in the case of a Lender) the proceeds of a Loan to be
made by such Lender hereunder or (in the case of a Borrower) a payment to the
Administrative Agent for account of one or more of the Lenders
<PAGE>
35
hereunder (such payment being herein called the "Required Payment"), which
----------------
notice shall be effective upon receipt, that the Payor does not intend to make
the Required Payment to the Administrative Agent, the Administrative Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient(s) on such date and, if the Payor has not in fact made
the Required Payment to the Administrative Agent, the recipient(s) of such
payment shall, on demand, repay to the Administrative Agent the amount so made
available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the
Administrative Agent until the date the Administrative Agent recovers such
amount at a rate per annum equal to, for each of the first three days following
the date such amount was made available by the Administrative Agent, the Federal
Funds Rate for such day, and following such three day period, the interest rate
applicable to the Loans corresponding to such amount, and, if such recipient(s)
shall fail promptly to make such payment, the Administrative Agent shall be
entitled to recover such amount, on demand, from the Payor, together with
interest as aforesaid.
4.07 Sharing of Payments, Etc.
-------------------------
(a) Each Borrower agrees that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim the Administrative Agent
or a Lender may otherwise have, the Administrative Agent and each Lender shall
be entitled, at its option, to offset balances held by it for account of such
Borrower at any of its offices, in Dollars or in any other currency, against any
principal of or interest on any of such Lender's Loans to such Borrower or any
other amount payable by such Borrower to such Lender or to the Administrative
Agent hereunder, that is not paid when due (regardless of whether the balances
are then due to such Borrower), in which case it shall promptly notify such
Borrower and the Administrative Agent thereof, provided that the Administrative
--------
Agent's or Lender's failure to give such notice shall not affect the validity
thereof.
(b) If any Lender shall obtain from any Borrower payment of any
principal of or interest on any Loan owing to it or payment of any other amount
under this Agreement or any other Credit Document through the exercise of any
right of set-off, banker's lien or counterclaim or similar right or otherwise
(other than from the Administrative Agent as provided herein), and, as a result
of such payment, such Lender shall have received a greater percentage of the
principal of or interest on the Loans or such other amounts then due hereunder
or thereunder by such Borrower to such Lender than the percentage received by
any other Lender except as permitted hereunder, it shall promptly purchase from
such other Lenders participations in (or, if and to the extent specified by such
Lender, direct interests in) the Loans or such other amounts, respectively,
owing to such other Lenders (or in interest due thereon, as the case may be) in
such amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all the Lenders shall share the benefit of such
excess payment (net of any expenses that may be incurred by such Lender in
obtaining or preserving such excess payment) pro rata in accordance
--- ----
<PAGE>
36
with the unpaid principal of and/or interest on the Loans or such other amounts,
respectively, owing to each of the Lenders, provided that if at the time of such
--------
payment the outstanding principal amount of the Syndicated Loans shall not be
held by the Lenders pro rata in accordance with their respective Commitments in
--- ----
effect at the time such Loans were made (by reason of a failure of a Lender to
make a Loan hereunder in the circumstances described in the last paragraph of
Section 13.04), then such purchases of participations and/or direct interests
shall be made in such manner as will result, as nearly as is practicable, in the
outstanding principal amount of the Syndicated Loans being held by the Lenders
pro rata according to the amounts of such Commitments. To such end all the
- --- ----
Lenders shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must otherwise
be restored.
(c) Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of any Borrower. If, under any applicable bankruptcy, insolvency or
other similar law any Lender receives a secured claim in lieu of a set-off to
which this Section 4.07 applies, such Lender shall, to the extent practicable,
exercise its rights in respect of such secured claim in a manner consistent with
the rights of the Lenders entitled under this Section 4.07 to share in the
benefits of any recovery on such secured claim.
Section 5. Yield Protection, Etc.
----------------------
5.01 Additional Costs.
----------------
(a) Each Borrower agrees to pay directly to each Lender from time to
time within 15 days after request is made by such Lender and receipt by such
Borrower of the certificate of such Lender described in Section 5.01(c) such
amounts as such Lender may reasonably determine to be necessary to compensate
such Lender for any increase in the costs that such Lender reasonably determines
are attributable to its making or maintaining any Eurodollar Loans to such
Borrower or its obligation to make any Eurodollar Loans hereunder to such
Borrower by an amount such Lender deems to be material, or any reduction in any
amount receivable by such Lender hereunder in respect of any of such Loans or
such obligation, resulting from any Regulatory Change that:
(i) changes the basis of taxation of any amounts payable to such
Lender under this Agreement in respect of any of such Loans (other than
taxes imposed on or measured by the overall net income of such Lender or of
its Applicable Lending Office for any of such Loans by any jurisdiction in
which such Lender has its principal office or such Applicable Lending
Office or is subject to taxation other than as a result of the transactions
contemplated by this Agreement); or
(ii) imposes or modifies any reserve, special deposit or similar
requirements (other than Eurocurrency Reserve Requirements) relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, such Lender or any commitment of such Lender (including,
without limitation, the Commitment of such Lender hereunder).
<PAGE>
37
If any Lender requests compensation from any Borrower under this Section
5.01(a), such Borrower may, by notice to such Lender (with a copy to the
Administrative Agent), suspend the obligation of such Lender thereafter to make
or Continue Loans to such Borrower of the Type with respect to which such
compensation is requested, or to Convert Loans of any other Type into Loans of
such Type, until the Regulatory Change giving rise to such request ceases to be
in effect (in which case the provisions of Section 5.04 shall be applicable),
provided that such suspension shall not affect the right of such Lender to
- --------
receive the compensation so requested.
(b) Without limiting the effect of the foregoing provisions of this
Section 5.01 (but without duplication), each Borrower agrees to pay directly to
each Lender from time to time on request such amounts as such Lender may
reasonably determine to be necessary to compensate such Lender (or, without
duplication, the bank holding company of which such Lender is a subsidiary) for
any increase in such costs that it reasonably determines to be material which
are attributable to the maintenance by such Lender (or any Applicable Lending
Office or such bank holding company), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) of any court or
governmental or monetary authority (i) following any Regulatory Change or (ii)
changing after the date hereof the interpretation or administration of any risk-
based capital guideline or other requirement (whether or not having the force of
law and whether or not the failure to comply therewith would be unlawful)
heretofore or hereafter issued by any government or governmental or supervisory
authority implementing at the national level the Basle Accord (including,
without limitation, the Final Risk-Based Capital Guidelines of the Board of
Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12
C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the
Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of
capital in respect of its Commitment or Loans to such Borrower (such
compensation to include, without limitation, an amount equal to any reduction of
the rate of return on equity of such Lender (or any Applicable Lending Office or
such bank holding company) to a level below that which such Lender (or any
Applicable Lending Office or such bank holding company) could have achieved but
for such law, regulation, interpretation, directive or request). For purposes
of this Section 5.01(b), "Basle Accord" shall mean the proposals for risk-based
------------
capital framework described by the Basle Committee on Lending Regulations and
Supervisory Practices in its paper entitled "International Convergence of
Capital Measurement and Capital Standards" dated July 1988, as amended, modified
and supplemented and in effect from time to time or any replacement thereof.
(c) Each Lender shall notify each Borrower of any event occurring
after the date of this Agreement entitling such Lender to compensation under
paragraph (a) or (b) of this Section 5.01 as promptly as practicable, but in any
event within 30 days, after such Lender obtains actual knowledge thereof;
provided that each Lender will designate a different Applicable Lending Office
- --------
for the Loans of such Lender affected by such event if such designation will
avoid the need for, or reduce the amount of, such compensation and will not, in
the sole opinion of such Lender, be disadvantageous to such Lender, except that
such Lender shall have no obligation to designate an Applicable Lending Office
located in the United States of America. Each Lender will furnish to each
Borrower a certificate setting forth the basis and amount of each request by
such Lender for compensation under paragraph (a) or (b) of this
<PAGE>
38
Section 5.01. Determinations and allocations by any Lender for purposes of this
Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) of
this Section 5.01, or of the effect of capital maintained pursuant to paragraph
(b) of this Section 5.01, on its costs or rate of return of maintaining Loans or
its obligation to make Loans, or on amounts receivable by it in respect of
Loans, and of the amounts required to compensate such Lender under this Section
5.01, shall be prima facie evidence of such determinations and allocations.
(d) Notwithstanding the foregoing, no Lender shall be entitled to any
compensation described in Section 5.01(a) or (b) unless, at the time it requests
such compensation, it is the policy or general practice of such Lender to
request compensation for comparable costs in similar circumstances under
comparable provisions of other credit agreements for comparable customers unless
specific facts or circumstances applicable to any Obligor or the transactions
contemplated by this Agreement would alter such policy or general practice,
provided that nothing in this Section 5.01(d) shall preclude a Lender from
- --------
waiving the collection of similar costs from one or more of its other customers.
(e) If any Lender fails to give the notice described in Section
5.01(c) within 30 days after it obtains actual knowledge of the event required
to be described in such notice, such Lender shall, with respect to any
compensation that would otherwise be owing to such Lender under paragraph (a) or
(b) of this Section 5.01, only be entitled to payment for increased costs
incurred from after the date that such Lender does give such notice.
5.02 Limitation on Types of Loans. Anything herein to the contrary
----------------------------
notwithstanding, if, on or prior to the determination of any Eurodollar Rate for
any Interest Period:
(a) the Administrative Agent is advised by the Reference Bank
that quotations of interest rates for the relevant deposits referred to in
the definition of "Eurodollar Rate" in Section 1.01 hereof are not being
provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for any Eurodollar Loans or LIBOR
Market Loans as provided herein; or
(b) if the related Loans are Syndicated Loans, the Majority
Lenders notify the Administrative Agent that the relevant rates of interest
referred to in the definition of "Eurodollar Rate" in Section 1.01 hereof
upon the basis of which the rate of interest for Eurodollar Loans for such
Interest Period is to be determined are not likely adequately to cover the
cost to such Lenders of making or maintaining such Type of Loans for such
Interest Period (which determination by the Majority Lenders shall be
conclusive);
then the Administrative Agent shall give each affected Borrower and each Lender
prompt notice thereof and, so long as such condition remains in effect, the
Lenders shall be under no obligation to make additional Loans of such Type, to
Continue Loans of such Type or to Convert Loans of any other Type into Loans of
such Type, and the Borrowers shall, on the last day(s) of the then
<PAGE>
39
current Interest Period(s) for the outstanding Loans of such Type, either prepay
such Loans or Convert such Loans into another Type of Loan in accordance with
Section 2.10.
5.03 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain Eurodollar
Loans or LIBOR Market Loans hereunder, then such Lender shall promptly notify
the Borrowers thereof (with a copy to the Administrative Agent) and such
Lender's obligation to make or Continue, or to Convert Loans of any other Type
into, Eurodollar Loans shall be suspended until such time as such Lender may
again make and maintain Eurodollar Loans (in which case the provisions of
Section 5.04 shall be applicable), and such Lender shall no longer be obligated
to make any LIBOR Market Loan that it offered to make prior to such event.
5.04 Treatment of Affected Loans. If the obligation of any Lender to
---------------------------
make a Eurodollar Loan or to Continue, or to Convert Loans of any other Type
into, Loans of a particular Type shall be suspended pursuant to Section 5.01 or
5.03 (Loans of such Type being herein called "Affected Loans" and such Type
--------------
being herein called the "Affected Type"), such Lender's Affected Loans shall be
-------------
automatically Converted into ABR Loans on the last day(s) of the then current
Interest Period(s) for Affected Loans (or, in the case of a Conversion required
by Section 5.03, on such earlier date as required by law) and, unless and until
such Lender gives notice as provided below that the circumstances specified in
Section 5.01 or 5.03 that gave rise to such Conversion no longer exist:
(a) to the extent that such Lender's Affected Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's Affected Loans shall be applied instead to its
ABR Loans; and
(b) all Loans that would otherwise be made or Continued by such
Lender as Loans of the Affected Type shall be made or Continued instead as
ABR Loans, and all Loans of such Lender that would otherwise be Converted
into Loans of the Affected Type shall be Converted instead into (or shall
remain as) ABR Loans.
If such Lender gives notice to the Borrowers with a copy to the Administrative
Agent that the circumstances specified in Section 5.01 or 5.03 that gave rise to
the Conversion of such Lender's Affected Loans pursuant to this Section 5.04 no
longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when Loans of the Affected Type made by other
Lenders are outstanding, such Lender's ABR Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type, to the extent necessary so that,
after giving effect thereto, all Syndicated Loans held by the Lenders holding
Loans of the Affected Type and by such Lender are held pro rata (as to principal
--- ----
amounts, Types and Interest Periods) in accordance with their respective
Commitments.
5.05 Compensation. Each Borrower shall pay to the Administrative
------------
Agent for the account of each Lender, upon the request of such Lender through
the Administrative Agent, such
<PAGE>
40
amount or amounts as shall be sufficient (in the reasonable opinion of such
Lender) to compensate it for any loss, cost or expense that such Lender
reasonably determines is attributable to:
(a) any payment, mandatory or optional prepayment or Conversion of a
Eurodollar Loan, LIBOR Market Loan or a Set Rate Loan made by such Lender
to such Borrower for any reason (including, without limitation, the
acceleration of the Loans pursuant to Section 11 hereof) on a date other
than the last day of the Interest Period for such Loan; or
(b) any failure by such Borrower for any reason (including, without
limitation, the failure of any of the conditions precedent specified in
Section 6 hereof to be satisfied but excluding any failure by such Borrower
due to an event or circumstance described in Section 5.02 or 5.03) to
borrow a Eurodollar Loan or a Competitive Bid Option Loan (with respect to
which, in the case of a Competitive Bid Option Loan, such Borrower has
accepted a CBO Quote) from such Lender on the date for such borrowing
specified in the relevant notice of borrowing given pursuant to Section
2.02 or 2.03(e).
Without limiting the effect of the preceding sentence, such compensation shall
be an amount equal to the excess, if any, of (i) the amount of interest that
otherwise would have accrued on the principal amount so paid, prepaid or
Converted or not borrowed for the period from the date of such payment,
prepayment, Conversion or failure to borrow to the last day of the then current
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan that would have commenced on the date specified
for such borrowing) at the applicable rate of interest for such Loan provided
for herein less the Applicable Margin (and less any LIBO Margin above the
applicable LIBO Rate in the case of any LIBOR Market Loans) over (ii) the amount
of interest that otherwise would have accrued on such principal amount at a rate
per annum equal to the interest component of the amount such Lender would have
bid in the London interbank market (if such Loan is a Eurodollar Loan or a LIBOR
Market Loan) or the United States secondary certificate of deposit market (or
other comparable United States market agreeable to such Lender and such
Borrower, if such amount cannot be determined for the United States secondary
certificate of deposit market) (if such Loan is a Set Rate Loan or a Swing Line
Federal Funds Loan) for Dollar deposits of leading banks in amounts comparable
to such principal amount and with maturities comparable to such period (as
reasonably determined by such Lender).
5.06. U.S. Taxes.
----------
(a) Each Borrower agrees to pay to each Lender that is not a U.S.
Person such additional amounts as are necessary in order that the net payment of
any amount due to such non-U.S. Person by such Borrower hereunder after
deduction for or withholding in respect of any U.S. Tax imposed with respect to
such payment (or in lieu thereof, payment of such U.S. Tax by such non-U.S.
Person), will not be less than the amount stated herein to be then due and
payable, provided that the foregoing obligation to pay such additional amounts
--------
shall not apply:
<PAGE>
41
(i) to any payment to a Lender hereunder unless such Lender is, on
the date hereof (or on the date it becomes a Lender as provided in Section
2.12, 2.13 or 13.06(b) hereof) and on the date of any change in the
Applicable Lending Office of such Lender, entitled to submit either a Form
1001 (relating to such Lender and entitling it to a complete exemption from
withholding on all payments to be received by it hereunder in respect of
the Loans) or Form 4224 (relating to all payments to be received by such
Lender hereunder in respect of the Loans); or
(ii) to any U.S. Tax that would not have been imposed but for the
failure by such non-U.S. Person to comply with applicable certification,
information, documentation or other reporting requirements concerning the
nationality, residence, identity or connections with the United States of
America of such non-U.S. Person if such compliance is required by statute
or regulation of the United States of America as a precondition to relief
or exemption from such U.S. Tax.
For the purposes of this Section 5.06(a), (w) "Form 1001" shall mean Form 1001
---------
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
---------
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates including without limitation Form W-8ECI (Certificate
of Foreign Person's Claim for Exemption From Withholding on Income Effectively
Connected With the Conduct of a Trade or Business in the United States), (y)
"U.S. Person" shall mean a citizen, national or resident of the United States of
- ------------
America, a corporation, partnership or other entity created or organized in or
under any laws of the United States of America, or any estate or trust that is
subject to Federal income taxation regardless of the source of its income and
(z) "U.S. Taxes" shall mean any present or future tax, assessment or other
----------
charge or levy imposed by or on behalf of the United States of America or any
taxing authority thereof or therein.
(b) Within 30 days after paying any amount to the Administrative
Agent or any Lender from which it is required by law to make any deduction or
withholding, and within 30 days after it is required by law to remit such
deduction or withholding to any relevant taxing or other authority, each
Borrower shall deliver to the Administrative Agent for delivery to such non-U.S.
Person evidence in the control of such Borrower and reasonably satisfactory to
such Person of such deduction, withholding or payment (as the case may be).
(c) Each Lender which is not a U.S. Person agrees that:
(i) it shall, no later than the date of this Agreement (or, in the
case of a Lender which becomes a party hereto pursuant to Section 2.12,
2.13 or 13.06(b) after the date hereof, the date upon which the Lender
becomes a party hereto) deliver to the Borrowers and the Administrative
Agent two accurate and complete signed originals of Form 4224 or Form 1001,
as appropriate, in each case indicating that the Lender is on the date of
<PAGE>
42
delivery thereof entitled to receive payments under this Agreement free
from withholding of U.S. Taxes;
(ii) if at any time the Lender makes any changes necessitating a new
Form 4224 or Form 1001 or at any time any Borrower shall not be able to
continue to rely on any Form 4224 or 1001 previously submitted by such
Lender, such Lender shall, to the extent legally entitled to do so at such
time, promptly deliver to the Borrowers and the Administrative Agent in
replacement for, or in addition to, the forms previously delivered by it
hereunder, two accurate and complete signed originals of Form 4224 or two
accurate and complete signed originals of Form 1001, as appropriate, in
each case indicating that the Lender is on the date of delivery thereof
entitled to receive payments under this Agreement free from withholding of
U.S. Taxes;
(iii) it shall, promptly upon any Borrower's reasonable request to
that effect, deliver to such Borrower and the Administrative Agent such
other forms or similar documentation as may be required from time to time
by any applicable law, treaty, rule or regulation in order to establish
such Lender's tax status for withholding purposes.
(d) Notwithstanding anything herein to the contrary, no Borrower will
be required to pay any additional amounts in respect of U.S. Taxes:
(i) if the obligation to pay such additional amounts would not have
arisen but for a failure by such Lender to comply with its obligations
under Section 5.06(c);
(ii) if such Lender shall have delivered to the Borrowers and the
Administrative Agent a Form 4224 or a Form 1001 in respect of such
Applicable Lending Office pursuant to Section 5.06(c), and such Lender
shall not on the date of delivery thereof or at any time thereafter be
entitled to exemption from deduction or withholding of U.S. Taxes in
respect of payments by such Borrower hereunder for the account of such
Applicable Lending Office for any reason other than as a result of a change
in United States law or regulations or in the official interpretation of
such law or regulations by any governmental authority charged with the
interpretation or administration thereof after the Effective Date (or, in
the case of a Lender which becomes a party hereto pursuant to Section 2.12,
2.13 or 13.06(b) after the date hereof, the date upon which such Lender
becomes a party hereto);
(iii) with respect to each Lender, if such additional amounts
represent taxes imposed on its income, or franchise taxes imposed on it, by
the jurisdiction of its Applicable Lending Office, or by the jurisdiction
under the laws of which the Lender is organized, or, in either such case,
any political subdivision or taxing authority thereof or therein.
<PAGE>
43
Section 6. Conditions Precedent.
--------------------
6.01 Effective Date. This Agreement shall become effective on the
--------------
first date (the "Effective Date") that each of the following conditions shall
--------------
have been satisfied or fulfilled (or waived in accordance with Section 13.04)
but in no event later than January 29, 1999:
(a) Approvals. All governmental and third party approvals necessary
---------
or, in the reasonable discretion of the Administrative Agent, advisable in
connection with the continuing operations of the Borrowers and their
respective Subsidiaries and the financing contemplated hereby shall have
been obtained and be in full force and effect.
(b) Documents. The receipt by the Administrative Agent of the
---------
following documents, each of which shall be satisfactory to the
Administrative Agent in form and substance:
(i) Corporate Documents. The following documents, each certified as
-------------------
indicated below:
(1) a copy of the charter, as amended and in effect, of each
Obligor certified as of a recent date by the secretary or assistant
secretary of such Obligor, and a certificate from the Comptroller of the
Currency or the Secretary of State of its jurisdiction of incorporation, as
the case may be, dated as of a recent date, as to the good standing of such
Obligor; and
(2) a certificate of the secretary or an assistant secretary of
each Obligor, dated the Effective Date and certifying (A) that attached
thereto is a true and complete copy of the by-laws of such Obligor as
amended and in effect at all times from the date on which the resolutions
referred to in clause (B) were adopted to and including the date of such
certificate, (B) that attached thereto is a true and complete copy of
resolutions duly adopted by the board of directors of such Obligor
authorizing the execution, delivery and performance of such of the Credit
Documents to which such Obligor is or is intended to be a party and the
extensions of credit hereunder, and that such resolutions have not been
modified, rescinded or amended and are in full force and effect, (C) that
the charter of such Obligor has not been amended since the date of the
certification thereto furnished pursuant to clause (1) above, and (D) as to
the incumbency and specimen signature of each officer of such Obligor
executing the Credit Documents and each other document to be delivered by
such Obligor in connection therewith (and the Administrative Agent and each
Lender may conclusively rely on such certificate until it receives notice
in writing from such Obligor).
(ii) Status and Officer's Certificates. Each of the conditions set
---------------------------------
forth in Section 6.02(a) and (b) shall be true and the Administrative Agent
shall have received a certificate of a senior officer of each Borrower,
dated the Effective Date, to the effect set forth in Section 6.02(a) and
(b).
<PAGE>
44
(iii) Opinion of Counsel to the Obligors. Opinions, dated the
----------------------------------
Effective Date, of Orrick, Herrington & Sutcliffe LLP, counsel to the
Obligors, and Ellen Richey, general counsel to the Obligors, substantially
in the form of Exhibits E-1 and E-2, respectively, hereto and covering such
other matters as the Administrative Agent may reasonably request.
(iv) Opinion of Counsel to the Administrative Agent. An opinion,
----------------------------------------------
dated the Effective Date, of Simpson Thacher & Bartlett, counsel to the
Administrative Agent, substantially in the form of Exhibit I hereto.
(v) Credit Agreement. Counterparts of this Agreement duly executed
----------------
on behalf of each Obligor and each of the Administrative Agent and the
Lenders.
(vi) Other Documents. Such other documents as the Administrative
---------------
Agent may reasonably request.
(c) Termination of Existing Agreement: Obligors shall have
---------------------------------
terminated the commitments under the Existing Agreement. In connection
therewith, the Obligors shall have paid to the Administrative Agent, for
the account of the lenders under the Existing Agreement, the total
outstanding principal amount, if any, under the Existing Agreement together
with all fees and all interest accrued on such outstanding amounts, to the
extent such fees and interest were due and payable on or before the
Effective Date.
(d) Fees. The Lenders and the Administrative Agent shall have
----
received all fees required to be paid, and all expenses (other than fees
and expenses of legal counsel) for which invoices have been presented, on
or before the Closing Date.
The Administrative Agent shall promptly give the Borrowers and each Lender
notice of the Effective Date.
6.02 Initial and Subsequent Loans. The obligation of any Lender to
----------------------------
make to any Borrower its initial Loan (including any Swing Line Loan,
Competitive Bid Option Loan or Syndicated Loan), any subsequent Swing Line Loan
or Competitive Bid Option Loan and any subsequent Syndicated Loan (other than
Syndicated Loans made pursuant to Section 2.04(c)) that increases the principal
amount of outstanding Syndicated Loans, upon the occasion of each borrowing, is
subject to the conditions precedent that, both immediately prior to the making
of such Loan and also after giving effect thereto and to the intended use
thereof:
(a) No Default. No Default or Event of Default with respect to such
----------
Borrower or the Guarantor shall have occurred and be continuing;
(b) Representations and Warranties True. The representations and
-----------------------------------
warranties made by such Borrower and the Guarantor in Section 7 hereof and
in each of the other Credit Documents, shall be true and complete on and as
of the date of the making of such Loan or other extension of credit with
the same force and effect as if made on and as of
<PAGE>
45
such date (or, if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date); and
(c) Notice. All notices of such borrowing shall have been properly
------
and timely given in accordance with the requirements of this Agreement.
Each notice of borrowing by any Borrower hereunder shall constitute a
certification by such Borrower to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless such Borrower otherwise notifies
the Administrative Agent prior to the date of such borrowing, as of the date of
such borrowing).
Section 7. Representations and Warranties.
------------------------------
To induce the Administrative Agent and the Lenders to enter into this
Agreement and to make the Loans, each Obligor (but in the case of Section 7.01,
only the Guarantor) hereby represents and warrants to the Administrative Agent
and each Lender that:
7.01 Financial Condition. The consolidated statement of financial
-------------------
condition of the Guarantor and its Consolidated Subsidiaries as at December 31,
1997 and the consolidated statement of financial condition of PB and its
Consolidated Subsidiaries as at December 31, 1997 and their related consolidated
statements of income and changes in shareholders' equity and of cash flows for
the fiscal year ended on such date, reported on by Ernst & Young LLP, copies of
which have heretofore been furnished to each Lender, present fairly their
consolidated financial condition as at such date, and the consolidated results
of their operations and their consolidated cash flows for the fiscal year then
ended. The pro forma unaudited consolidated statement of financial condition of
--- -----
PNB and its Consolidated Subsidiaries as at December 31, 1997 and the related
consolidated statement of income for the fiscal year ended on such date, copies
of which have heretofore been furnished to each Lender, present fairly the pro
---
forma consolidated financial condition of PNB and its Consolidated Subsidiaries
- -----
as at such date, and the consolidated results of their operations for the fiscal
year then ended. The unaudited consolidated statement of financial condition of
each of the Borrowers and the Guarantor and their respective Consolidated
Subsidiaries as at September 30, 1998 and the related unaudited consolidated
statements of income and (with respect to the Guarantor only) of cash flows for
the nine-month period ended on such date, certified by a Responsible Officer,
copies of which have heretofore been furnished to each Lender, present fairly
the consolidated financial condition of each of the Borrowers and the Guarantor
and their respective Consolidated Subsidiaries as at such date, and the
consolidated results of their operations and (with respect to the Guarantor
only) their consolidated cash flows for the nine-month period then ended
(subject to normal year-end audit adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by such accountants or Responsible Officer, as the case may
be, and as disclosed therein). Neither the Guarantor nor any of its
Consolidated Subsidiaries had, at the date of the most recent statement of
financial condition referred to above, any material Guarantee Obligation,
contingent liability or liability for taxes, or any long-term lease or unusual
forward or long-term commitment, including, without limitation, any interest
rate or foreign
<PAGE>
46
currency swap or exchange transaction, which are required to be, but which are
not, reflected in the foregoing statements or in the notes thereto. During the
period from December 31, 1997 to and including the date hereof there has been no
sale, transfer or other disposition by any of the Borrowers or the Guarantor or
any of their Consolidated Subsidiaries of any material part of their business or
property, other than assets securitized in the ordinary course of business or
assets transferred from one Consolidated Subsidiary to another, and no purchase
or other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the consolidated financial condition
of any of the Borrowers or the Guarantor and their respective Consolidated
Subsidiaries at December 31, 1997, except as previously disclosed to the
Administrative Agent.
7.02 No Change. From December 31, 1997 to the Effective Date, there
---------
has been no development or event in or relating to the business and affairs of
such Obligor which has had or would reasonably be expected to have a Material
Adverse Effect on such Obligor.
7.03 Corporate Existence; Compliance with Law. Each of such Obligor
----------------------------------------
and its Material Subsidiaries (a) is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, (b) has
the corporate power and authority, and the legal right, to own and operate its
property, to lease the property it operates as lessee and to conduct the
business in which it is currently engaged, (c) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, except to the extent that the failure to so qualify
would not, in the aggregate, reasonably be expected to have a Material Adverse
Effect on such Obligor, and (d) is in compliance with all Requirements of Law
except to the extent that the failure to comply therewith would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect on such
Obligor.
7.04 Corporate Power; Authorization; Enforceable Obligations. Such
-------------------------------------------------------
Obligor has the corporate power and authority, and the legal right, to make,
deliver and perform the Credit Documents to which it is a party and to borrow
hereunder (in the case of each Borrower) and has taken all necessary corporate
action to authorize the borrowings on the terms and conditions of this Agreement
and to authorize the execution, delivery and performance of the Credit Documents
to which it is a party. No consent or authorization of, filing with, notice to
or other act by or in respect of, any Governmental Authority is required for the
borrowings by such Obligor hereunder or with the execution, delivery,
performance, validity or enforceability by such Obligor of the Credit Documents
to which such Obligor is a party, except such as have been obtained or will be
obtained as and when required or if the failure to obtain such consent or take
such other action would not reasonably be expected to have a Material Adverse
Effect on such Obligor. This Agreement has been, and each other Credit Document
to which it is a party will be, duly executed and delivered on behalf of such
Obligor. This Agreement constitutes, and each other Credit Document to which it
is a party when executed and delivered will constitute, a legal, valid and
binding obligation of such Obligor enforceable against such Obligor in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights
<PAGE>
47
generally and by general equitable principles (whether enforcement is sought by
proceedings in equity or at law).
7.05 No Legal Bar. The execution, delivery and performance of the
------------
Credit Documents to which such Obligor is a party, the borrowings hereunder and
the use of the proceeds thereof will not violate any Requirement of Law or
Contractual Obligation of such Obligor or of any of its Material Subsidiaries
and will not result in, or require, the creation or imposition of any Lien on
any of its or their respective properties or revenues pursuant to any such
Requirement of Law or Contractual Obligation, except to the extent such
violation or Lien would not reasonably be expected to have a Material Adverse
Effect on such Obligor.
7.06 No Material Litigation. No litigation, investigation or
----------------------
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of such Obligor, threatened by or against such Obligor or any
of its Material Subsidiaries or against any of its or their respective
properties or revenues (a) with respect to any of the Credit Documents or any of
the transactions contemplated hereby or thereby, or (b) which would reasonably
be expected to have a Material Adverse Effect on such Obligor.
7.07 No Default. Neither such Obligor nor any of its Material
----------
Subsidiaries is in default under or with respect to any of its Contractual
Obligations in any respect which would reasonably be expected to have a Material
Adverse Effect on such Obligor. No Default or Event of Default has occurred and
is continuing with respect to such Obligor.
7.08 Ownership of Property; Liens. As of the Effective Date (i) each
----------------------------
of such Obligor and its Material Subsidiaries has valid record title in fee
simple to, or a valid leasehold interest in, its interest in all of its real
property, and valid title to, or a valid leasehold interest in, its interest in
all of its other property, and (ii) none of such property is subject to any Lien
except as permitted by Section 8.08.
7.09 Taxes. Each of such Obligor and its Material Subsidiaries has
-----
filed or caused to be filed all tax returns which, to the knowledge of such
Obligor, are required to be filed and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
property and all other taxes, fees or other charges imposed on it or any of its
property by any Governmental Authority (other than any amount the validity of
which is currently being contested in good faith by appropriate proceedings and
with respect to which reserves in conformity with GAAP have been provided on the
books of such Obligor or such Material Subsidiary, as the case may be); as of
the Effective Date no tax Lien has been filed, and, to the knowledge of such
Obligor, no claim is being asserted, with respect to any such tax, fee or other
charge.
7.10 Federal Regulations. No part of the proceeds of any Loans to
-------------------
such Obligor will be used for "purchasing" or "carrying" any "margin stock"
within the respective meanings of each of the quoted terms under Regulation U of
the Board of Governors of the Federal Reserve System as now and from time to
time hereafter in effect or for any purpose which violates the provisions of the
Regulations of such Board of Governors. The value of all margin stock owned
<PAGE>
48
directly or indirectly by such Obligor does not and will not constitute more
than 25% of the total assets of such Obligor.
7.11 ERISA. With respect to such Obligor's ERISA Plans:
-----
(a) each such ERISA Plan is in compliance in all material respects
with, and has been administered in all material respects in compliance
with, the terms of such plan, the applicable provisions of ERISA (to the
extent said plan is an ERISA Plan), the Code (to the extent said plan is
intended to comply with the Code) and any other Federal or state law,
except to the extent any such non-compliance would not have a Material
Adverse Effect;
(b) a favorable determination of qualification under Section 401(a)
or Section 403(a) of the Code of each ERISA Pension Plan of such Obligor
which is intended to be so qualified and each amendment thereto, and a
recognition of exemption from federal income taxation under Section
501(c)(9) of each funded ERISA Welfare Plan of such Obligor, has been
received from the Internal Revenue Service, and to such Obligor's
knowledge, nothing has occurred since the date of each such determination
or recognition that would affect adversely such qualification or exemption;
(c) the amount for which such Obligor or any ERISA Affiliate would be
liable pursuant to the provisions of Section 4062 or 4064 of ERISA with
respect to each ERISA Pension Plan would be not greater than $25,000,000 if
such plan had terminated as of the date of this representation; and
(d) as of the most recent valuation date of each ERISA Pension Plan
of such Obligor, the market value of plan assets of each such ERISA Pension
Plan subject to Section 302 of ERISA or to Section 412 of the Code is not
less than (i) the greater of (1) the plan's accrued liability as determined
under Section 302(c)(7)(A)(i)(II) of ERISA and Section 412(c)(7)(A)(i)(II)
of the Code and (2) the present value of vested benefits of the plan as
determined on the basis of PBGC Form 1 less (ii) $25,000,000.
7.12 Investment Company Act; Other Regulations. Such Obligor is not
-----------------------------------------
an "investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. Such
Obligor is not subject to regulation under any Federal or state statute or
regulation (other than Regulation X of the Board of Governors of the Federal
Reserve System) which limits its ability to incur Indebtedness other than, in
the case of PNB, statutes and regulations generally applicable to national banks
and FDIC-insured institutions and, in the case of PB, statutes and regulations
generally applicable to Utah industrial loan corporations and FDIC-insured
institutions.
7.13 Subsidiaries. All the Subsidiaries of such Obligor at the date
------------
hereof are listed on Schedule I.
<PAGE>
49
7.14 Purpose of Loans. The proceeds of any Loans to such Obligor
----------------
shall be used by such Obligor for general corporate purposes.
7.15 True and Complete Disclosure. All factual information, when
----------------------------
taken as a whole, furnished in writing by such Obligor to the Administrative
Agent pursuant to or in connection with this Agreement is accurate in all
material respects on the date as of which such information is dated or certified
and is not incomplete by reason of omitting to state a material fact respecting
such Obligor and necessary to make such information, when taken as a whole, not
misleading in any material respect, in light of the circumstances under which
such information was provided.
7.16 Public Utility Holding Company Act. Neither such Obligor nor
----------------------------------
any of its Subsidiaries is a "holding company", or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company", within the meaning of
the Public Utility Holding Company Act of 1935, as amended.
7.17 Year 2000 Matters. The Borrowers have commenced and are
-----------------
currently in the process of carrying out a year 2000 project which, in
accordance with applicable regulatory guidelines, is designed to identify and
make any modifications necessary to avoid potential disruptions to its computer
systems arising from year 2000 issues. Any reprogramming or other modifications
to the systems used or relied upon by the Borrowers (including any such systems
supplied by third parties with which the Borrowers' systems interface) and the
related testing are scheduled to be completed by July 31, 1999. The costs to
the Borrowers and their respective Subsidiaries that have not been incurred as
of the date hereof for such modifications and testing are not reasonably
expected to result in a Default or Event of Default or to have a Material
Adverse Effect.
Section 8. Certain Covenants of Each Obligor.
---------------------------------
Each Obligor, as applicable, covenants and agrees with the Lenders and
the Administrative Agent that, so long as any Commitment or Loan is outstanding
and until payment in full of all amounts payable by any Obligor hereunder:
8.01 Financial Statements, Etc. Each Borrower, in the case of
--------------------------
clauses (a), (d), (f), (g) and (h), and the Guarantor, in the case of clauses
(b), (c), (e), (f) and (g), shall deliver to each of the Administrative Agent
and the Lenders:
(a) as soon as available and in any event within sixty (60) days
after the end of each of the first three (3) quarterly fiscal periods of
each fiscal year of such Borrower, consolidated statements of income of
such Borrower and its Consolidated Subsidiaries for the period from the
beginning of the respective fiscal year to the end of such period, and the
related consolidated balance sheets of such Borrower and its Consolidated
Subsidiaries as at the end of such period, setting forth in each case in
comparative form the corresponding consolidated figures for the
corresponding period in the preceding fiscal year, accompanied by a
certificate of a senior financial or accounting officer of
<PAGE>
50
such Borrower stating that said consolidated financial statements fairly
present the consolidated financial condition and results of operations of
such Borrower and its Consolidated Subsidiaries in accordance with GAAP, as
at the end of, and for, such period (subject to normal year-end audit
adjustments);
(b) as soon as available and in any event within sixty (60) days
after the end of each of the first three (3) quarterly fiscal periods of
each fiscal year of the Guarantor, consolidated statements of income,
changes in shareholders' equity and cash flows of the Guarantor and its
Consolidated Subsidiaries for such period and for the period from the
beginning of the respective fiscal year to the end of such period, and the
related consolidated balance sheet of the Guarantor and its Consolidated
Subsidiaries as at the end of such period, setting forth in each case in
comparative form the corresponding consolidated figures for the
corresponding period in the preceding fiscal year, accompanied by a
certificate of a senior financial or accounting officer of the Guarantor
stating that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of the Guarantor
and its Consolidated Subsidiaries at the end of, and for, such period
(subject to normal year-end audit adjustments);
(c) (i) as soon as available and in any event within one-hundred
twenty (120) days after the end of each fiscal year of the Guarantor,
consolidated statements of income, changes in shareholders' equity and cash
flows of the Guarantor and its Consolidated Subsidiaries for such fiscal
year and the related consolidated balance sheet of the Guarantor and its
Consolidated Subsidiaries as at the end of such fiscal year, setting forth
in each case in comparative form the corresponding consolidated figures for
the preceding fiscal year, and accompanied by an opinion thereon of
independent certified public accountants of recognized national standing,
which opinion shall state that said consolidated financial statements
fairly present the consolidated financial condition and results of
operations of the Guarantor and its Consolidated Subsidiaries as at the end
of, and for, such fiscal years in accordance with GAAP and (ii) as soon as
available and in any event within one-hundred twenty (120) days after the
end of each fiscal year of such Borrower, consolidated statements of income
of such Borrower and its Consolidated Subsidiaries for such fiscal year and
the related consolidated balance sheet of such Borrower and its
Consolidated Subsidiaries as at the end of such fiscal year, setting forth
in each case in comparative form the corresponding consolidated figures for
the preceding fiscal year, accompanied by a certificate of a senior
financial or accounting officer of such Borrower stating that said
consolidated financial statements fairly present the consolidated financial
condition and results of operations of such Borrower and its Consolidated
Subsidiaries in accordance with GAAP, as at the end of, and for, such
fiscal year;
(d) at the time each Borrower furnishes each set of financial
statements pursuant to paragraph (a) above and at the time the Guarantor
furnishes each set of financial statements pursuant to paragraph (c) above,
a certificate of a senior financial or accounting officer of each Borrower
to the effect that to such officer's knowledge no Default or Event of
Default has occurred and is continuing (or, if any Default or Event of
<PAGE>
51
Default has occurred and is continuing, describing the same in reasonable
detail and describing the action, if any, that such Borrower has taken or
proposes to take with respect thereto);
(e) at the time it furnishes each set of financial statements
pursuant to paragraph (b) or (c) above, a certificate of a senior financial
or accounting officer of the Guarantor (i) to the effect that to such
officer's knowledge no Default or Event of Default has occurred and is
continuing (or, if any Default or Event of Default has occurred and is
continuing, describing the same in reasonable detail and describing the
action, if any, that the Guarantor has taken or proposes to take with
respect thereto) and (ii) setting forth in reasonable detail the
computations necessary to determine whether the Guarantor is in compliance
with Section 9.01 as of the end of the respective quarterly fiscal period
or fiscal year;
(f) promptly upon receipt thereof, copies of any reports and
management letters submitted to such Obligor by its independent certified
public accountants in connection with any annual or interim audit of the
books of such Obligor and its Subsidiaries, together with such Obligor's
responses thereto, if any;
(g) from time to time such other information regarding the financial
condition, operations, business or prospects of such Obligor (including,
without limitation, any Plan or Multiemployer Plan and any reports or other
information required to be filed under ERISA) as the Administrative Agent
may reasonably request; and
(h) with respect only to the Borrowers, at the time each Borrower
furnishes each set of financial statements pursuant to paragraph (a) or
(c)(ii) above, copies of the publicly available portion of such Borrower's
quarterly Call Reports (or successors) to the OCC or the FDIC and, if
permitted by applicable law, copies of any reports of examination by the
OCC or the FDIC.
8.02 Litigation. Each Obligor will promptly give to the
----------
Administrative Agent notice of all legal or arbitral proceedings, and of all
proceedings by or before any Governmental Authority, and any material
development in respect of such legal or other proceedings, against such Obligor
or any of its Subsidiaries, which have a reasonable likelihood of being
adversely determined and which, if adversely determined, would reasonably be
expected to result in a Material Adverse Effect.
8.03 Existence, Etc. Each Obligor will, and will cause each of its
--------------
Material Subsidiaries to:
(a) preserve and maintain its legal existence and all of its material
rights, privileges, licenses and franchises if failure to maintain such
rights, privileges, licenses and franchises would reasonably be expected to
have a Material Adverse Effect on such Obligor; provided that nothing in
--------
this Section 8.03 shall prohibit any transaction expressly permitted under
Section 8.06 hereof;
<PAGE>
52
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of Governmental Authorities if failure to comply
with such requirements would reasonably be expected to have a Material
Adverse Effect on such Obligor;
(c) pay and discharge all taxes, assessments and governmental charges
or levies imposed on it or on its income or profits or on any of its
significant property (whether real, personal or mixed and whether tangible
or intangible) prior to the date on which penalties attach thereto, except
for any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained;
(d) keep adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting
principles consistently applied; and
(e) upon at least five Business Days' prior notice, permit officers
and employees of the Administrative Agent or, with the consent of such
Obligor, a Lender, to visit and inspect any of the properties of such
Obligor and to examine and audit the minute books, books of account and
other records of such Obligor and make copies thereof or extracts
therefrom, and discuss its affairs, finances and accounts with its officers
and, at the request of the Administrative Agent and the consent of such
Obligor, with such Obligor's independent accountants, during normal
business hours as often as the Administrative Agent may reasonably desire.
8.04 Insurance. Each Obligor will, and will cause each of its
---------
Material Subsidiaries to, maintain insurance in full force and effect with
responsible and financially sound insurance companies, against such risks, on
such properties and in such amounts as is customarily maintained by similar
businesses; and file with the Administrative Agent upon its request a detailed
list of the insurance companies, the amounts and rates of the insurance, the
dates of the expiration thereof and the properties and risks covered thereby;
provided, however, to the extent that it would be consistent with prudent
- --------
business practice and customary among corporations engaged in similar
businesses, such Obligor may self-insure for damage or loss.
8.05 Notices. Each Obligor will promptly give notice to the
-------
Administrative Agent of:
(a) the occurrence of any Default or Event of Default;
(b) any change of the rating assigned by S&P, Moody's or D&P to the
senior unsecured indebtedness of PNB;
(c) as soon as possible, and in any event within ten days after such
Obligor knows or has reason to believe that any of the events or conditions
specified below with respect to any ERISA Plan or ERISA Multiemployer Plan
of such Obligor has occurred or exists,
<PAGE>
53
a statement signed by a Responsible Officer setting forth details
respecting such event or condition and the action, if any, that such
Obligor or ERISA Affiliate thereof proposes to take with respect thereto
(and a copy of any report or notice required to be filed with or given to
PBGC by such Obligor or ERISA Affiliate with respect to such event or
condition):
(i) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder (other than any event the
reporting requirement with respect to which has been waived by PBGC),
with respect to an ERISA Pension Plan of such Obligor (provided that a
--------
failure to meet the minimum funding standard of Section 302 of ERISA
or Section 412 of the Code, including, without limitation, the failure
to make on or before its due date a required installment under Section
302(e) of ERISA or Section 412(m) of the Code, shall be treated as a
reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code); and any request for a
waiver under Section 412(d) of the Code for any ERISA Pension Plan of
such Obligor;
(ii) the distribution under Section 4041 of ERISA of a notice
of intent to terminate any ERISA Pension Plan of such Obligor or any
action taken by such Obligor or any ERISA Affiliate to terminate any
ERISA Pension Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any ERISA Pension Plan of such Obligor, or the receipt
by such Obligor or any ERISA Affiliate of a notice that such a
proceeding has been instituted by PBGC with respect to an ERISA
Multiemployer Plan of such Obligor;
(iv) the complete or partial withdrawal from an ERISA
Multiemployer Plan by such Obligor or any ERISA Affiliate that results
in liability under Section 4204 of ERISA (including the obligation to
satisfy secondary liability as a result of a purchaser default) or
Section 4201 of ERISA (in either case without regard to reduction or
waiver of such liability under Section 4207 or 4208 of ERISA) or the
receipt by such Obligor or any ERISA Affiliate of notice from an ERISA
Multiemployer Plan that it is in reorganization or insolvency pursuant
to Section 4241 or 4245 of ERISA or that it intends to terminate or
has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding on behalf of any ERISA
Multiemployer Plan against such Obligor or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed within
30 days;
(vi) the cessation of operations at a facility which would
subject such Obligor or any ERISA Affiliate to the provisions of
Section 4062(e) of ERISA;
<PAGE>
54
(vii) the withdrawal from an ERISA Pension Plan by such
Obligor or any ERISA Affiliate that results in liability in accordance
with the provisions of Section 4063 of ERISA;
(viii) the termination of an ERISA Pension Plan to which such
Obligor or any ERISA Affiliate contributed, or was required to
contribute, at any time within the five plan years preceding the date
of termination so as to become subject to the provisions of Section
4064 of ERISA;
(ix) the adoption of an amendment to any ERISA Pension Plan
that, pursuant to Section 307 of ERISA or Section 401(a)(29) the Code,
would require such Obligor or any ERISA Affiliate timely to provide
security to the plan in accordance with the provisions of said Section
or would result in the loss of tax-exempt status of the trust of which
such plan is a part if such security is not timely provided;
(x) the funded current liability percentage, within the
meaning of Section 302(d)(8) of ERISA and Section 412(l)(8) of the
Code, of each ERISA Pension Plan of such Obligor is less than 60%.
(xi) the aggregate amount of accumulated benefit obligations,
determined in accordance with Statement of Accounting Standards No.
87, of all ERISA Plans of such Obligor which are ERISA Pension Plans
exceeds the aggregate fair market value of plan assets of all such
plans by more than $25,000,000;
(xii) the aggregate amount of transition obligations,
determined in accordance with Statement of Financial Accounting
Standards No. 106 (or, before such Statement is applicable to such
Obligor or any ERISA Affiliate, a good faith estimate of such
transition obligation), of all ERISA Welfare Plans of such Obligor
(other than ERISA Pension Plans) which has not been recognized as an
income expense in the income statement of such Obligor and its
Subsidiaries exceeds $25,000,000;
(xiii) any transaction or occurrence proscribed by Section 406
of ERISA, or subject to tax under Section 4975 of the Code, for which
a statutory exemption is not available;
(xiv) the payment under any ERISA Plan of such Obligor
(including but not limited to individual employment and severance
agreements) which is not deductible for federal income tax purposes by
virtue of Section 280G of the Code;
(xv) the filing of any action, suit or claim (other than a
routine claim for benefits), including but not limited to a civil or
criminal action or civil penalty pursuant to the provisions of Title
I, Subtitle B, Part 5 of ERISA, in respect of any ERISA Plan of such
Obligor against such Plan, such Obligor or any ERISA
<PAGE>
55
Affiliate, or any other person which could result in liability of such
Obligor or any ERISA Affiliate; and
(xvi) from time to time such other information regarding any
ERISA Plan of, and any reports or other information required to be
filed under ERISA by, such Obligor or any of its Subsidiaries as any
Lender or the Administrative Agent may reasonably request.
Each notice pursuant to this Section shall be accompanied by a
statement of a Responsible Officer setting forth details of the occurrence
referred to therein and stating what action the Obligor proposes to take with
respect thereto. Notice of any event described in this Section 8.05 which
relates to more than one Obligor need only be given by one Obligor, provided
--------
such notice specifies all Obligors to which such event applies.
8.06 Limitation on Fundamental Changes. Each Obligor shall not, and
---------------------------------
shall not permit its Material Subsidiaries to, enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in the character of its present business,
except:
(a) such Obligor or any Subsidiary of such Obligor may be merged or
consolidated with or into any Person (provided that the surviving entity
--------
shall be the Guarantor or a wholly owned direct or indirect Subsidiary of
the Guarantor);
(b) any Subsidiary of such Obligor (including any Borrower) may
convey, sell, lease, assign, transfer or otherwise dispose of any or all of
its assets (upon voluntary liquidation or otherwise) to such Obligor or to
any other wholly owned direct or indirect Subsidiary of the Guarantor; and
(c) changes in the character of its present business if after giving
effect to such change such Obligor and its Material Subsidiaries will be
principally engaged in the business of offering, selling, servicing or
owning consumer products and services (including, without limitation,
consumer financial products and services).
Nothing in this Section 8.06 shall prohibit any Obligor or its
Material Subsidiaries from transferring or pledging Receivables pursuant to a
Securitization.
8.07 Limitation on Sale of Assets. Each Obligor shall not, and shall
----------------------------
not permit its Material Subsidiaries to, convey, sell, lease, assign, transfer
or otherwise dispose of any of its property, business or assets (including,
without limitation, Receivables and leasehold interests), whether now owned or
hereafter acquired, or, in the case of any Material Subsidiary, issue or sell
any shares of such Material Subsidiary's Capital Stock to any Person other than
such Obligor or any wholly owned direct or indirect Subsidiary of the Guarantor,
except:
<PAGE>
56
(a) the sale or other disposition of property which is obsolete, worn
out or no longer used or useful in the ordinary course of business;
(b) as permitted under Section 8.09 hereof;
(c) the sale of Receivables if (A) such sale is pursuant to a
Securitization or an arrangement containing customary provisions generally
limiting recourse to the Receivables sold and (B) after giving effect to
such sale such Obligor will be in compliance with all of the applicable
covenants contained in Sections 8 and 9, and no Default or Event of Default
will occur by reason of such sale;
(d) sales, leases and dispositions of assets other than Receivables
in the ordinary course of its business in arm's length transactions for
full and fair value;
(e) as permitted by Section 8.06(b); and
(f) any sale of assets to any Person not covered by (a) through (e)
above, if after giving effect to such sale such Obligor will be in
compliance with all of the applicable covenants contained in Sections 8 and
9 and no Default or Event of Default will occur by reason of such sale.
8.08 Limitation on Liens. Each Obligor shall not, and shall not
-------------------
permit its Material Subsidiaries to, create, incur, assume or suffer to exist
any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except:
(a) Liens incidental to the conduct of the business of such Obligor
or its Material Subsidiaries or the ownership of its assets or properties
and not incurred in connection with the borrowing of money or the
acquisition of any asset and which in the aggregate do not materially
detract from the business, properties, condition (financial or otherwise)
or operations, present or prospective, of such Obligor;
(b) Liens securing purchase money debt, so long as each such Lien
secures only the Indebtedness incurred to finance all or part of the cost
of acquiring the property subject to such Lien, provided such Lien attaches
to such property concurrently with, or within 90 days after the date of,
such acquisition;
(c) Liens on property resulting from the rights of vendors or lessors
under conditional sales agreements, leases required to be capitalized under
GAAP or other title retention agreements, provided such Lien is not
extended to other property of such Obligor or its Material Subsidiaries;
(d) Liens in existence on the date hereof as set forth in Schedule
II, provided that, unless permitted under Section 8.08(a), no such Lien is
--------
spread to cover any additional property after the date hereof and that the
amount of Indebtedness secured thereby is not increased;
<PAGE>
57
(e) Liens on the property of any Material Subsidiary of an Obligor in
favor of such Obligor or any other wholly owned direct or indirect
Subsidiary of the Guarantor;
(f) Liens existing on the property of any Person at the time such
Person becomes a Subsidiary of or is merged or consolidated with an Obligor
or any of its Material Subsidiaries and not created in contemplation of
such merger or consolidation, and Liens existing on property prior to such
property being acquired by an Obligor or any of its Material Subsidiaries
not created in contemplation of such acquisition;
(g) Liens arising out of the refinancing, extension, renewal or
refunding of Indebtedness secured by any Lien permitted by this Section
8.08, provided such Indebtedness is not increased and is not secured by any
additional property;
(h) Liens for taxes not yet due and payable and Liens for taxes being
contested in good faith by appropriate proceedings for which adequate
reserves in accordance with GAAP have been established;
(i) in the case of a Borrower, Liens granted to any Federal Reserve
Bank to secure advances or other transactions incidental to the conduct of
the business of such Borrower, including loans to meet liquidity
requirements;
(j) Liens resulting from any Securitization (including Liens on
assets retained by the transferor in connection with a Securitization);
(k) Liens on cash and readily marketable securities securing
obligations in respect of Swap Agreements (as defined in Section 101 of the
Bankruptcy Code) in an amount not to exceed (i) the net mark to market
exposure of the counterparty thereunder (subject to customary minimum
transfer thresholds and periodic valuations) plus (ii) any additional
amounts requested by counterparties in accordance with their general
internal credit guidelines or policies with respect to particular types of
Swap Agreements;
(l) Liens for judgments or decrees that have been bonded and that
have not resulted in the occurrence of an Event of Default under Section
11(i);
(m) Liens on the property of any Obligor or its Material Subsidiaries
not otherwise permitted by this Section 8.08 securing obligations not to
exceed, in the aggregate, 10% of the Consolidated Tangible Capital of the
Guarantor; and
(n) other Liens consented to in writing by the Administrative Agent
and the Majority Lenders; provided that the Administrative Agent and the
--------
Lenders shall not unreasonably withhold such consent.
8.09 Limitation on Transactions with Affiliates. Each Obligor shall
------------------------------------------
not enter into any transaction, including, without limitation, any purchase,
sale, lease or exchange of property
<PAGE>
58
or the rendering of any service, with any Affiliate unless such transaction is
(a) in the ordinary course of the Obligor's or such Affiliate's business, or
upon fair and reasonable terms no less favorable to such Obligor than it would
obtain in a comparable arm's length transaction with a Person which is not an
Affiliate, and (b) in compliance with all applicable law.
Section 9. Additional Obligor-Specific Covenants.
-------------------------------------
9.01 Guarantor Covenants. The Guarantor further covenants and agrees
-------------------
with the Lenders that, so long as any Commitment or Loan is outstanding, the
Guarantor will not:
(a) Maintenance of Consolidated Tangible Capital. Permit its
--------------------------------------------
Consolidated Tangible Capital at any time to be less than the sum of (i)
$625,000,000 and (ii) 40% of its Consolidated Net Income for each fiscal quarter
commencing after September 30, 1998 and ending on or before such date of
determination (without any deduction for any Consolidated Net Loss for any such
fiscal quarter).
(b) Maintenance of Ratio of Tier 1 Capital to Managed Receivables.
-------------------------------------------------------------
Permit the ratio of its Tier 1 Capital to its Managed Receivables at any time to
be less than 4.0%, provided that, for any period of up to three calendar months,
--------
such ratio may be as low as 3.50% during such three month period so long as it
returns to 4.0% or more at the end of such three month period.
(c) Maximum Ratio of Non-Performing Assets to Managed Receivables.
-------------------------------------------------------------
Permit the ratio of its Non-Performing Assets to its Managed Receivables on the
last day of any calendar month to exceed 6%.
9.02 Covenants of the Borrowers. Each of the Borrowers further
--------------------------
covenants and agrees with the Lenders that, so long as any Commitment or Loan is
outstanding to it, it will (i) maintain at all times such amount of capital as
may be prescribed by the Board of Governors of the Federal Reserve System from
time to time, whether by regulation, agreement or order and (ii) be "adequately
capitalized" (as defined in 12 U.S.C. 1831o, as amended, reenacted or
redesignated from time to time).
Section 10. Guarantee.
---------
10.01 Guarantee.
---------
(a) The Guarantor hereby unconditionally and irrevocably guarantees
to the Lenders and their respective successors, indorsees, transferees and
assigns, the prompt and complete payment by the Borrowers to the Administrative
Agent on behalf of the Lenders when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations (including, without limitation,
any Obligations resulting from increases in the aggregate Commitments pursuant
to Section 2.13 or 2.14) without set-off or counterclaim in Dollars at the
Principal Office of the Administrative Agent in accordance with the terms of
this Agreement.
<PAGE>
59
(b) The Guarantor further agrees to pay all reasonable out-of-pocket
costs and expenses of the Lenders and the Administrative Agent (including,
without limitation, reasonable counsels' fees) in connection with any Event of
Default and any enforcement or collection proceedings resulting therefrom or in
connection with the protection or preservation of rights or interests following
an Event of Default or the negotiation of any restructuring or "work-out"
(whether or not consummated) of the obligations of the Guarantor under this
Section 10 following an Event of Default.
(c) No payment or payments made by any Borrower or any other Person
or received or collected by the Administrative Agent or any Lender from any
Borrower or any other Person by virtue of any action or proceeding or any set-
off or appropriation or application, at any time or from time to time, in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment or payments, continue to be effective
until the Obligations are paid in full and the Commitments are terminated.
(d) The Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Administrative Agent or any Lender on
account of its liability under this Section 10, it will notify the
Administrative Agent and such Lender in writing that such payment is made under
this Section 10 for such purpose.
10.02 Right of Set-off. The Administrative Agent and each Lender is
----------------
hereby irrevocably authorized at any time and from time to time after the
occurrence and during the continuation of an Event of Default, without notice to
the Guarantor, any such notice being expressly waived by the Guarantor, to set
off and appropriate and apply any and all deposits (general or special, time or
demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Administrative Agent or such Lender or any bank controlled by such
Lender to or for the credit or the account of the Guarantor, or any part thereof
in such amounts as the Administrative Agent or such Lender may elect, against or
on account of the obligations and liabilities of the Guarantor to the
Administrative Agent or such Lender hereunder as the Administrative Agent or
such Lender may elect, whether or not the Administrative Agent or such Lender
has made any demand for payment and although such obligations, liabilities and
claims may be contingent or unmatured. The Administrative Agent and each Lender
shall notify the Guarantor promptly of any such set-off and the application made
by the Administrative Agent or such Lender, as the case may be, of the proceeds
thereof; provided that the failure to give such notice shall not affect the
--------
validity of such set-off and application. The rights of the Administrative
Agent and each Lender under this paragraph are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which the
Administrative Agent or such Lender may have.
10.03 Waiver of Subrogation. Notwithstanding anything to the
---------------------
contrary in this Agreement, as long as the Obligations remain outstanding the
Guarantor hereby waives all rights which may have arisen in connection with this
Agreement to be subrogated to any of the rights (whether contractual, under the
Bankruptcy Code, including Section 509 thereof, under common
<PAGE>
60
law or otherwise) of the Lenders against the Borrowers or against any collateral
security or guarantee or right of offset held by the Lenders for the payment of
the Obligations. So long as the Obligations remain outstanding, if any amount
shall be paid by or on behalf of the Borrowers to the Guarantor on account of
any of the rights waived in this paragraph, such amount shall be held by the
Guarantor in trust, segregated from other funds of such Guarantor, and shall,
forthwith upon receipt by such Guarantor, be turned over to the Administrative
Agent in the form received by the Guarantor (duly indorsed by the Guarantor to
the Lender, if required), to be applied against the Obligations, whether matured
or unmatured, in such order as the Administrative Agent may determine. The
provisions of this paragraph shall survive the termination of this Agreement and
the payment in full of the Obligations and the termination of the Commitments.
10.04 Amendments, etc. re Obligations; Waiver of Rights. The
-------------------------------------------------
Guarantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against the Guarantor, and without notice to or further
assent by the Guarantor (except as provided in Section 13.04), any demand for
payment of any of the Obligations made by the Administrative Agent or any Lender
may be rescinded by the Administrative Agent or such Lender, and any of the
Obligations continued, and the Obligations, or the liability of any other party
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Administrative Agent or any Lender, and this
Agreement and any other documents executed and delivered in connection herewith
may be amended, modified, supplemented or terminated, in whole or in part, as
the Administrative Agent (or the Majority Lenders, as the case may be) may deem
advisable from time to time, and any collateral security, guarantee or right of
offset at any time held by the Administrative Agent or any Lender for the
payment of the Obligations may be sold, exchanged, waived, surrendered or
released. Neither the Administrative Agent nor any Lender shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Obligations or for this Agreement or any property subject
thereto. When making any demand hereunder against the Guarantor, the
Administrative Agent or any Lender may, but shall be under no obligation to,
make a similar demand on the related Borrower or any other guarantor, and any
failure by the Administrative Agent or any Lender to make any such demand or to
collect any payments from the Borrowers or any such other guarantor or any
release of the Borrowers or such other guarantor shall not relieve the Guarantor
of its obligations or liabilities hereunder, and shall not impair or affect the
rights and remedies, express or implied, or as a matter of law, of the
Administrative Agent or any Lender against the Guarantor. For the purposes
hereof "demand" shall include the commencement and continuance of any legal
proceedings.
10.05 Guarantee Absolute and Unconditional. The Guarantor waives any
------------------------------------
and all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Administrative Agent or
any Lender upon the obligations of the Guarantor under this Agreement or
acceptance of this guarantee; the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived, in reliance upon the obligations of the Guarantor
under this Agreement; and all dealings between the Borrowers or the Guarantor,
on the one hand, and the
<PAGE>
61
Administrative Agent and the Lenders, on the other, shall likewise be
conclusively presumed to have been had or consummated in reliance upon the
obligations of the Guarantor under this Agreement. The Guarantor waives
diligence, presentment, protest, demand for payment and notice of default or
nonpayment to or upon any Borrower or the Guarantor with respect to the
Obligations. The obligations of the Guarantor under this Section 10 shall be
construed as a continuing, absolute and unconditional guarantee of payment
without regard to (a) the validity, or enforceability of this Agreement, any of
the Obligations or any other collateral security therefor or guarantee or right
of offset with respect thereto at any time or from time to time held by the
Administrative Agent or any Lender, (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by any Borrower against the Administrative Agent or
any Lender, or (c) any other circumstance whatsoever (with or without notice to
or knowledge of the Borrowers or the Guarantor) which constitutes, or might be
construed to constitute, an equitable or legal discharge of any Borrower for the
Obligations, or of the Guarantor under this Agreement, in bankruptcy or in any
other instance. When pursuing its rights and remedies hereunder against the
Guarantor, the Administrative Agent and any Lender may, but shall be under no
obligation to, pursue such rights and remedies as it may have against any
Borrower or any other Person or against any collateral security or guarantee for
the Obligations or any right of offset with respect thereto, and any failure by
the Administrative Agent or any Lender to pursue such other rights or remedies
or to collect any payments from any Borrower or any such other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of any Borrower or any such other Person or of
any such collateral security, guarantee or right of offset, shall not relieve
the Guarantor of any liability hereunder, and shall not impair or affect the
rights and remedies, whether express, implied or available as a matter of law,
of the Administrative Agent or any Lender against the Guarantor. The obligations
of the Guarantor under this Agreement shall remain in full force and effect and
be binding in accordance with and to the extent of its terms upon the Guarantor
and its successors and assigns thereof, and shall inure to the benefit of the
Administrative Agent and the Lenders, and their respective successors,
indorsees, transferees and assigns, until all the Obligations and the
obligations of the Guarantor under this Agreement shall have been satisfied by
payment in full and the Commitments shall be terminated, notwithstanding that
from time to time during the term of this Agreement the Borrowers may be free
from any Obligations.
10.06 Reinstatement. The obligations of the Guarantor under this
-------------
Agreement shall continue to be effective, or be reinstated, as the case may be,
if at any time payment, or any part thereof, of any of the Obligations is
rescinded or must otherwise be restored or returned by the Administrative Agent
or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of any Borrower or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, any
Borrower or any substantial part of its property, or otherwise, all as though
such payments had not been made.
Section 11. Events of Default.
-----------------
If any of the following events ("Events of Default") shall occur and
-----------------
be continuing:
<PAGE>
62
(a) Any Borrower shall fail to pay any principal of any Loan when
due in accordance with the terms thereof or hereof; or any Borrower shall
fail to pay any interest on any Loan, any Facility Fee, any Utilization Fee
or any other amount payable by such Borrower hereunder, within five days
after any such interest, fee or other amount becomes due in accordance with
the terms thereof or hereof; or
(b) The Guarantor shall fail to pay any amount pursuant to Section 10
hereof within five days after such amount becomes due in accordance with
the terms thereof; or
(c) Any representation or warranty made or deemed made by any Obligor
herein or which is contained in any certificate furnished by it at any time
under this Agreement shall prove to have been incorrect in any material
respect on or as of the date made or deemed made; or
(d) Any Obligor shall default in the observance or performance of any
agreement contained in Section 8.06, 8.07, 9.01 or 9.02; or
(e) Any Obligor shall default in the observance or performance of any
other agreement contained in this Agreement (other than as provided in
paragraphs (a) through (d) of this Section), and such default shall
continue unremedied for a period of 30 days after the Administrative Agent
has given notice of such default to such Obligor; or
(f) Any Obligor or any of its Material Subsidiaries shall (i) default
in any payment of principal of or interest of any Indebtedness (other than
the Loans) or in the payment of any Guarantee Obligation in an aggregate
amount in excess of $25,000,000 in the case of any Obligor and its Material
Subsidiaries, and such default shall remain uncured or unwaived within the
cure period or grace period, if any, provided in the instrument or
agreement under which such Indebtedness or Guarantee Obligation was
created; or (ii) default in the observance or performance of any other
agreement or condition relating to any such Indebtedness or Guarantee
Obligation or contained in any instrument or agreement evidencing, securing
or relating thereto, or any other event shall occur or condition exist, the
effect of which default or other event or condition is to cause, or to
permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf
of such holder or holders or beneficiary or beneficiaries) to cause, with
the giving of notice if required, such Indebtedness to become due prior to
its stated maturity or such Guarantee Obligation to become payable and such
default shall remain uncured or unwaived within the cure period or grace
period, if any, provided therein; or
(g) (i) Any Borrower or any of its Material Subsidiaries or the
Guarantor shall commence any case, proceeding or other action (A) under any
existing or future law of any jurisdiction, domestic or foreign, relating
to bankruptcy, insolvency, reorganization or relief of debtors, seeking to
have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition
or other relief with respect
<PAGE>
63
to it or its debts, or (B) seeking appointment of a receiver, trustee,
custodian, conservator or other similar official for it or for all or any
substantial part of its assets, or any Borrower or any of its Material
Subsidiaries or the Guarantor shall make a general assignment for the
benefit of its creditors; or (ii) there shall be commenced against any
Borrower or any of its Material Subsidiaries or the Guarantor any case,
proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced against
any Borrower or any of its Material Subsidiaries or the Guarantor any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part
of its assets which results in the entry of an order for any such relief
which shall not have been vacated, discharged, or stayed or bonded pending
appeal within 60 days from the entry thereof; or (iv) any Borrower or any
of its Material Subsidiaries or the Guarantor shall take any corporate
action for the purpose of effecting any of the acts set forth in clause
(i), (ii), or (iii) above; or (v) any Borrower or any of its Material
Subsidiaries or the Guarantor shall admit in writing its inability to pay
its debts as they become due; or
(h) An event or condition specified in Section 8.05(c) hereof shall
occur or exist with respect to any ERISA Plan and, as a result of such
event or condition, together with all other such events or conditions, any
Obligor or any ERISA Affiliate shall incur a liability to or in respect of
an ERISA Plan or to PBGC (or any combination of the foregoing) which would
constitute, in the determination of the Majority Lenders, a Material
Adverse Effect with respect to such Obligor; or
(i) One or more judgments or decrees shall be entered against any
Obligor or any of its Material Subsidiaries involving in the aggregate a
liability (not paid or fully covered by insurance) of $25,000,000 or more,
and shall remain unvacated, undischarged, unstayed or unbonded pending
appeal within 30 days from the entry thereof; or
(j) (i) Any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), shall become, or obtain rights (whether by means of
warrants, options or otherwise) to become, the "beneficial owner" (as
defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or
indirectly, of more than 50% of the outstanding voting stock of the
Guarantor or (ii) the board of directors of the Guarantor shall cease to
consist of a majority of Continuing Directors;
(k) The Guarantor shall cease to own directly at least 95% of the
outstanding voting stock of each Borrower; or
(1) Any Borrower or any Material Subsidiary of such Borrower which is
an Insured Depository Institution shall enter into a capital maintenance
agreement or be required to submit a capital restoration plan of the type
referred to in 12 U.S.C. 1831o(b)(2)(C);.
<PAGE>
64
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (g) above with respect to the Guarantor
(other than an Event of Default caused solely by a case, proceeding or other
action with respect to a Borrower), automatically the Commitments and the Swing
Line Commitments to lend to all Borrowers shall immediately terminate and the
Loans hereunder (with accrued interest thereon) and all other amounts owing by
any Obligor under this Agreement shall immediately become due and payable, (B)
if such event is an Event of Default specified in clause (i) or (ii) of
paragraph (g) above with respect to a Borrower, automatically the Commitments
and the Swing Line Commitments to lend to such Borrower shall immediately
terminate and the Loans to such Borrower hereunder (with accrued interest
thereon) and all other amounts owing by such Borrower under this Agreement
shall immediately become due and payable, (C) if such event is any other Event
of Default with respect to the Guarantor or any Event of Default specified in
paragraph (b), (j) or (k), either or both of the following actions may be taken:
(i) with the consent of the Majority Lenders, the Administrative Agent may, or
upon the request of the Majority Lenders, the Administrative Agent shall, by
notice to the Guarantor and the Borrowers declare the Commitments and the Swing
Line Commitments to lend to all Borrowers to be terminated forthwith, whereupon
the Commitments and the Swing Line Commitments shall immediately terminate; and
(ii) with the consent of the Majority Lenders, the Administrative Agent may, or
upon the request of the Majority Lenders, the Administrative Agent shall, by
notice to the Guarantor and the Borrowers, declare the Loans to all Borrowers
hereunder (with accrued interest thereon) and all other amounts owing by any
Obligor under this Agreement to be due and payable forthwith, whereupon the same
shall immediately become due and payable and (D) if such event is any other
Event of Default with respect to any Borrower, either or both of the following
actions may be taken: (i) with the consent of the Majority Lenders, the
Administrative Agent may, or upon the request of the Majority Lenders, the
Administrative Agent shall, by notice to such Borrower declare the Commitments
and the Swing Line Commitments to lend to such Borrower to be terminated
forthwith, whereupon the Commitments and the Swing Line Commitments to lend to
such Borrower shall immediately terminate; and (ii) with the consent of the
Majority Lenders, the Administrative Agent may, or upon the request of the
Majority Lenders, the Administrative Agent shall, by notice to such Borrower,
declare the Loans to such Borrower hereunder (with accrued interest thereon) and
all other amounts owing by such Borrower under this Agreement to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
Except as expressly provided above in this Section 11, presentment, demand,
protest and all other notices of any kind are hereby expressly waived.
Section 12. The Administrative Agent.
------------------------
12.01 Appointment, Powers and Immunities. Each Lender hereby
----------------------------------
appoints and authorizes the Administrative Agent to act as its agent hereunder
with such powers as are specifically delegated to the Administrative Agent by
the terms of this Agreement, together with such other powers as are reasonably
incidental thereto. The Administrative Agent (which term as used in this
sentence and in Section 12.05 and the first sentence of Section 12.06 shall
include reference to its affiliates and its own and its affiliates' officers,
directors, employees and agents): (a) shall have no duties or responsibilities
except those expressly set forth in this Agreement and
<PAGE>
65
in the other Credit Documents, and shall not by reason of this Agreement or any
other Credit Document be a trustee for any Lender; (b) shall not be responsible
to the Lenders for any recitals, statements, representations or warranties
contained in this Agreement or in any other Credit Document, or in any
certificate or other document referred to or provided for in, or received by any
of them under, this Agreement or any other Credit Document, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Credit Document or any other document referred to or
provided for herein or therein or for any failure by any Borrower or any other
Person to perform any of its obligations hereunder or thereunder; (c) shall not
be required to initiate or conduct any litigation or collection proceedings
hereunder or under any other Credit Document; (d) shall not be responsible for
any action taken or omitted to be taken by it hereunder or under any other
Credit Document or under any other document or instrument referred to or
provided for herein or therein or in connection herewith or therewith, except
for its own gross negligence or willful misconduct. The Administrative Agent may
employ agents and attorneys-in-fact and shall not be responsible for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
in good faith. The Administrative Agent may deem and treat the Lender specified
in the Register with respect to any amount owing hereunder as the owner thereof
for all purposes hereof unless and until a notice of the assignment or transfer
thereof shall have been filed with the Administrative Agent, together with the
consent of the Borrowers and the Administrative Agent to such assignment or
transfer (to the extent provided in Section 13.06(b) hereof).
12.02 Reliance by Administrative Agent. The Administrative Agent
--------------------------------
shall be entitled to rely upon any certification, notice or other communication
(including, without limitation, any thereof by telephone, telecopy, telex,
telegram or cable) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Administrative Agent. As to any matters not expressly provided
for by this Agreement or any other Credit Document, the Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions given by the Majority
Lenders or, if provided herein, in accordance with the instructions given by the
Majority Lenders or all of the Lenders as is required in such circumstance, and
such instructions of such Lenders and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders.
12.03 Defaults. The Administrative Agent shall not be deemed to have
--------
knowledge or notice of the occurrence of a Default or Event of Default (other
than the non-payment of principal of or interest on Loans or of Facility Fee or
Utilization Fee) unless the Administrative Agent has received notice from a
Lender or an Obligor specifying such Default or Event of Default and stating
that such notice is a "Notice of Default". In the event that the Administrative
Agent receives such a notice of the occurrence of a Default or Event of Default,
the Administrative Agent shall give prompt notice thereof to the Lenders (and
shall give each Lender prompt notice of each such non-payment). The
Administrative Agent shall (subject to Sections 12.01, 12.07 and 13.04 hereof)
take such action with respect to such Default or Event of Default as shall be
directed by the Majority Lenders, provided that, unless and until the
--------
Administrative Agent shall have received such directions, the Administrative
Agent may (but
<PAGE>
66
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Default or Event of Default as it shall deem advisable in
the best interest of the Lenders except to the extent that this Agreement
expressly requires that such action be taken, or not be taken, only with the
consent or upon the authorization of the Majority Lenders or all of the Lenders.
12.04 Rights as a Lender. With respect to its Commitment and the
------------------
Loans made by it, Chase (and any successor acting as Administrative Agent) in
its capacity as a Lender hereunder shall have the same rights and powers
hereunder as any other Lender and may exercise the same as though it were not
acting as the Administrative Agent, and the term "Lender" or "Lenders" shall,
unless the context otherwise indicates, include the Administrative Agent in its
individual capacity. Chase (and any successor acting as Administrative Agent)
and its affiliates may (without having to account therefor to any Lender) accept
deposits from, lend money to, make investments in and generally engage in any
kind of banking, trust or other business with the Obligors (and any of their
respective Subsidiaries or Affiliates) as if it were not acting as the
Administrative Agent, and Chase and its affiliates may accept fees and other
consideration from the Obligors for services in connection with this Agreement
or otherwise without having to account for the same to the Lenders.
12.05 Indemnification. The Lenders agree to indemnify the
---------------
Administrative Agent (to the extent not reimbursed under Section 13.03 or
otherwise on behalf of the Borrowers, but without limiting the obligations of
the Borrowers under Section 13.03) ratably in accordance with their respective
Commitments, for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever that may be imposed on, incurred by or asserted
against the Administrative Agent (in its capacity as Administrative Agent)
(including by any Lender) arising out of or by reason of any investigation in or
in any way relating to or arising out of this Agreement or any other Credit
Document or any other documents contemplated by or referred to herein or therein
or the transactions contemplated hereby or thereby (including, without
limitation, the costs and expenses that any Borrower is obligated to pay under
Section 13.03 hereof, but excluding, unless a Default or Event of Default has
occurred and is continuing, normal administrative costs and expenses incident to
the performance of its agency duties hereunder) or the enforcement of any of the
terms hereof or thereof or of any such other documents, provided that no Lender
--------
shall be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the party to be indemnified.
12.06 Non-Reliance on Administrative Agent and Other Lenders. Each
------------------------------------------------------
Lender agrees that it has, independently and without reliance on the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Obligors and the decision to enter into this Agreement and that it will,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under this Agreement or any other Credit Document. The
Administrative Agent shall not be required to keep itself informed as to the
performance or observance by the Obligors of this Agreement or any of the other
Credit
<PAGE>
67
Documents or any other document referred to or provided for herein or therein or
to inspect the Properties or books of the Obligors. Except for notices, reports
and other documents and information expressly required to be furnished to the
Lenders by the Administrative Agent hereunder, the Administrative Agent shall
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the affairs, financial condition or business of any
Obligor or any Subsidiary of any Obligor (or any of their affiliates) that may
come into the possession of the Administrative Agent or any of its affiliates.
12.07 Failure to Act. Except for action expressly required of the
--------------
Administrative Agent hereunder, the Administrative Agent shall in all cases be
fully justified in failing or refusing to act hereunder and thereunder unless it
shall receive further assurances to its reasonable satisfaction from the Lenders
of their indemnification obligations under Section 12.05 against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.
12.08 Resignation of Administrative Agent. Subject to the
-----------------------------------
appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by giving notice thereof
to the Lenders and the Borrowers. If the Administrative Agent also then serves
in the capacity of a Swing Line Lender, such resignation of the Administrative
Agent shall not terminate its obligations as a Swing Line Lender. Upon any such
resignation, the Majority Lenders shall with the consent of the Borrowers (which
consent shall not be unreasonably withheld) have the right to appoint a
successor Administrative Agent, which shall be a Lender; provided that if upon
--------
the date of such appointment an Event of Default shall exist, such consent of
the Borrowers shall not be required. If no successor Administrative Agent shall
have been so appointed by the Majority Lenders and shall have accepted such
appointment within 30 days after the retiring Administrative Agent's giving of
notice of resignation, then the retiring Administrative Agent may, on behalf of
the Lenders, appoint a successor Administrative Agent with the consent of the
Borrowers (such consent not to be unreasonably withheld); provided that if upon
--------
the date of such appointment an Event of Default shall exist, such consent of
the Borrowers shall not be required, that shall be a Lender with a combined
capital and surplus of at least $2,000,000,000. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent (with the consent of the Borrowers as may be provided above), such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Administrative
Agent, and the retiring Administrative Agent shall be discharged from its duties
and obligations hereunder. After any retiring Administrative Agent's
resignation hereunder as Administrative Agent, the provisions of this Section
12 shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as the Administrative Agent.
12.09 Syndication Agents. The Syndication Agents shall not have any
------------------
duties or responsibilities, or be entitled to any of the rights of the
Administrative Agent under, this Agreement or under any other Credit Document.
<PAGE>
68
Section 13. Miscellaneous.
-------------
13.01 Waiver. No failure on the part of the Administrative Agent or
------
any Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this Agreement or any other
Credit Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege under this Agreement or any
other Credit Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The remedies provided herein
are cumulative and not exclusive of any remedies provided by law.
13.02 Notices. All notices, requests and other communications
-------
provided for herein and under the other Credit Documents (including, without
limitation, any modifications of, or waivers or consents under, this Agreement)
shall be given or made in writing (including, without limitation, by telex or
telecopy), or, with respect to notices that pursuant to Section 2.03 or 2.04 may
be given by telephone, confirmed in writing by telecopy by the close of business
on the day the notice is given, delivered (or telephoned, as the case may be) to
the intended recipient at the "Address for Notices" specified below its name on
the signature pages hereof, or, as to any party, at such other address as shall
be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement, all such communications shall be deemed to
have been duly given when transmitted by telex or telecopy or personally
delivered (or telephone in the case of notices that may be given by telephone
pursuant to Section 2.03 or 2.04) or, in the case of a mailed notice, upon
receipt, in each case given or addressed as aforesaid.
13.03 Expenses, Etc. Each Borrower severally agrees to pay or
-------------
reimburse each of the Lenders and the Administrative Agent, as the case may be,
within 15 days after receipt of written demand for: (a) all reasonable out-of-
pocket costs and expenses of the Administrative Agent (including, without
limitation, the reasonable fees and expenses of Simpson Thacher & Bartlett,
special New York counsel to the Administrative Agent and the Lenders), in
connection with (i) the negotiation, preparation, execution and delivery of this
Agreement and the other Credit Documents and the extension of credit hereunder
and (ii) any modification, supplement or waiver of any of the terms of this
Agreement or any of the other Credit Documents; (b) all reasonable out-of-pocket
costs and expenses of the Lenders and the Administrative Agent (including,
without limitation, reasonable counsels' fees) in connection with (i) any Event
of Default and any enforcement or collection proceedings resulting therefrom or
in connection with the protection or preservation of rights or interests
following an Event of Default or the negotiation of any restructuring or "work-
out" (whether or not consummated) of the obligations of the Obligors hereunder
and under the other Credit Documents following an Event of Default and (ii) the
enforcement of this Section 13.03; and (c) all transfer, stamp, documentary or
other similar taxes, assessments or charges levied by any governmental or
revenue authority in respect of this Agreement or any of the other Credit
Documents or any other document referred to herein or therein, provided, that a
--------
Borrower shall have no payment or reimbursement obligations under this Section
13.03 in connection with any of the foregoing events or circumstances that
relate solely to the other Borrower.
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69
Each Borrower hereby severally agrees (i) to indemnify the
Administrative Agent and each Lender, their respective Affiliates and their
respective directors, officers, employees, attorneys and agents from, and hold
each of them harmless against any and all losses, liabilities, claims, damages
or expenses incurred by any of them (including, without limitation, any and all
losses, liabilities, claims, damages or expenses incurred by the Administrative
Agent to any Lender) arising out of or by reason of any investigation or
litigation or other proceedings (including any threatened investigation or
litigation or other proceedings, but excluding any investigation, litigation or
proceeding solely between Lenders or between the Administrative Agent and any
Lender or Lenders), whether or not the Administrative Agent or any Lender or
such other indemnified Person is a party thereto, relating to the extensions of
credit hereunder or any actual or proposed use by the Borrowers or any of their
Subsidiaries of the proceeds of any of the extensions of credit hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or other
proceedings (but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified) and (ii) not to assert any claim against the
Administrative Agent, any Lender, any of their affiliates, or any of their
respective directors, officers, employees, attorneys and agents, on any theory
of liability, for special, indirect, consequential or punitive damages arising
out of or otherwise relating to any of the transactions contemplated herein or
in any other Credit Document, other than claims arising by reason of the gross
negligence or willful misconduct of any such Person; provided that a Borrower
--------
shall have no indemnification obligation under this Section 13.03 in connection
with any of the foregoing events or circumstances that related solely to the
other Borrower.
13.04 Amendments, Etc. Except as otherwise expressly provided in
---------------
this Agreement, any provision of any Credit Document may be modified or
supplemented only by an instrument in writing signed by the Guarantor, the
Borrowers and the Majority Lenders, or by the Guarantor, the Borrowers and the
Administrative Agent acting with the consent of the Majority Lenders, and any
provision of any Credit Document may be waived by the Majority Lenders or by the
Administrative Agent acting with the consent of the Majority Lenders; provided
--------
that: no modification, supplement or waiver shall: (a) unless by an instrument
signed by each Lender affected thereby: (i) increase, or extend the term of any
of the Commitments (other than as contemplated by Section 2.12, 2.13 or 2.14),
or extend the time or waive any requirement for the reduction or termination of
any of the Commitments (other than as contemplated by Section 2.12, 2.13 or
2.14), (ii) extend the date fixed for the payment of principal of or interest on
any Loan (other than Swing Line Loans) or any fee hereunder, (iii) reduce the
amount of any such payment of principal, (iv) reduce the rate at which interest
is payable thereon or any fee is payable hereunder or (v) alter the rights or
obligations of the Borrowers to prepay Loans; (b) unless by an instrument signed
by all of the Lenders or by the Agent acting with the consent of all of the
Lenders: (i) alter the terms of this Section 13.04, (ii) modify the definition
of the term "Majority Lenders" or modify in any other manner the number or
percentage of the Lenders required to make any determinations or waive any
rights hereunder or to modify any provision hereof, (iii) alter the terms of
Section 10, or (iv) alter the terms of Section 4.02; (c) unless by an instrument
signed by the Administrative Agent, modify or supplement Section 12 or impose
any additional duties or obligations upon the Administrative Agent without the
consent of the Administrative Agent; and (d) unless by an instrument signed by
each of the Swing Line
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70
Lenders, amend or modify any term or condition relating to the Swing Line Loans
or affecting the rights or duties of the Swing Line Lenders; provided that the
--------
consent of all of the Lenders shall be required to extend the date of payment of
any Swing Line Loan beyond the Termination Date.
Any such waiver and any such amendment, supplement or modification
shall apply equally to each of the Lenders and shall be binding upon the
Borrowers, the Lenders, the Administrative Agent and all future holders of the
obligations owing hereunder. In the case of any waiver, the Borrowers, the
Lenders and the Administrative Agent shall be restored to their former position
and rights hereunder and under any other Credit Documents, and any Default or
Event of Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Default or Event of Default,
or impair any right consequent thereon.
Anything in this Agreement to the contrary notwithstanding, if at a
time when the conditions precedent set forth in Section 6 to any Syndicated Loan
hereunder are, in the opinion of the Majority Lenders, satisfied, any Lender
shall fail to fulfill its obligations to make such Loan, then, for so long as
such failure shall continue, such Lender shall be deemed for all purposes
relating to amendments, modifications, waivers or consents under this Agreement
or any of the other Credit Documents (including, without limitation, under this
Section 13.04 and under Section 12.08) to have no Loans or Commitments, shall
not be treated as a "Lender" hereunder when performing the computation of
Majority Lenders, and shall have no rights under the first paragraph of this
Section 13.04; provided that any action taken by the other Lenders with respect
--------
to the matters referred to in clause (a) of the first paragraph of this Section
13.04 shall not be effective as against such Lender unless consented to by such
Lender.
13.05 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
13.06 Assignments and Participations.
------------------------------
(a) No Obligor may assign any of its rights or obligations hereunder
or under any other Credit Document without the prior consent of all of the
Lenders and the Administrative Agent.
(b) Each Lender may assign any of its Loans, and its Commitment (but
only with the consent of the Obligors and the Administrative Agent, each such
consent not to be unreasonably withheld or delayed), provided that (i) no such
--------
consent by the Obligors or the Administrative Agent shall be required in the
case of any assignment to another Lender or if the assignee is an affiliate of
the assigning Lender; (ii) any partial assignment shall be in an amount at least
equal to $10,000,000 and, after giving effect thereto, the assigning Lender
shall have Commitments and Loans aggregating at least $15,000,000, in each case
unless otherwise agreed by the Obligors and the Administrative Agent; (iii) each
such assignment by a Lender of its Syndicated Loans or Commitment shall be made
in such manner so that the same portion of its
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71
Syndicated Loans and Commitment is assigned to the respective assignee and, if
Syndicated Loans held by such Lender are outstanding to more than one Borrower,
such Syndicated Loans shall be assigned to such assignee pro rata in accordance
--- ----
with the amount thereof outstanding to each such Borrower and (iv) the parties
to each such assignment shall execute and deliver to the Guarantor, the
Borrowers and the Administrative Agent an Assignment and Acceptance. Upon such
execution and delivery of the Assignment and Acceptance, and upon consent
thereto by the Obligors and the Administrative Agent, to the extent required
above, the assignee shall have, to the extent of such assignment (unless
otherwise provided in such assignment with the consent of the Obligors and the
Administrative Agent), the obligations, rights and benefits of a Lender
hereunder holding the Commitment and Loans (or portions thereof) assigned to it
(in addition to the Commitment and Loans, if any, theretofore held by such
assignee) provided that, with respect to any Regulatory Change or other event
entitling such assignee to receive any amount pursuant to Section 5.01, 5.05 or
5.06 which Regulatory Change or event has occurred prior to the date of such
assignment, such assignee shall not be entitled to receive any greater amount
with respect to such Regulatory Change or other event pursuant to Section 5.01,
5.05 or 5.06 than the assigning Lender would have been entitled to receive in
respect of the amount of Commitment and Loans assigned to such assignee if such
assignment had not occurred. The assigning Lender shall, to the extent of such
assignment, be released from the Commitment (or portion thereof) so assigned.
Upon each such assignment the assignee Lender or the assignor Lender shall pay
the Administrative Agent an assignment fee of $2,500; provided that no fee shall
--------
be payable upon an assignment by a Lender to an affiliate of such Lender or an
assignment or pledge by a Lender to a Federal Reserve Bank pursuant to Section
13.06(d).
(c) Any Lender may, in the ordinary course of its commercial banking
business and in accordance with applicable law, at any time sell to one or more
banks or other entities ("Participants") participating interests in any Loan
------------
owing to such Lender, any Commitment of such Lender or any other interest of
such Lender hereunder and under the other Credit Documents, provided that such
--------
Lender give concurrent written notice of such proposed participation (other than
a participation to be sold to an affiliate of such Lender) to the Obligors. In
the event of any such sale by a Lender of a participating interest to a
Participant, such Lender's obligations under this Agreement to the other parties
to this Agreement shall remain unchanged, such Lender shall remain solely
responsible for the performance thereof, such Lender shall remain the holder of
any such obligation owing to it under this Agreement for all purposes under this
Agreement and the other Credit Documents, and the Borrowers, the Guarantor and
the Administrative Agent shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement and the other Credit Documents. Each Obligor agrees that if amounts
outstanding under this Agreement are due and payable, or shall have been
declared or shall have become due and payable by such Obligor upon the
occurrence of an Event of Default, each Participant shall, to the maximum extent
permitted by applicable law, be deemed to have the right of setoff in respect of
its participating interest in amounts owing under this Agreement to the same
extent as if the amount of its participating interest were owing directly to it
as a Lender under this Agreement, provided that, in purchasing such
participating interest, such Participant shall be deemed to have agreed to share
with the Lenders the proceeds thereof as provided in Section 4.07 as fully as if
it were a Lender hereunder. The Borrowers also agree that each Participant
shall be entitled to the benefits of
<PAGE>
72
Sections 5.01, 5.05 and 5.06 with respect to its participation in the
Commitments and the Loans outstanding from time to time as if it was a Lender;
provided that, in the case of Section 5.06, such Participant shall have complied
- --------
with the requirements of said Section; and provided, further, that no
-------- -------
Participant shall be entitled to receive any greater amount pursuant to any such
Section than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor Lender
to such Participant had no such transfer occurred. In no event shall a Lender
that sells a participation agree with the Participant to take or refrain from
taking any action hereunder or under any other Credit Document except that such
Lender may agree with the Participant that it will not, without the consent of
the Participant, agree to (i) increase or extend the term, or extend the time or
waive any requirement for the reduction or termination, of such Lender's related
Commitment, (ii) extend the date fixed for the payment of principal of or
interest on the related Loan or Loans or any portion of any fee hereunder
payable to the Participant, (iii) reduce the amount of any such payment of
principal, (iv) reduce the rate at which interest is payable thereon, or any fee
hereunder payable to the Participant, to a level below the rate at which the
Participant is entitled to receive such interest or fee, (v) alter the rights or
obligations of the Borrowers to prepay the related Loans, (vi) release the
Guarantor from its obligations under Section 10 or (vii) change the terms of
Section 4.02.
(d) In addition to the assignments and participations permitted under
the foregoing provisions of this Section 13.06, any Lender may assign and pledge
all or any portion of its Loans to any Federal Reserve Bank as collateral
security pursuant to Regulation A and any Operating Circular issued by such
Federal Reserve Bank. No such assignment shall release the assigning Lender
from its obligations hereunder. In order to facilitate such pledge or
assignment, each Borrower hereby agrees that, upon request of any Lender at any
time and from time to time after such Borrower has made its initial borrowing
hereunder, such Borrower shall provide to such Lender, at such Borrower's own
expense, a promissory note, substantially in the form of Exhibit F-1 or F-2, as
the case may be, evidencing the Loans owing to such Lender.
(e) A Lender may furnish any information concerning the Guarantor and
any of the Borrowers or any of their respective Subsidiaries in the possession
of such Lender from time to time to permitted assignees and Participants
(including prospective assignees and Participants) under this Section 13.06,
subject, however, to the provisions of Section 13.06(g).
(f) Anything in this Section 13.06 to the contrary notwithstanding,
no Lender may assign or participate any interest in any Loan held by it
hereunder to a Borrower or any of its Affiliates or Subsidiaries without the
prior written consent of each Lender.
(g) Each of the Lenders and the Administrative Agent agrees (on
behalf of itself and each of its affiliates, directors, officers, employees and
representatives) to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential information
of this nature and in accordance with safe and sound Lending practices and not
to disclose to any third party or any department or personnel of such Lender or
the Administrative Agent engaged in a consumer finance business competitive with
any Borrower, any non-public information supplied to it by the Guarantor or any
Borrower pursuant to or in connection with this Agreement which is identified by
the Guarantor or such Borrower as being
<PAGE>
73
confidential at the time the same is delivered to the Lenders or the
Administrative Agent, provided that nothing herein shall limit the disclosure of
--------
any such information (i) to the extent required by statute, rule, regulation or
judicial process, (ii) to counsel for any of the Lenders or the Administrative
Agent, (iii) to bank examiners, auditors or accountants, (iv) to the
Administrative Agent or any other Lender, (v) in connection with any litigation
to which any one or more of the Lenders or the Administrative Agent is a party,
(vi) to any permitted assignee or Participant (or prospective assignee or
Participant) under this Section 13.06 so long as such assignee or Participant
(or prospective assignee or Participant) consents to the terms of this Section
13.06(g), (vii) which was in the possession of such Lender or its affiliates as
shown by clear and convincing evidence prior to the Guarantor or Borrowers
furnishing it to such Lender, or (viii) which is received by such Lender,
without restriction as to its disclosure or use, from a Person who, to such
Lender's knowledge or reasonable belief, was not prohibited from disclosing it
by any duty of confidentiality; and provided further that such Lender shall, to
-------- -------
the extent permitted by law, give the Obligors prior written notice of any
disclosure permitted by clauses (i) or (v) in connection with any litigation or
other legal process so that the Obligors may seek such protective orders as they
may deem appropriate.
(h) The Administrative Agent shall maintain at its address referred
to in Section 13.02 a copy of each Assignment and Acceptance delivered to it and
a register (the "Register") for the recordation of the names and addresses of
--------
the Lenders and the Commitment of, and principal amount of the Loans owing to,
each Lender from time to time. The entries in the Register shall be prima facie
evidence of the existence and amounts of the obligations of the Borrowers
therein recorded, and the Guarantor, the Borrowers, the Administrative Agent and
the Lenders may treat each Person whose name is recorded in the Register as the
owner of the Loan recorded therein for all purposes of this Agreement. The
Register shall be available for inspection and copying by the Guarantor, the
Borrowers or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
13.07 Survival. The obligations of the Borrowers (and of the
--------
Guarantor as guarantor) under Sections 5.01, 5.05, 5.06 and 13.03 and the
obligations of the Lenders under Section 12.05 shall survive the repayment of
the Loans and the termination of the Commitments. In addition, each
representation and warranty made, or deemed to be made by a notice of any
extension of credit, herein or pursuant hereto shall survive the making of such
representation and warranty, and no Lender shall be deemed to have waived, by
reason of making any extension of credit hereunder, any Default which may arise
by reason of such representation or warranty proving to have been false or
misleading, notwithstanding that such Lender or the Administrative Agent may
have had notice or knowledge or reason to believe that such representation or
warranty was false or misleading at the time such extension of credit was made.
13.08 Captions. The table of contents and captions and section
--------
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
<PAGE>
74
13.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
13.10 Independence of Covenants. All covenants under this Agreement
-------------------------
shall each be given independent effect so that if a particular action or
condition is not permitted by any such covenant or any exception thereto, the
fact that it would be permitted by another covenant, by an exception thereto, or
be otherwise within the limitations thereof, shall not avoid the occurrence of a
Default or an Event of Default if such action is taken or condition exists.
13.11 Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
13.12 Integration. This Agreement and the other Credit Documents
-----------
represent the agreement of the Guarantor, the Borrowers, the Administrative
Agent and the Lenders with respect to the subject matter hereof, and there are
no promises, undertakings, representations or warranties by the Administrative
Agent or any Lender relative to the subject matter hereof not expressly set
forth or referred to herein or in the other Credit Documents.
13.13 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
-------------
OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
13.14 Submission to Jurisdiction; Waivers. Each of the Obligors
-----------------------------------
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Credit Documents to
which it is a party, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the courts of
the State of New York sitting in New York County, the courts of the United
States of America for the Southern District of New York, and appellate
courts from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to such
Obligor at its address set forth below or at
<PAGE>
75
such other address of which the Administrative Agent shall have been
notified pursuant thereto; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction.
13.15 Waivers of Jury Trial. THE BORROWERS, THE GUARANTOR, THE
---------------------
ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT
OR ANY OTHER CREDIT DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
PROVIDIAN NATIONAL BANK, as a Borrower
By: /s/ David J. Petrini
-----------------------------------------
Name: David J. Petrini
Title: Chief Financial Officer, Executive
Vice President and Treasurer
Address for Notices:
c/o Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
Attention: Chief Financial Officer
Telecopier No.: (415) 278-6028
Telephone No.: (415) 543-0404
PROVIDIAN BANK, as a Borrower
By: /s/ David J. Petrini
-----------------------------------------
Name: David J. Petrini
Title: Chief Financial Officer, Executive
Vice President and Treasurer
Address for Notices:
c/o Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
Attention: Chief Financial Officer
Telecopier No.: (415) 278-6028
Telephone No.: (415) 543-0404
<PAGE>
PROVIDIAN FINANCIAL CORPORATION, as
Guarantor
By: /s/ David J. Petrini
----------------------------------------
Name: David J. Petrini
Title: Chief Financial Officer, Executive
Vice President and Treasurer
Address for Notices:
c/o Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
Attention: Chief Financial Officer
Telecopier No.: (415) 278-6028
Telephone No.: (415) 543-0404
<PAGE>
Commitment
- ----------
$ 90,000,000
----------
THE CHASE MANHATTAN BANK,
as Administrative Agent and a Lender
By: /s/ Christine Herrick
-----------------------------------------
Name: Christine Herrick
Title: Vice President
Address for Notices to Chase as Administrative
Agent:
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017
Attention: Christine Herrick
Telecopier No.: 212-270-1789
Telephone No.: 212-270-9747
Lending Office for ABR Loans:
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017
Attention: Christine Herrick
Telecopier No.: 212-270-1789
Telephone No.: 212-270-9747
Lending Office for Loans other than ABR Loans:
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017
Attention: Christine Herrick
Telecopier No.: 212-270-1789
Telephone No.: 212-270-9747
<PAGE>
Commitment
- ----------
$ 85,000,000
----------
NATIONSBANK, N.A., as a Lender
By: /s/ Mary P. Riggins
-----------------------------------------
Name: Mary Pat Riggins
Title: Vice President
Lending Office for ABR Loans:
Nationsbank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Perla Perez
Telecopier No.: 214-508-0944
Telephone No.: 214-508-2513
Lending Office for Loans other than ABR Loans:
Nationsbank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Perla Perez
Telecopier No.: 214-508-0944
Telephone No.: 214-508-2513
Address for Notices:
Nationsbank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Mary Pat Riggins
Telecopier No.: 214-508-0604
Telephone No.: 214-508-0585
<PAGE>
NATIONSBANC MONTGOMERY SECURITIES
LLC, as Syndication Agent
By: /s/ Greg Veneker
---------------------------------------------
Name: Greg Veneker
Title: Managing Director
Lending Office for ABR Loans:
Nationsbank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Perla Perez
Telecopier No.: 214-508-0604
Telephone No.: 214-508-0584
Lending Office for Loans other than ABR Loans:
Nationsbank, N.A.
901 Main Street, 14th Floor
Dallas, Texas 75202
Attention: Perla Perez
Telecopier No.: 214-508-0604
Telephone No.: 214-508-0584
Address for Notices:
Nationsbank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Greg Veneker
Telecopier No.: 214-508-0604
Telephone No.: 214-508-0584
<PAGE>
Commitment
- ----------
$ 85,000,000
----------
CITICORP USA, INC.,
as Syndication Agent and a Lender
By: /s/ Daniel Brill
---------------------------------------------
Name: Daniel Brill
Title: Attorney in fact
Lending Office for ABR Loans:
Citicorp USA, Inc.
399 Park Avenue
New York, NY 10043
Attention: Peter Bickford
Telecopier No.: 212-935-4285
Telephone No.: 212-559-8146
Lending Office for Loans other than ABR Loans:
Citicorp USA, Inc.
399 Park Avenue
New York, NY 10043
Attention: Peter Bickford
Telecopier No.: 212-935-4285
Telephone No.: 212-559-8146
Address for Notices:
Citicorp USA, Inc.
399 Park Avenue
New York, NY 10043
Attention: Peter Bickford
Telecopier No.: 212-935-4285
Telephone No.: 212-559-8146
<PAGE>
Commitment
- ----------
$ 85,000,000
----------
CREDIT SUISSE FIRST BOSTON,
as Syndication Agent and a Lender
By: /s/ Jay Chall /s/ Andrea Shkane
----------------------------------
Name: Jay Chall Andrea Shkane
Title: Director Vice President
Lending Office for ABR Loans:
Credit Suisse First Boston
11 Madison Avenue, 20th Floor
New York, NY 10010-3692
Attention: Jay Chall
Telecopier No.: 212-325-8320
Telephone No.: 212-325-9010
Lending Office for Loans other than ABR Loans:
Credit Suisse First Boston
11 Madison Avenue, 20th Floor
New York, NY 10010-3692
Attention: Jay Chall
Telecopier No.: 212-325-8320
Telephone No.: 212-325-9010
Address for Notices:
Credit Suisse First Boston
Five World Trade Center, 8th Floor
New York, NY 10048
Attention: Andre Kopinski
Telecopier No.: 212-322-1260
Telephone No.: 212-335-0593
<PAGE>
Commitment
- ----------
$ 80,000,000
----------
COMMERZBANK AG LOS ANGELES BRANCH, as Managing
Agent and a Lender
By: /s/ Christian Jagenberg
----------------------------------
Name: Christian Jegenberg
Title: SVP and Manager
By: /s/ Werner Schmidbauer
----------------------------------
Name: Werner Schmidbauer
Title: Vice President
Lending Office for ABR Loans:
Commerzbank AG
Los Angeles Branch
633 West 5th Street, Suite 6600
Los Angeles, CA 90071
Attention: Werner Schmidbauer
Telecopier No.: 213-623-0039
Telephone No.: 213-623-8223
Lending Office for Loans other than ABR Loans:
Commerzbank AG
Los Angeles Branch
633 West 5th Street, Suite 6600
Los Angeles, CA 90071
Attention: Werner Schmidbauer
Telecopier No.: 213-623-0039
Telephone No.: 213-623-8223
Address for Notices:
Commerzbank AG
Los Angeles Branch
633 West 5th Street, Suite 6600
Los Angeles, CA 90071
Attention: Werner Schmidbauer
Telecopier No.: 213-623-0039
Telephone No.: 213-623-8223
<PAGE>
Commitment
- ----------
$ 70,000,000
----------
DEUTSCHE BANK AG NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES, as Co-Agent and a Lender
By: /s/ Gayma Z. Shivnarain
----------------------------------
Name: Gayma Z. Shivnarain
Title: Vice President
By: /s/ Jonathan B.P. Mendes
----------------------------------
Name: Jonathan B.P. Mendes
Title: Vice President
Lending Office for ABR Loans:
Deutsche Bank AG NewYork and/or
Cayman Islands Branches
31 West 52nd Street
New York, NY 10019
Attention: Gayma Shivnarain
Telecopier No.: 212-469-8551
Telephone No.: 212-469-8100
Lending Office for Loans other than ABR Loans:
Deutsche Bank AG NewYork and/or
Cayman Islands Branches
31 West 52nd Street
New York, NY 10019
Attention: Gayma Shivnarain
Telecopier No.: 212-469-8551
Telephone No.: 212-469-8100
Address for Notices:
Deutsche Bank AG NewYork and/or
Cayman Islands Branches
31 West 52nd Street
New York, NY 10019
Attention: Gayma Shivnarain
Telecopier No.: 212-469-8551
Telephone No.: 212-469-8100
<PAGE>
Commitment
- ----------
$ 70,000,000
----------
THE BANK OF NEW YORK ( LOS ANGELES),
as Co-Agent and a Lender
By: /s/ Jennifer Ellerman
----------------------------------
Name: Jennifer Ellerman
Title: Assistant Vice President
Lending Office for ABR Loans:
The Bank of New York
One Wall Street BNOWS22
New York, NY 10286
Attention: Sandra Morgan
Telecopier No.: 212-635-6877
Telephone No.: 212-635-6743
Lending Office for Loans other than ABR Loans:
The Bank of New York
One Wall Street BNOWS22
New York, NY 10286
Attention: Sandra Morgan
Telecopier No.: 212-635-6877
Telephone No.: 212-635-6743
Address for Notices:
The Bank of New York (Los Angeles)
10990 Wilshire Blvd., Suite 1125
Los Angeles, CA 90024
Attention: Jennifer Ellerman
Telecopier No.: 310-996-8667
Telephone No.: 310-996-8677
<PAGE>
Commitment
- ----------
$ 70,000,000
----------
THE FIRST NATIONAL BANK OF CHICAGO,
as Co-Agent and a Lender
By: /s/ Robert English
----------------------------------
Name: Robert English
Title: First Vice President
Lending Office for ABR Loans:
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670-0162
Attention: Robert English
Telecopier No.: 312-732-6222
Telephone No.: 312-732-1504
Lending Office for Loans other than ABR Loans:
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670-0162
Attention: Robert English
Telecopier No.: 312-732-6222
Telephone No.: 312-732-1504
Address for Notices:
The First National Bank of Chicago
One First National Plaza
Chicago, IL 60670-0162
Attention: Robert English
Telecopier No.: 312-732-6222
Telephone No.: 312-732-1504
<PAGE>
Commitment
- ----------
$ 40,000,000
----------
BARCLAYS BANK PLC, as Lead Manager and a Lender
By: /s/ Karen M. Wagner
----------------------------------
Name: Karen M. Wagner
Title: Associate Director
Lending Office for ABR Loans:
Barclays Bank Plc
222 Broadway, 8th Floor
New York, NY 10038
Attention: Christina Challenger
Telecopier No.: 212-412-3701
Telephone No.: 212-412-5306
Lending Office for Loans other than ABR Loans:
Barclays Bank Plc
222 Broadway, 8th Floor
New York, NY 10038
Attention: Christina Challenger
Telecopier No.: 212-412-3701
Telephone No.: 212-412-5306
Address for Notices:
Barclays Bank Plc
222 Broadway, 8th Floor
New York, NY 10038
Attention: Christina Challenger
Telecopier No.: 212-412-3701
Telephone No.: 212-412-5306
<PAGE>
Commitment
- ----------
$ 40,000,000
----------
CREDIT LYONNAIS NEW YORK BRANCH, as Lead Manager
and a Lender
By: /s/ Edward W. Leong
----------------------------------
Name: Edward W. Leong
Title: First Vice President & Manager
Lending Office for ABR Loans:
Credit Lyonnais
515 S. Flower Street, Suite 2200
Los Angeles, CA 90071
Attention: Emiko Nagai
Telecopier No.: 213-362-5949
Telephone No.: 213-362-5940
Lending Office for Loans other than ABR Loans:
Credit Lyonnais
515 S. Flower Street, Suite 2200
Los Angeles, CA 90071
Attention: Emiko Nagai
Telecopier No.: 213-362-5949
Telephone No.: 213-362-5940
Address for Notices:
Credit Lyonnais
515 S. Flower Street, Suite 2200
Los Angeles, CA 90071
Attention: Elizabeth Moyer
Telecopier No.: 213-362-5949
Telephone No.: 213-362-5945
<PAGE>
Commitment
- ----------
$ 40,000,000
----------
FLEET BANK, as a Lender
By: /s/ Kevin J. Batterton
-----------------------------------
Name: Kevin J. Batterton
Title: Senior Vice President
Lending Office for ABR Loans:
Fleet Bank
1185 Avenue of the Americas
New York, NY 10036
Attention: Kevin Batterton
Telecopier No.: 212-819-6207
Telephone No.: 212-819-6076
Lending Office for Loans other than ABR Loans:
Fleet Bank
1185 Avenue of the Americas
New York, NY 10036
Attention: Kevin Batterton
Telecopier No.: 212-819-6207
Telephone No.: 212-819-6076
Address for Notices:
Fleet Bank
1185 Avenue of the Americas
New York, NY 10036
Attention: Kevin Batterton
Telecopier No.: 212-819-6207
Telephone No.: 212-819-6076
<PAGE>
Commitment
- ----------
$ 40,000,000
----------
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
LOS ANGELES AGENCY, as Lead Manager and a Lender
By: /s/ Vicente L. Timiraos
----------------------------------
Name: Vicente L. Timiraos
Title: SVP & SDGM
Lending Office for ABR Loans:
The Industrial Bank of Japan, Limited,
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Mark Moss
Telecopier No.: 213-688-7486
213-488-9840
Telephone No.: 213-893-6355
213-893-6424
Lending Office for Loans other than ABR Loans:
The Industrial Bank of Japan, Limited,
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Mark Moss
Telecopier No.: 213-688-7486
213-488-9840
Telephone No.: 213-893-6355
213-893-6424
Address for Notices:
The Industrial Bank of Japan, Limited,
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Mark Moss
Telecopier No.: 213-688-7486/213-488-9840
Telephone No.: 213-893-6355/213-893-6424
<PAGE>
Commitment
- ----------
$40,000,000
- -----------
MELLON BANK, N.A. (PITTSBURGH), as Lead
Manager and a Lender
By: /s/ John R. Jehling
----------------------------------
Name: John R. Jehling
Title: First Vice President
Lending Office for ABR Loans:
Mellon Bank N.A. (Pittsburgh)
One Mellon Bank Center, Room 1510370
Pittsburgh, PA 15258-0001
Attention: John Jehling
Telecopier No.: 412-234-9047
Telephone No.: 412-234-9211
Lending Office for Loans other than ABR Loans:
Mellon Bank N.A. (Pittsburgh)
One Mellon Bank Center, Room 1510370
Pittsburgh, PA 15258-0001
Attention: John Jehling
Telecopier No.: 412-234-9047
Telephone No.: 412-234-9211
Address for Notices:
Mellon Bank N.A. (Pittsburgh)
One Mellon Bank Center, Room 1510370
Pittsburgh, PA 15258-0001
Attention: John Jehling
Telecopier No.: 412-234-9047
Telephone No.: 412-234-9211
<PAGE>
Commitment
- ----------
$ 40,000,000
----------
SOCIETE GENERALE, NEW YORK BRANCH,
as Lead Manager and a Lender
By: /s/ Janet M. Kagan
----------------------------------
Name: Janet M. Kagan
Title: Director
Lending Office for ABR Loans:
Societe Generale, New York Branch
1221 Avenue of the Americas
New York, NY 10020 Attention: Janet Kagan
Telecopier No.: 212-278-7614
Telephone No.: 212-278-7049
Lending Office for Loans other than ABR Loans:
Societe Generale, New York Branch
1221 Avenue of the Americas
New York, NY 10020
Attention: Janet Kagan
Telecopier No.: 212-278-7614
Telephone No.: 212-278-7049
Address for Notices:
Societe Generale, New York Branch
1221 Avenue of the Americas
New York, NY 10020
Attention: Janet Kagan
Telecopier No.: 212-278-7614
Telephone No.: 212-278-7049
<PAGE>
Commitment
- -----------
$ 30,000,000
-----------
CREDIT AGRICOLE INDOSUEZ, as a Lender
By: /s/ Katherine L. Abbott
----------------------------------
Name: Katherine L. Abbott
Title: First Vice President
By: /s/ David Bouhl
----------------------------------
Name: David Bouhl, FVP
Title: Head of Corporate Banking Chicago
Lending Office for ABR Loans:
Credit Agricole Indosuez
55 East Monroe Street
Chicago, IL 60603-5702
Attention: Kathleen Martens
Telecopier No.: 312-372-3455
Telephone No.: 312-917-7444
Lending Office for Loans other than ABR Loans:
Credit Agricole Indosuez
55 East Monroe Street
Chicago, IL 60603-5702
Attention: Kathleen Martens
Telecopier No.: 312-372-3455
Telephone No.: 312-917-7444
Address for Notices:
Credit Agricole Indosuez
55 East Monroe Street
Chicago, IL 60603-5702
Attention: Kathleen Martens
Telecopier No.: 312-372-3455
Telephone No.: 312-917-7444
<PAGE>
Commitment
- ----------
$ 25,000,000
----------
BANK OF MONTREAL (CHICAGO), as a Lender
By: /s/ Inba Ponnusamy
----------------------------------
Name: Inba Ponnusamy
Title: Director
Lending Office for ABR Loans:
Bank of Montreal (Chicago)
115 S. La Salle, 12th Floor
Chicago, IL 60603
Attention: Dave Skrypkar
Telecopier No.: 312-845-2199
Telephone No.: 312-750-4327
Lending Office for Loans other than ABR Loans:
Bank of Montreal (Chicago)
115 S. La Salle, 12th Floor
Chicago, IL 60603
Attention: Dave Skrypkar
Telecopier No.: 312-845-2199
Telephone No.: 312-750-4327
Address for Notices:
Bank of Montreal (Chicago)
115 S. La Salle, 12th Floor
Chicago, IL 60603
Attention: Dave Skrypkar
Telecopier No.: 312-845-2199
Telephone No.: 312-750-4327
<PAGE>
Commitment
- ----------
$ 25,000,000
----------
BANQUE NATIONALE DE PARIS
(SAN FRANCISCO), as a Lender
By: /s/ Jennifer Y. Cho
-----------------------------------
Name: Jennifer Y. Cho
Title: Vice President
By: /s/ Jennifer Y. Cho
-----------------------------------
Name: Jeffrey S. Kajisa
Title: Assistant Vice President
Lending Office for ABR Loans:
Banque Nationale de Paris
(San Francisco)
180 Montgomery Street, 3rd Floor
San Francisco, CA 94104
Attention: Jeffrey Kajisa, Don Hart
Telecopier No.: 415-989-9041
Telephone No.: 415-956-2511
Lending Office for Loans other than ABR Loans:
Banque Nationale de Paris
(San Francisco)
180 Montgomery Street, 3rd Floor
San Francisco, CA 94104
Attention: Jeffrey Kajisa, Don Hart
Telecopier No.: 415-989-9041
Telephone No.: 415-956-2511
Address for Notices:
Banque Nationale de Paris
(San Francisco)
180 Montgomery Street, 3rd Floor
San Francisco, CA 94104
Attention: Jeffrey Kajisa, Don Hart
Telecopier No.: 415-989-9041
Telephone No.: 415-956-2511
<PAGE>
Commitment
- ----------
$ 25,000,000
----------
CIBC INC., as a Lender
By: /s/ Gerald Girardi
----------------------------------
Name: Gerald Girardi
Title: Executive Director
Lending Office for ABR Loans:
CIBC INC.
Two Paces West, Suite 1200
2727 Paces Ferry Road, N.W.
Atlanta, GA 30339
Attention: Tonya Hunter
Telecopier No.: 770-319-4950
Telephone No.: 770-319-4819
Lending Office for Loans other than ABR Loans:
CIBC INC.
Two Paces West, Suite 1200
2727 Paces Ferry Road, N.W.
Atlanta, GA 30339
Attention: Tonya Hunter
Telecopier No.: 770-319-4950
Telephone No.: 770-319-4819
Address for Notices:
CIBC INC.
425 Lexington Avenue, 8th Floor
New York, NY 10017
Attention: Gerald Girardi
Telecopier No.: 212-856-3558
Telephone No.: 212-856-3649
<PAGE>
Commitment
- ----------
$ 20,000,000
----------
BANKERS TRUST COMPANY, as a Lender
By: /s/ Cynthia Berge O'Keefe
-------------------------
Name: Cynthia Berge O'Keefe
Title: Managing Director
Lending Office for ABR Loans:
Bankers Trust (New York)
One Bankers Trust Plaza
New York, NY 10006
Attention: Jennifer Laino
Telecopier No.: 212-250-7351
Telephone No.: 212-250-5062
Lending Office for Loans other than ABR Loans:
Bankers Trust (New York)
One Bankers Trust Plaza
New York, NY 10006
Attention: Jennifer Laino
Telecopier No.: 212-250-7351
Telephone No.: 212-250-5062
Address for Notices:
Bankers Trust (New York)
One Bankers Trust Plaza
New York, NY 10006
Attention: Cindy Berge-O'Keeffe
Telecopier No.: 212-747-7478
Telephone No.: 212-250-7818
<PAGE>
SCHEDULE I
Subsidiaries
------------
Subsidiaries of Providian Financial Corporation
Providian National Bank
Providian Bank
Providian Credit Corporation
First Select Corporation
First Deposit Life Insurance Company
Providian Capital I
Providian Investment Corporation
Providian Mauritius Investment Ltd.
Providian Bancorp Services
Commonwealth Premium Finance
Providian Services Corporation
Providian Services LLC
Robena LP
Robena LLC
Robena Feedstock LLC
<PAGE>
SCHEDULE II
Existing Liens
--------------
None except as permitted by Section 8.08
<PAGE>
EXHIBIT A
FORM OF ASSIGNMENT AND ACCEPTANCE
Dated ________,
Reference is made to the Credit Agreement, dated as of January 12, 1999 (as
amended, modified or supplemented from time to time, the "Credit Agreement"),
-----------------
among Providian National Bank, a national banking association incorporated,
organized and existing under the laws of the United States of America ("PNB"),
---
Providian Bank, a corporation organized and existing under the laws of the
State of Utah ("PB"; together with PNB, the "Borrowers"); Providian Financial
-- ---------
Corporation, a corporation organized and existing under the laws of the State of
Delaware (the "Guarantor"; together with the Borrowers, the "Obligors"); the
--------- --------
several banks and other financial institutions or entities from time to time
parties thereto (the "Lenders"); and The Chase Manhattan Bank, a New York
-------
banking corporation, as Administrative Agent for the Lenders (in such capacity,
together with any successor appointed pursuant to Section 12.08 thereof, the
"Administrative Agent").
- ---------------------
Terms defined in the Credit Agreement and not otherwise defined herein are used
herein as therein defined.
________________ (the "Assignor") and _______________ (the "Assignee") agree
as follows:
1. The Assignor hereby sells and assigns to the Assignee, without
recourse, and the Assignee hereby purchases and assumes from the Assignor, that
portion of the Assignor's rights and obligations under the Credit Agreement as
of the date hereof (other than in respect of Competitive Bid Option Loans)
specified in Section 1 of Schedule 1 hereto. Such portion of the Assignor's
Commitment and of outstanding Syndicated Loans owing to the Assignor being
purchased and assumed by the Assignee constitutes the percentage interest
specified in Section 2 of Schedule 1 hereto in and to the aggregate Commitments
of all of the Lenders and the aggregate principal amount of all of the
Syndicated Loans outstanding.
2. The Assignor (i) represents and warrants that as of the date hereof its
Commitment (after giving effect to any assignments thereof made prior to the
date hereof, whether or not such assignments have become effective, but without
giving effect hereto or to any other assignments thereof also made on the date
hereof) is in the dollar amount specified as the Assignor's Commitment in
Section 3 of Schedule 1 hereto and the aggregate outstanding principal amount of
Syndicated Loans owing to it (after giving effect to any assignments thereof
made prior to the date hereof, whether or not such assignments have become
effective, but without giving effect hereto or to any other assignments thereof
also made on the date hereof) is in the dollar amount specified as the aggregate
outstanding principal amount of such Syndicated Loans owing to the Assignor in
Section 3 of Schedule l hereto; (ii) represents and warrants that as of the date
hereof its
<PAGE>
Commitment and the aggregate outstanding principal amount of Syndicated Loans
owing to it (after giving effect to any assignments thereof made prior to the
date hereof, whether or not such assignments have become effective, and after
giving effect hereto and to any other assignments thereof also made on the date
hereof) constitutes the percentage interest specified in Section 4 of Schedule 1
hereto in and to the aggregate Commitments of all of the Lenders and the
aggregate principal amount of all Syndicated Loans outstanding and its
Commitment (after giving effect to any assignments thereof made prior to the
date hereof, whether or not such assignments have become effective, and after
giving effect hereto and to any other assignments thereof also made on the date
hereof) is in the dollar amount specified as the Assignor's Commitment in
Section 4 of Schedule 1 hereto and the aggregate outstanding principal amount of
Syndicated Loans owing to it (after giving effect to any assignments thereof
made prior to the date hereof, whether or not such assignments have become
effective, and after giving effect hereto and to any other assignments thereof
also made on the date hereof) is in the dollar amount specified as the aggregate
outstanding principal amount of such Syndicated Loans owing to the Assignor in
Section 4 of Schedule 1 hereto; (iii) represents and warrants that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (iv) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with any
Credit Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of any of the Credit Documents or any other
instrument or document furnished pursuant thereto; and (v) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of any of the Borrowers or the Guarantor or the performance
or observance by any of the Borrowers or the Guarantor of any of its obligations
under any Credit Document to which it is a party or any other instrument or
document furnished pursuant thereto.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements referred to in
Section 7.01 thereof or the financial statements most recently delivered by the
Borrowers and the Guarantor pursuant to Section 8.01 thereof and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (ii) agrees
that it will, independently and without reliance upon the Administrative Agent,
the Assignor or any other Lender and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking action under the Credit Documents; (iii) appoints and
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such powers under the Credit Documents as are delegated to the
Administrative Agent by the terms thereof, together with such powers as are
reasonably incidental thereto; (iv) agrees to be bound by the provisions of the
Credit Agreement and agrees that it will perform in accordance with their terms
all of the obligations which by the terms of the Credit Documents are required
to be performed by it as a Lender; (v) specifies as its Applicable Lending
Offices (and address for notices) the office(s) set forth beneath its name on
the signature page hereof; and (vi) attaches the forms prescribed by the
Internal Revenue Service of the United States certifying as to the Assignee's
status for purposes of determining exemption from United States withholding
taxes with respect to all payments
<PAGE>
to be made to the Assignee under the Credit Documents or such other documents as
are necessary to indicate that all such payments are subject to such rates at a
rate reduced by an applicable tax treaty./1/
4. Following the execution of this Assignment and Acceptance by the Assignor
and the Assignee, it will be delivered to the Obligors and the Administrative
Agent for acceptance, together with payment to the Administrative Agent of the
$2,500 assignment fee; provided that no fee shall be payable upon an assignment
--------
by a Lender to an Affiliate of such Lender or upon an assignment or pledge by a
Lender to a Federal Reserve Bank pursuant to Section 13.06(d) of the Credit
Agreement. The effective date of this Assignment and Acceptance shall be the
date of acceptance thereof by the Administrative Agent and the Obligors or such
later date specified on Schedule 1 hereto (the "Effective Date").
5. Upon such acceptance and recording by the Administrative Agent, as of the
Effective Date, (i) the Assignee shall be a party to the Credit Agreement and,
to the extent provided in this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and under the Credit Documents and (ii) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Documents.
6. Upon such acceptance and recording by the Administrative Agent, from and
after the Effective Date, the Administrative Agent shall make all payments under
the Credit Documents in respect of the interest assigned hereby (including,
without limitation, all payments of principal, interest and commitment fees with
respect thereto) to the Assignee. The Assignor and Assignee shall make all
appropriate adjustments in payments under the Credit Documents for periods prior
to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective officers thereunto duly
authorized, as of the date first above written, such execution being made on
Schedule 1 hereto.
- -------------------
/1/ Clause (vi) applies if the Assignee is organized under the laws of a
jurisdiction outside the United States.
<PAGE>
Schedule 1
to
Assignment and Acceptance
Dated _______________,___
Section 1.
- ----------
Assignee's purchased portion of
Assignor's (i) Commitment and (i) $_____________
(ii) outstanding Syndicated Loans
owing to the Assignor: (ii) $_____________
Section 2.
- ----------
Assignee's percentage interest in
aggregate Commitments of all Lenders
and in aggregate principal amount
of Syndicated Loans outstanding
(after giving effect hereto): ___%
Section 3.
- ----------
Assignor's Commitment
(before giving effect hereto): $___________
Aggregate outstanding principal
amount of Syndicated Loans
owing to the Assignor
(before giving effect hereto): $___________
Section 4.
- ----------
Assignor's percentage interest in
aggregate Commitments of all
Lenders and in aggregate
principal amount of Syndicated
Loans outstanding (after
giving effect hereto): ____%
Assignor's Commitment
(after giving effect hereto): $___________
Aggregate outstanding principal amount
of Syndicated Loans owing to
the Assignor (after
giving effect hereto): $___________
<PAGE>
Section 5.
- ----------
Effective Date/1/: ___________________, 199_
[NAME OF ASSIGNOR]
By:_____________________________
Title:
[NAME OF ASSIGNEE]
By:______________________________
Title:
Lending Office for ABR Loans:
Lending Office for other Types of Loans:
Address for Notices:
Accepted this day
of ___________,__
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:__________________________
Title:
- -----------------------
/1/ This date should be no earlier than the date of acceptance by the Agent and
the Obligors (to the extent required by the Credit Agreement).
<PAGE>
Accepted this ___________ day of _________,__/2/:
PROVIDIAN FINANCIAL CORPORATION,
as Guarantor
By:__________________________
Title:
PROVIDIAN NATIONAL BANK
By:__________________________
Title:
PROVIDIAN BANK
By:__________________________
Title:
- ---------------------
/2/ Acceptance required only to the extent provided in the Credit Agreement.
<PAGE>
FORM OF CBO QUOTE REQUEST
[Date]
To: The Chase Manhattan Bank, as Administrative Agent
From: [Borrower]
Re: CBO Quote Request
Pursuant to Section 2.03(b) of the Credit Agreement dated as of January 12,
1999 ( as amended, modified or supplemented from time to time, the "Credit
------
Agreement") among the undersigned, the other Borrower party thereto, Providian
- ---------
Financial Corporation, as Guarantor, the Lenders named therein, and The Chase
Manhattan Bank, as Administrative Agent, we hereby give notice that we request
CBO Quotes for the following proposed Competitive Bid Option Borrowing(s):
<TABLE>
<CAPTION>
Borrowing Date Quotation Date[1] Amount[2] Type[3] Interest Period[4]
- ------------------ ------------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
</TABLE>
Terms used herein have the meanings assigned to them in the Credit Agreement.
[NAME OF BORROWER]
By:
-----------------------------
Name:
Title:
____________________
[1] For use if a Set Rate in a Set Rate Auction is requested to be
submitted before the proposed date of borrowing.
[2] Each amount must be $5,000,000 or a larger multiple of $1,000,000.
[3] Insert either "LIBO Margin" (in the case of LIBOR Market Loans) or "Set
Rate" (in the case of Set Rate Loans).
[4] A whole number of months, in the case of a LIBOR Market Loan or, in the
case of a Set Rate Loan, a period of at least 7 days after the making of
such Set Rate Loan and ending on a Business Day.
<PAGE>
FORM OF CBO QUOTE
To: The Chase Manhattan Bank, as Administrative Agent
From: [Lender]
Re: CBO Quote to [Borrower] (the "Borrower")
This CBO Quote is given in accordance with Section 2.03(c) of the Credit
Agreement dated as of January 12, 1999 ( as amended, modified or supplemented
from time to time, the "Credit Agreement") among [Name of Borrower], the other
Borrower party thereto, Providian Financial Corporation, as Guarantor, the
Lenders named therein and The Chase Manhattan Bank, as Administrative Agent.
Terms defined in the Credit Agreement are used herein as defined therein.
In response to the Borrower's invitation dated __________,__ ,we hereby make
the following CBO Quote(s) on the following terms:
l. Quoting Lender:
2. Person to contact at Quoting Lender:
3. We hereby offer to make Competitive Bid Option Loan(s) in the following
principal amount[s], for the following Interest Period(s) and at the
following rate(s):
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Date Date[*1] Amount[*2] Type[*3] Period[*4] Rate[*5]
- --------- --------- -------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
</TABLE>
___________________________
* All numbered footnotes appear on the last page of this Exhibit.
<PAGE>
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the Credit Agreement,
irrevocably obligate[s] us to make the Competitive Bid Option Loan(s) for which
any offer(s) (is/are) accepted, in whole or in part (subject to Section 2.03 of
the Credit Agreement).
Very truly yours,
[NAME OF LENDER]
---------------------------------
By:
Authorized Officer
Dated:
----------------------------
- -----------------------------------
[1] As specified in the related CBO Quote Request.
[2] The principal amount bid for each Interest Period may not exceed the
principal amount requested. Bids must be made for at least $5,000,000
or a larger multiple of $1,000,000.
[3] Indicate "LIBO Margin" (in the case of LIBOR Market Loans) or "Set
Rate" (in the case of Set Rate Loans).
[4] A whole number of months, in the case of a LIBOR Market Loan or, in
the case of a Set Rate Loan, a period of at least 7 days after the
making of such Set Rate Loan and ending on a Business Day, as
specified in the related CBO Quote Request.
[5] For a LIBOR Market Loan, specify margin over or under the LIBO Rate
determined for the applicable Interest Period. Specify percentage
(rounded, if necessary, to the nearest 1/10,000th of 1%) and specify
whether "PLUS" or "MINUS". For a Set Rate Loan, specify rate of
interest per annum (rounded, if necessary, to the nearest 1/10,000th
of 1%).
<PAGE>
EXHIBIT D-1
FORM OF NOTICE OF BORROWING
OF COMPETITIVE BID OPTION LOANS
[Date]
TO: The Chase Manhattan Bank, as Administrative Agent
FROM: [Name of Borrower]
RE: Notice of Borrowing of Competitive Bid Option Loans
The undersigned refers to the Credit Agreement, dated as of January
12, 1999 ( as amended, modified or supplemented from time to time, the "Credit
Agreement"; terms defined therein being used herein as therein defined) among
the undersigned, the other Borrower party thereto, Providian Financial
Corporation, as Guarantor, the Lenders party thereto and The Chase Manhattan
Bank, as Administrative Agent; and hereby gives you notice, irrevocably,
pursuant to and in accordance with Section 2.03(e) of the Credit Agreement, that
the undersigned hereby accepts the following offers notified to the undersigned
pursuant to Section 2.03(d), in an aggregate principal amount of $____________,
in respect of the CBO Quote Request dated _________, delivered by the
undersigned to the Administrative Agent pursuant to Section 2.03(b):
<TABLE>
<CAPTION>
Borrowing Quotation Interest
Lender Date Date Amount Type Period Rate
- ------------ ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
The undersigned hereby certifies that the following statements will be
true on the date[s] set forth under the caption "Borrowing Date" above:
(A) the representations and warranties made by the undersigned and
the Guarantor in Section 7 of the Credit Agreement and in each of the other
Credit Documents to which it is a party are true and complete before and
after giving effect to the Competitive Bid Option Loans specified above,
with the same force and effect as if made on and as of such date (or, if
any such representation or warranty is expressly stated to have been made
as of a specific date, as of such specific date); and
(B) no Default or Event of Default with respect to the undersigned or
the Guarantor has occurred and is continuing, or would result from the
making of such Competitive Bid Option Loans.
<PAGE>
EXHIBIT D-1
Very truly yours,
[NAME OF BORROWER]
By:
-------------------------------
Title:
<PAGE>
EXHIBIT D-2
FORM OF NOTICE OF BORROWING
OF SYNDICATED LOANS
[Date]
TO: The Chase Manhattan Bank, as Administrative Agent
FROM: [Name of Borrower] (the "Borrower")
RE: Notice of Borrowing of Syndicated Loans
The undersigned refers to the Credit Agreement, dated as of January
12, 1999, (as amended, modified or supplemented from time to time, the "Credit
Agreement"; terms defined therein being used herein as therein defined) among
the undersigned, the other Borrower party thereto, Providian Financial
Corporation, as Guarantor, the Lenders party thereto, and The Chase Manhattan
Bank, as Administrative Agent; and hereby gives you notice, irrevocably,
pursuant to Section 4.05 of the Credit Agreement, that the undersigned hereby
requests a borrowing or borrowings of Syndicated Loans under the Credit
Agreement, and in connection therewith sets forth below the information relating
to such borrowing or borrowings (the "Proposed Borrowing") as required by
Section 4.05 of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is __________,__.
(ii) The aggregate amount of the Proposed Borrowing is $_______/1/
[which shall be comprised of Loans of $________ ("Borrowing 1") and
$________ ("Borrowing 2")]./2/
(iii) The Loans comprising the Proposed Borrowing are [ABR Loans]
Eurodollar Loans].
/3/(iv) The Interest Period for each Eurodollar Loan made as
part of the Proposed Borrowing is _____ month[s]/4/ [with respect to
Borrowing 1 and _____ month[s] with respect to Borrowing 2].
- ----------------------
/1/ To be used if different Interest Periods are selected with respect to
different borrowings of Eurodollar Loans included in the Proposed
Borrowing.
/2/ To be expanded to "Borrowing 3" etc., if necessary.
/3/ To be included for a Proposed Borrowing comprised, in whole or in part, of
Eurodollar Loans.
/4/ To be used if the Proposed Borrowing is comprised of more than one
borrowing of Eurodollar Loans and different Interest Periods are selected
with respect to different borrowings of Eurodollar Loans.
<PAGE>
EXHIBIT D-2
The undersigned hereby certifies that the following statements will be
true on the date of the Proposed Borrowing:
(A) the representations and warranties made by the undersigned and
the Guarantor in Section 7 of the Credit Agreement and in each of the other
Credit Documents to which it is a party are true and complete before and
after giving effect to the Proposed Borrowing, with the same force and
effect as if made on and as of such date (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as of
such specific date); and
(B) no Default or Event of Default with respect to the undersigned or
the Guarantor has occurred and is continuing, or would result from the
making of such Proposed Borrowing.
Very truly yours,
[NAME OF BORROWER]
By:
---------------------------------
Title:
<PAGE>
EXHIBIT D-3
FORM OF NOTICE OF BORROWING
OF SWING LINE LOANS
[Date]
TO: The Chase Manhattan Bank, as Administrative Agent
FROM: [Name of Borrower]
RE: Notice of Borrowing of Swing Line Loans
The undersigned refers to the Credit Agreement, dated as of January
12, 1999 (as amended, modified or supplemented from time to time, the "Credit
------
Agreement"; terms defined therein being used herein as therein defined) among
- ---------
the undersigned, the other Borrower party thereto, Providian Financial
Corporation, as Guarantor, the Lenders party thereto, and The Chase Manhattan
Bank, as Administrative Agent; and hereby gives you notice, irrevocably,
pursuant to Section 2.04 of the Credit Agreement, that the undersigned hereby
requests a borrowing of Swing Line Loans under the Credit Agreement, and in
connection therewith sets forth below the information relating to such borrowing
(the "Proposed Borrowing") as required by Section 2.04 of the Credit Agreement:
(i) The Proposed Borrowing is requested from the Swing Line
Lenders.
(ii) The Business Day of the Proposed Borrowing is ______,__.
(ii) The aggregate amount of the Proposed Borrowing is $_____.
(iii) The Loans comprising the Proposed Borrowing will bear
interest at the [ABR] [Swing Line Federal Funds Rate].
The undersigned hereby certifies that the following statements will be
true on the date of the Proposed Borrowing:
(A) the representations and warranties made by the undersigned and
the Guarantor in Section 7 of the Credit Agreement and in each of the other
Credit Documents to which it is a party are true and complete before and
after giving effect to the Proposed Borrowing, with the same force and
effect as if made on and as of such date (or, if any such representation or
warranty is expressly stated to have been made as of a specific date, as of
such specific date); and
<PAGE>
EXHIBIT D-3
(B) no Default or Event of Default with respect to the undersigned or
the Guarantor has occurred and is continuing, or would result from the
making of such Proposed Borrowing.
Very truly yours,
[NAME OF BORROWER]
By:
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT E-1
January 12, 1999
The Chase Manhattan Bank,
as Administrative Agent,
Each of the Lenders party to the Credit Agreement
(as hereinafter defined)
Ladies/Gentlemen:
We have acted as special counsel to Providian National Bank ("PNB"),
Providian Bank ("PB") and Providian Financial Corporation (the "Guarantor") in
connection with the Credit Agreement, dated as of January 12, 1999 (the "Credit
Agreement"), by and among PNB and PB (collectively, the "Borrowers"), the
Guarantor (together with the Borrowers, the "Obligors"), each of the Lenders
named in the Credit Agreement (the "Lenders") and The Chase Manhattan Bank, as
Administrative Agent for the Lenders (the "Administrative Agent"). This opinion
is furnished to you pursuant to Section 6.01(b)(iii) of the Credit Agreement.
Capitalized terms used in this opinion, unless specifically defined in this
opinion, have the meanings given to them in the Credit Agreement.
Materials Examined
In this regard, we have examined executed originals or copies of the
following:
(a) the Credit Agreement;
(b) the Fee Letter dated October 20, 1998;
(c) the opinion of even date addressed to you from Ellen Richey,
General Counsel to the Guarantor (the "General Counsel's Opinion");and
(d) such other instruments, corporate records, certificates and other
documents that we have deemed necessary as a basis for the opinions
hereinafter expressed.
The Credit Agreement and the Fee Letter are sometimes collectively
referred to as the "Credit Documents."
Opinions
Based upon such examination, and having regard for legal
considerations which we deem relevant, and subject to the assumptions,
limitations and qualifications below, we are of the opinion that:
1. The Credit Documents constitute valid and binding obligations of
each of the Obligors, enforceable against each of them in accordance with their
respective terms.
<PAGE>
EXHIBIT E-1
2. No order, consent, permit or approval of any governmental
authority of the United States of America or the State of New York pursuant to
any statute of the United States of America or of the State of New York, that we
in the exercise of customary professional diligence would reasonably recognize
to be applicable to any of the Obligors in connection with the transactions
contemplated by the Credit Agreement, is required to be obtained by any of the
Obligors for the execution, delivery and performance of its obligations under
the Credit Documents to which it is a party.
3. The execution, delivery and performance by each of the Obligors of
the Credit Documents to which it is a party neither is prohibited by, nor
subjects any of the Obligors to a fine, penalty or similar sanction that would
be materially adverse to any of them under, any statute of the United States of
America or any statute of the State of New York that we in the exercise of
customary professional diligence would reasonably recognize to be applicable to
such Obligor in connection with the transactions contemplated by the Credit
Agreement.
Certain Assumptions
With your permission we have assumed the following: (a) the
authenticity of original documents and the genuineness of all signatures; (b)
the conformity to the originals of all documents submitted to us as copies; (c)
with respect to factual matters therein, the truth, accuracy and completeness of
the information, representations and warranties contained in the Credit
Agreement; (d) the due authorization, execution and delivery of all Credit
Documents by the respective parties thereto; (e) the Credit Documents are valid
and binding obligations of, and enforceable against, the respective parties
thereto, other than the Obligors; and (f) the absence of any evidence extrinsic
to the provisions of written agreements between the parties that the parties
intended a meaning contrary to that expressed by those provisions.
Certain Limitations and Qualifications
We express no opinion as to matters of law other than the law of the
State of New York and the United States of America. No opinion is given in
paragraphs 2 or 3 with respect to any federal bank regulatory law or regulation.
With respect to paragraph 1, to the extent federal bank regulatory laws or
regulations are applicable to the transactions contemplated by the Credit
Agreement, we have relied on the General Counsel's Opinion as to compliance by
the Obligors with any such bank regulatory law or regulation. Finally, we
express no opinion as to any matters of municipal law or the laws of any other
local agencies or governmental or regulatory authorities within any state.
Our opinion that any Credit Document is valid, binding or enforceable
against the any Obligor in accordance with its terms is qualified as to:
(a) limitations imposed by bankruptcy, insolvency, fraudulent
conveyance, reorganization, arrangement, moratorium or other similar laws
relating to or affecting the rights of creditors generally;
<PAGE>
EXHIBIT E-1
(b) rights to indemnification and contribution which may be limited by
applicable law or equitable principles or otherwise unenforceable as against
public policy;
(c) general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performance or injunctive relief, regardless
of whether such enforceability is considered in a proceeding in equity or at
law; and
(d) the enforceability of the obligations of the Guarantor under
Section 10 of the Credit Agreement with respect to any Obligation which is
invalid or unenforceable.
We also advise you that subsequent actions by the Lenders or the
Administrative Agent may give rise to defenses afforded to guarantors under New
York law.
Use of Opinion
This opinion letter addresses the legal consequences of only the facts
existing or assumed as of the date hereof.k The opinions expressed
herein are based on an analysis of existing laws and court decisions and
cover certain matters not directly addressed by such authorities. Such
opinions may be affected by actions taken or omitted, events occurring,
or changes in relevant facts, after the date hereof. We have not
undertaken to determine, or to inform any person of, the occurrence or
non-occurrence of any such actions, events or changes. This opinion
letter is solely for your benefit in connection with the transactions
covered by the first paragraph of this letter and may not be relied upon
or used by, circulated, quoted, or referred to, nor may copies hereof be
delivered to, any other person without our prior written approval, except
that (i) copies of this opinion letter may be provided to your attorneys
and accountants and bank regulatory authorities, and (ii) this opinion
letter may be relied upon by, and copies may be delivered to, permitted
transferees of a Lender in connection with such transfer. We disclaim
any obligation to update this opinion letter for events occurring or
coming to our attention after the date hereof.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
--------------------------------------
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT E-2
January 12, 1999
The Chase Manhattan Bank, as
Administrative Agent, and the
Lenders party to the Credit
Agreement (as hereinafter defined)
Re: Providian Credit Agreement
--------------------------
Ladies and Gentlemen:
I have acted as in-house counsel for Providian Financial Corporation, a
Delaware corporation ("PFC"), Providian National Bank, a national banking
association ("PNB"), and Providian Bank, a Utah corporation ("PB"), in
connection with the Credit Agreement, dated as of January 12, 1999 (the "Credit
Agreement"), among PNB and PB (the "Borrowers"), PFC (the "Guarantor" and,
together with the Borrowers, the "Obligors"), the Lenders party thereto (the
"Lenders") and The Chase Manhattan Bank, as Administrative Agent for the Lenders
(in such capacity, the "Administrative Agent").
This opinion is being furnished to you pursuant to Section 6.01(b)(iii) of
the Credit Agreement. All capitalized terms used but not defined herein have
the respective meanings given to such terms in the Credit Agreement.
For purposes of rendering this opinion, I have examined originals or copies
identified to my satisfaction of the following documents:
(a) the Credit Agreement;
(b) the Fee Letter dated October 20, 1998;
(c) the articles of association, articles of incorporation or
certificate of incorporation, as the case may be, and by-laws, each as
amended to the date hereof, of each of the Obligors;
(d) a certificate of good standing with respect to PFC issued by the
Delaware Secretary of State, dated January 11, 1999;
(e) a certificate of good standing with respect to PNB issued by the
Comptroller of the Currency, dated January 8, 1999; and
<PAGE>
EXHIBIT E-2
(f) a certificate of good standing with respect to PB issued by the
Utah Secretary of State, dated January 11, 1999.
The documents referred to in items (a) and (b) above are sometimes
referred to herein as the "Credit Documents."
In addition, except as otherwise provided below, I have made such
inquiries and investigations and examined such corporate records of the Obligors
as I have deemed necessary to render the opinions set forth herein. As used
herein, the phrase "to my knowledge" refers to my actual knowledge based on my
review of the documents listed above and the information, inquiries and
investigations described herein and no others.
For purposes of this opinion, I have assumed (i) the due
authorization, execution and delivery of Documents by each of the parties
thereto other than the Obligors; (ii) that each such other party thereto has the
legal power to act in the capacities in which it is to act under the Credit
Documents; (iii) the conformity to the originals of any documents submitted to
me as certified or photostatic copies, the authenticity of such documents and
the genuineness of all signatures on such documents; (iv) that each of the
Credit Documents is the legal, valid and binding obligation of each of the
parties thereto other than the Obligors, enforceable against each such party in
accordance with its terms; and (v) that each such other party has performed and
will perform its obligations thereunder.
Based upon the foregoing, and subject to the qualifications,
limitations and assumptions hereinafter set forth, I am of the opinion that:
1. Each of the Obligors is validly existing and in good standing
under the laws of the jurisdiction of its organization and has all requisite
corporate power and authority to own and operate its properties, to conduct its
business in the manner in which it presently is conducted and to execute,
deliver and perform its obligations under the Credit Documents to which it is a
party.
2. Each of the Credit Documents to which an Obligor is a party has
been duly authorized by all necessary corporate action on the part of such
Obligor and has been duly executed and delivered by such Obligor.
3. Neither the execution and delivery by any Obligor of the Credit
Documents to which it is a party nor the performance by such Obligor of its
obligations thereunder (i) constitutes or will result in a breach of such
Obligor's charter or by-laws or, to my knowledge, any order of any court or
governmental authority having jurisdiction over such Obligor or constitutes a
violation of applicable law, (ii) will conflict with, or result in any material
breach of, or constitute a default under, or result in the creation or
imposition of any lien upon any property or assets of such Obligor or any of its
Subsidiaries pursuant to, any indenture, mortgage, deed of trust, agreement or
other instrument to which such Obligor or any of its Subsidiaries is a party or
by which such Obligor or any of its Subsidiaries is bound or (iii) will require
any consent, approval, authorization or order of, or filing with, any
governmental authority be obtained or effected by any Obligor, except such as
have been obtained or effected.
<PAGE>
EXHIBIT E-2
4. Except as disclosed in the Credit Agreement, there is no pending
or, to my knowledge, threatened, action, suit or proceeding or governmental
investigation against any Obligor or any of its Subsidiaries before or by any
court, arbitrator or governmental or administrative body (i) with respect to any
of the Credit Documents or the any of transactions contemplated thereby or (ii)
which would reasonably be expected to have a material adverse effect on the
financial condition of such Obligor and its Subsidiaries taken as a whole or the
ability of such Obligor to perform its obligations under the Credit Documents to
which it is a party.
5. None of the Obligors is an "investment company" or a person
directly or indirectly controlled by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended. None of the Obligors is a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
The foregoing opinions are subject to the following qualifications,
limitations and assumptions:
I render no opinion herein as to matters involving the laws of any
jurisdiction other than the laws of the State of California, the General
Corporation Law of the State of Delaware, the Revised Business Corporation Act
of the State of Utah and applicable federal bank regulatory laws and regulations
of the United States of America. No opinion is expressed herein with respect to
any securities or "blue sky" laws of any state. This opinion is limited to the
effect of the present state of such laws, as applied to the facts on which I
have relied (as set forth above), in existence on the date hereof. I express no
opinion as to the laws of any other time or jurisdiction or the applicability of
the laws of any particular jurisdiction. I assume no obligation to revise or
supplement this opinion in the event of future changes in such laws or the
interpretations thereof or such facts, and I assume no responsibility to advise
you of any such changes.
This opinion is delivered solely for your benefit in connection with
the transactions contemplated by the Credit Agreement and may not be relied upon
or used by, circulated, quoted or referred to, nor may any copies of this
opinion be delivered to, any other person without my prior written approval,
except that (i) copies of this opinion may be provided to your attorneys and
accountants and to bank examiners and other regulatory authorities, (ii) this
opinion may be relied upon by, and copies may be delivered to, permitted
transferees of a Lender in connection with such transfer and (iii) this opinion
may be relied upon by Orrick, Herrington & Sutcliffe LLP in giving their opinion
of even date to you.
Very truly yours,
/s/ Ellen Richey
- --------------------
Ellen Richey
General Counsel
<PAGE>
EXHIBIT E-2
<PAGE>
EXHIBIT F-1
[FORM OF SYNDICATED NOTE]
PROMISSORY NOTE
$_______________ [ __ ,]
New York, New York
FOR VALUE RECEIVED, [NAME OF BORROWER], a [national banking
association incorporated, organized and existing under the laws of the United
States of America] [corporation organized and existing under the laws of the
State of Utah] (the "Borrower"), hereby promises to pay to the order of
--------
_____________ (the "Lender"), for the account of its respective Applicable
------
Lending Offices provided for in the Credit Agreement referred to below, at the
principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, New
York 10017, Attention: Financial Institutions Division, 36th Floor, the
principal sum of ______________ Dollars (or such lesser amount as shall equal
the aggregate unpaid principal amount of the Syndicated Loans made by the Lender
to the Borrower under the Credit Agreement), in lawful money of the United
States of America and in immediately available funds, on the dates and in the
principal amounts provided in the Credit Agreement, and to pay interest on the
unpaid principal amount of each such Syndicated Loan, at such office, in like
money and funds, for the period commencing on the date of such Syndicated Loan
until such Syndicated Loan shall be paid in full, at the rates per annum and on
the dates provided in the Credit Agreement.
The date, amount, Type, interest rate and duration of Interest Period
(if applicable) of each Syndicated Loan made by the Lender to the Borrower, and
each payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedule attached hereto or any continuation thereof, each of
which recordations or endorsements shall constitute prima facie evidence of the
matters set forth therein; provided that the failure of the Lender to make any
--------
such recordation or endorsement shall not affect the obligations of the Borrower
to make a payment when due of any amount owing under the Credit Agreement or
hereunder in respect of the Syndicated Loans made by the Lender.
This Note is one of the promissory notes referred to in Section
13.06(d) of the Credit Agreement dated as of January 12, 1999 (as amended,
modified and supplemented and in effect from time to time, the "Credit
------
Agreement") among the Borrower, the other Borrower party thereto, Providian
- ---------
Financial Corporation, as Guarantor, the Lenders named therein and The Chase
Manhattan Bank, as Administrative Agent, and evidences Syndicated Loans made by
the Lender thereunder. Terms used but not defined in this Note have the
respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE>
EXHIBIT F-1
Except as permitted by Section 13.06 of the Credit Agreement, this
Note may not be assigned by the Lender to any other Person.
The Borrower hereby waives diligence, presentment, protest, demand and
notice of every kind.
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
[NAME OF BORROWER]
By
---------------------------------
Title:
<PAGE>
EXHIBIT F-1
SCHEDULE OF SYNDICATED LOANS
This Note evidences Syndicated Loans made, Continued or Converted
under the within-described Credit Agreement to the Borrower, on the dates, in
the principal amounts, of the Types, bearing interest at the rates and having
Interest Periods (if applicable) of the durations set forth below, subject to
the payments, Continuations, Conversions and prepayments of principal set forth
below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Date Made, Principal Type of Interest Duration Amount Paid Unpaid Notation
Continued Amount of Loan Rate of Prepaid, Principal Made by
or Loan Interest Continued Amount
Converted Period or
Converted
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT F-2
[FORM OF COMPETITIVE BID OPTION NOTE]
PROMISSORY NOTE
$_______________ [__,]
New York, New York
FOR VALUE RECEIVED, [NAME OF BORROWER], a [national banking
association incorporated, organized and existing under the laws of the United
States of America] [corporation organized and existing under the laws of the
State of Utah] (the "Borrower"), hereby promises to pay to the order
--------
of_____________ (the "Lender"), for the account of its respective Applicable
Lending Offices provided for in the Credit Agreement referred to below, at the
principal office of The Chase Manhattan Bank at 270 Park Avenue, New York, New
York 10017, Attention: Financial Institutions Division, 36th Floor, the
aggregate unpaid principal amount of the Competitive Bid Option Loans made by
the Lender to the Borrower under the Credit Agreement, in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such Competitive Bid Option Loan, at such
office, in like money and funds, for the period commencing on the date of such
Competitive Bid Option Loan until such Competitive Bid Option Loan shall be paid
in full, at the rates per annum and on the dates provided in the Credit
Agreement.
The date, amount, Type, interest rate and maturity date of each
Competitive Bid Option Loan made by the Lender to the Borrower, and each payment
made on account of the principal thereof, shall be recorded by the Lender on its
books and, prior to any transfer of this Note, endorsed by the Lender on the
schedule attached hereto or any continuation thereof, each of which recordations
or endorsements shall constitute prima facie evidence of the matters set forth
therein; provided that the failure of the Lender to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower to make a payment
when due of any amount owing under the Credit Agreement or hereunder in respect
of the Competitive Bid Option Loans made by the Lender.
This Note is one of the promissory notes referred to in Section
13.06(d) of the Credit Agreement dated as of January 12, 1999 (as amended,
modified and supplemented and in effect from time to time, the "Credit
------
Agreement") among the Borrower, the other Borrower party thereto, Providian
- ---------
Financial Corporation, as Guarantor, the Lenders named therein (including the
Lender) and The Chase Manhattan Bank, as Administrative Agent, and evidences
Competitive Bid Option Loans made by the Lender thereunder. Terms used but not
defined in this Note have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE>
EXHIBIT F-2
Except as permitted by Section 13.06 of the Credit Agreement, this
Note may not be assigned by the Lender to any other Person.
The Borrower hereby waives diligence, presentment, protest, demand and
notice of every kind.
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
[NAME OF BORROWER]
By
----------------------------
Title
<PAGE>
EXHIBIT F-2
SCHEDULE OF LOANS
This Note evidences Competitive Bid Option Loans made under the
within-described Credit Agreement to the Borrower, on the dates, in the
principal amounts, of the Types, bearing interest at the rates and maturing on
the dates set forth below, subject to the payments and prepayments of principal
set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Date of Principal Type of Interest Maturity Amount Unpaid Notation
Loan Amount of Loan Rate Date of Paid or Principal Made by
Loan Loan Prepaid Amount
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT G
ADDITIONAL LENDER ADDENDUM
ADDENDUM, dated _____________________, to the Credit Agreement, dated
as of January 12, 1999 (as amended, modified or supplemented from time to time,
the "Credit Agreement"), among Providian National Bank, a national banking
----------------
association incorporated, organized and existing under the laws of the United
States of America ("PNB"), Providian Bank, a corporation, organized and existing
---
under the laws of the State of Utah ("PB"; together with PNB, the "Borrowers");
-- ---------
Providian Financial Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Guarantor"; together with the Borrowers, the
---------
"Obligors"); the several banks and other financial institutions or entities from
time to time parties thereto (the "Lenders"); and The Chase Manhattan Bank, a
New York banking corporation, as Administrative Agent for the Lenders (in such
capacity, together with any successor appointed pursuant to Section 12.08
thereof, the "Administrative Agent").
--------------------
W I T N E S S E T H :
WHEREAS, the Credit Agreement provides that a financial institution;
although not originally a party thereto, may become a party to the Credit
Agreement with the consent of the Obligors by executing and delivering to the
Obligors and the Administrative Agent an addendum to the Credit Agreement in
substantially the form of this Addendum; and
WHEREAS, the undersigned was not an original party to the Credit
Agreement but now desires to become a party thereto;
NOW, THEREFORE, the undersigned hereby agrees as follows:
1. The undersigned (i) confirms that it has received a copy of the
Credit Agreement, together with copies of the financial statements referred to
in Section 7.01 thereof or the financial statements most recently delivered by
the Borrowers and the Guarantor pursuant to Section 8.01 thereof and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to become a Lender; (ii) agrees that it will,
independently and without reliance upon the Administrative Agent or any other
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under the Credit Documents; (iii) appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under the Credit Documents as are delegated to the Administrative
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; (iv) agrees to be bound by the provisions of the Credit
Agreement and agrees that it will perform in accordance with their terms all of
the obligations which by the terms of the Credit Documents are required to be
performed by it as a Lender; (v) specifies as its Applicable Lending Offices
(and address for notices) the office(s) set forth beneath its name on the
signature page hereof; (vi) attaches the forms prescribed by the Internal
Revenue Service of the United States certifying as to the status of the
undersigned for purposes of determining exemption from United States withholding
taxes with respect to all payments to be made to it under the Credit Documents
or such other documents as are necessary to indicate that all such payments are
subject to such rates
<PAGE>
EXHIBIT G
at a rate reduced by an applicable tax treaty; and (vii) and agrees that it
shall on the date this Addendum is accepted by the Borrowers and the
Administrative Agent become a Lender for all purposes of the Credit Agreement to
the same extent as if originally a party thereto.
2. The amount of the Commitment of the undersigned shall be $_______.
3. Terms defined in the Credit Agreement and not otherwise defined
herein are used herein as therein defined.
IN WITNESS WHEREOF, the undersigned has caused this Addendum to be
executed and delivered by a duly authorized officer on the date first above
written
[NAME OF LENDER]
By:
------------------------------------
Title:
Lending Office for ABR Loans:
Lending Office for Loans other than
ABR Loans:
Address for Notices:
Attention:
Telex No.:
Telecopier No.:
Telephone No.:
Accepted this ___ day of
____________, __.
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:
---------------------------
Title:
<PAGE>
EXHIBIT G
Accepted this ___ day of
____________,__.
PROVIDIAN FINANCIAL CORPORATION
as Guarantor
By:
-----------------------------
Title:
PROVIDIAN NATIONAL BANK
By:
------------------------------
Title:
PROVIDIAN BANK
By:
-------------------------------
Title:
<PAGE>
EXHIBIT H
INCREASED COMMITMENT ADDENDUM
ADDENDUM, dated _____________________, to the Credit Agreement, dated
as of January 12, 1999 (as amended, modified or supplemented from time to time,
the ?Credit Agreement?), among Providian National Bank, a national banking
----------------
association incorporated, organized and existing under the laws of the United
States of America ("PNB"), Providian Bank, a corporation organized and existing
---
under the laws of the State of Utah ("PB"; together with PNB, the "Borrowers");
-- ---------
Providian Financial Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Guarantor"; together with the Borrowers, the
---------
"Obligors"); the several banks and other financial institutions or entities from
--------
time to time party thereto (the "Lenders"); and The Chase Manhattan Bank, a New
York banking corporation, as Administrative Agent for the Lenders (in such
capacity, together with any successor appointed pursuant to Section 12.08
thereof, the "Administrative Agent").
--------------------
W I T N E S S E T H :
WHEREAS, the Credit Agreement provides in subsection 2.14 thereof that
any Lender with the consent of the Obligors may increase the amount of its
Commitment by executing and delivering to the Obligors and the Administrative
Agent an addendum to the Credit Agreement in substantially the form of this
Addendum; and
WHEREAS, the undersigned now desires to increase the amount of its
Commitment under the Credit Agreement;
NOW, THEREFORE, the undersigned hereby agrees as follows:
1. The undersigned agrees, subject to the terms and conditions of
the Credit Agreement, that it shall on the date this Addendum is accepted
by the Obligors and the Administrative Agent have its Commitment increased
$____________, thereby making the amount of its Commitment
$_______________.
2. Terms defined in the Credit Agreement and not otherwise defined
herein are used herein as therein defined.
IN WITNESS WHEREOF, the undersigned has caused this Addendum to be
executed and delivered by a duly authorized officer on the date first above
written
[NAME OF LENDER]
By:
-------------------------------
Title:
<PAGE>
EXHIBIT H
Accepted this ___ day of
____________, __.
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:
----------------------------
Title:
Accepted this ___ day of
____________, __.
PROVIDIAN FINANCIAL CORPORATION,
as Guarantor
By:
----------------------------
Title:
PROVIDIAN NATIONAL BANK
By:
----------------------------
Title:
PROVIDIAN BANK
By:
----------------------------
Title:
<PAGE>
EXHIBIT I
January 12, 1999
The Chase Manhattan Bank, as Administrative Agent under
the Credit Agreement, as hereinafter
defined (the "Administrative Agent")
--------------------
and
The Lenders listed on Schedule I hereto
which are parties to the Credit Agreement
on the date hereof
Re: Credit Agreement, dated as of January 12, 1999, among
Providian National Bank, a national banking association
incorporated, organized and existing under the laws of the
United States of America ("PNB"), Providian Bank, a
---
Corporation organized and existing under the laws of the State
of Utah ("PB"; together with PNB, the "Borrowers");
-- ---------
Providian Financial Corporation, a corporation organized and
Existing under the laws of the State of Delaware (the
"Guarantor"; together with the Borrowers, the "Obligors"); the
--------- --------
lending institutions identified in the Credit Agreement (the
"Lenders"); the Administrative Agent, and Nationsbanc
-------
Montgomery Securities LLC, Citicorp USA Inc. and Credit
Suisse First Boston, as Syndication Agents.
- -------------------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to the Administrative Agent in connection
with the preparation, execution and delivery of the Credit Agreement. Unless
otherwise indicated, capitalized terms used but not defined herein shall have
the respective meanings set forth in the Credit Agreement. This opinion is
furnished to you pursuant to Section 6.01(b)(iv) of the Credit Agreement.
In connection with this opinion, we have examined the Credit
Agreement, signed by each Obligor and by the Administrative Agent and certain of
the Lenders. We also have examined the originals, or duplicates or certified or
conformed copies, of such records, agreements, instruments and other documents
and have made such other investigations as we have deemed relevant and necessary
in connection with the opinions expressed herein. As to questions of fact
material to this opinion, we have relied upon certificates of public officials
and of officers and representatives of the Obligors. In addition, we have
examined, and have relied as to matters of fact upon, the representations made
in the Credit Agreement.
<PAGE>
EXHIBIT I
In rendering the opinion set forth below, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as duplicates or certified
or conformed copies, and the authenticity of the originals of such latter
documents.
In rendering the opinion set forth below, we have assumed that (1) the
Credit Agreement is a valid and legally binding obligation of each of the
Lenders parties thereto, (2)(a) each of the Obligors is validly existing and in
good standing under the laws of the jurisdiction in which it is organized and
has duly authorized, executed and delivered the Credit Agreement in accordance
with its organizational documents, (b) execution, delivery and performance by
each Obligor of the Credit Agreement do not violate the laws of the jurisdiction
in which it is organized or any other applicable laws (excepting the laws of the
State of New York and the Federal laws of the United States) and (c) execution,
delivery and performance by each Obligor of the Credit Agreement do not
constitute a breach or vioilation of any agreement or instrument which is
binding upon such Obligor and (3) no Obligor is an "investment company" within
the meaning of and subject to regulation under the Investment Company Act of
1940.
Based upon and subject to the foregoing, and subject to the
qualifications and limitations set forth herein, we are of the opinion that the
Credit Agreement constitutes the valid and legally binding obligation of each
Obligor, enforceable against such Obligor in accordance with its terms.
Our opinion set forth above is subject to (i) the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally (ii)
general equitable principles (whether considered in a proceeding in equity or at
law) and (iii) an implied covenant of good faith and fair dealing.
We express no opinion with respect to:
(A) the effect of any provision of the Credit Agreement which is
intended to permit modification thereof only by means of an agreement in
writing by the parties thereto;
(B) the effect of any provision of the Credit Agreement insofar as it
provides that any Person purchasing a participation from a Lender or other
Person may exercise set-off or similar rights with respect to such participation
or that any Lender or other Person may exercise set-off or similar rights other
than in accordance with applicable law;
(C) the effect of any provision of the Credit Agreement imposing
penalties or forfeitures;
(D) the enforceability of any provision of the Credit Agreement to
the extent that such provision constitutes a waiver of illegality as a defense
to performance of contract obligations; or
(E) the effect of any provision of the Credit Agreement relating to
indemnification or
<PAGE>
EXHIBIT I
exculpation in connection with violations of any securities laws or relating to
indemnification, contribution or exculpation in connection with willful,
reckless or criminal acts or gross negligence of the indemnified or exculpated
Person or the Person receiving contribution.
We are members of the Bar of the State of New York, and we do not
express any opinion herein concerning any law other than the law of the State of
New York and the Federal law of the United States.
This opinion letter is rendered to you in connection with the above
described transactions. This opinion letter may not be relied upon by you for
any other purpose, or relied upon by, or furnished to, any other person, firm or
corporation without our prior written consent.
Very truly yours,
/s/ Simpson Thacher & Bartlett
------------------------------
SIMPSON THACHER & BARTLETT
<PAGE>
EXHIBIT 12
Statement Re Computation of Ratios
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORP.
Select Financial Data
Year Ended December 31
-------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
a. Ratio of Earnings to Fixed Charges
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 490,563 $ 311,300 $ 257,251 $ 214,863 $ 175,203
Fixed charges 254,006 187,843 192,536 160,183 103,926
----------- ----------- ---------- ----------- ----------
Earnings, for computation purposes $ 744,569 $ 499,143 $ 449,787 $ 375,046 $ 279,129
=========== =========== ========== =========== ==========
FIXED CHARGES:
Interest on borrowings $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Interest on deposits 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of the
interest factor 6,740 4,733 2,967 2,300 2,267
----------- ----------- ---------- ----------- ----------
Fixed charges, including interest on deposits,
for computation purposes $ 254,006 187,843 192,536 160,183 103,926
=========== =========== ========== =========== ==========
Ratio of earnings to fixed charges, including
interest on deposits 2.93 2.66 2.34 2.34 2.69
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 490,563 311,300 257,251 214,863 175,203
Fixed charges 49,671 23,591 52,175 55,032 42,006
----------- ----------- ---------- ----------- ----------
Earnings, for computation purposes $ 540,234 334,891 309,426 269,895 217,209
=========== =========== ========== =========== ==========
FIXED CHARGES:
Interest on borrowings $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Portion of rents representative of the
interest factor 6,740 4,733 2,967 2,300 2,267
----------- ----------- ---------- ----------- ----------
Fixed charges, excluding interest on
deposits, for computation purposes $ 49,671 $ 23,591 $ 52,175 $ 55,032 $ 42,006
=========== =========== ========== =========== ==========
Ratio of earnings to fixed charges, excluding
interest on deposits
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 $ 490,563 311,300 257,251 214,863 175,203
Fixed charges 254,006 187,843 192,536 160,183 103,926
----------- ----------- ---------- ----------- ----------
Earnings, for computation purposes $ 744,569 $ 499,143 $ 449,787 $ 375,046 $ 279,129
=========== =========== ========== =========== ==========
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Interest on borrowings $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Interest on deposits 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of the
interest factor 6,740 4,733 2,967 2,300 2,267
----------- ----------- ---------- ----------- ----------
Fixed charges, including interest on deposits,
for computation purposes 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 $ 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 2.93 2.63 2.25 2.24 2.51
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 490,563 $ 311,300 $ 257,251 $ 214,863 $ 175,203
Fixed charges 49,671 23,591 52,175 55,032 42,006
----------- ----------- ---------- ----------- ----------
Earnings, for computation purposes $ 540,234 $ 334,891 $ 309,426 $ 269,895 $ 217,209
=========== =========== ========== =========== ==========
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Portion of rents representative of
the interest factor 6,740 4,733 2,967 2,300 2,267
----------- ----------- ---------- ----------- ----------
Fixed charges, excluding interest on deposits,
for computation purposes 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 $ 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 10.88 13.28 5.19 4.32 4.40
</TABLE>
<PAGE>
EXHIBIT 13
SELECTED financial data
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 842,579 $ 582,493 $ 584,182 $ 470,513 $ 338,747
Interest expense 247,266 183,110 189,569 157,883 101,613
---------------------------------------------------------------
Net Interest Income 595,313 399,383 394,613 312,630 237,134
Provision for credit losses 545,929 149,268 126,579 79,917 50,313
Non-interest income 1,266,179 634,632 423,819 344,805 274,252
Non-interest expense 825,000 573,447 434,602 362,655 285,870
---------------------------------------------------------------
Income Before Income Taxes 490,563 311,300 257,251 214,863 175,203
Income tax expense 194,117 119,839 97,485 79,411 65,084
---------------------------------------------------------------
Net Income $ 296,446 $ 191,461 $ 159,766 $ 135,452 $ 110,119
===============================================================
Cash dividends declared
per common share/(1)/(8)/ $ 0.15 $ 0.07 -- -- --
===============================================================
Earnings per share--
assuming dilution/(2)/(8)/ $ 2.04 $ 1.33 $ 1.08 $ 0.89 N/A
===============================================================
STATEMENT OF FINANCIAL CONDITION DATA
Loans held for
securitization or sale $ -- $ 450,233 $ 739,706 $ 123,330 $ --
Loans receivable/(3)/ 5,741,106 2,960,676 2,949,928 3,020,174 2,329,518
Allowance for credit losses (451,245) (145,312) (114,540) (93,429) (76,218)
Total assets 7,231,215 4,449,413 4,351,742 3,620,893 2,669,867
Deposits 4,672,298 3,212,766 3,390,112 2,157,765 1,680,450
Borrowings 872,257 232,000 258,500 942,680 532,800
Equity 803,187 595,114 483,144 349,255 326,100
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
1
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA,
CONTINUED
(dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
MANAGED FINANCIAL DATA
Credit cards and line of
credit loans $12,138,380 $8,838,607 $8,348,252 $5,906,469 $4,225,302
Home loans 1,106,568 1,063,446 951,382 722,878 472,858
---------------------------------------------------------------
Total consumer loans $13,244,948 $9,902,053 $9,299,634 $6,629,347 $4,698,160
===============================================================
Securitized loans $ 7,503,842 $6,491,144 $5,610,000 $3,485,843 $2,368,642
Managed revenue 2,373,012 1,507,223 1,093,610 817,710 637,330
KEY STATISTICS
Total accounts (000s) at year-end 7,904 4,617 3,849 2,815 2,239
Managed net interest margin/(4)/ 11.80% 11.23% 10.89% 11.80% 12.79%
Managed delinquency ratio/(5)/ 5.33% 4.22% 4.36% 3.34% 3.03%
Managed loan net credit loss
ratio/(6)/ 7.58% 6.32% 4.82% 3.95% 4.21%
Net income to average managed
assets/(7)/ 2.30% 1.81% 1.91% 2.24% 2.28%
Net income to average equity 42.76% 36.79% 38.43% 38.85% 35.10%
Average equity to average managed
assets 5.50% 5.29% 4.98% 5.75% 6.49%
</TABLE>
/(1)/ On June 10, 1997, Providian Financial Corporation began operations as a
separate stand-alone entity. Prior to that date it operated as a wholly
owned subsidiary of Providian Corporation. Cash dividends declared during
1997 represent cash dividends paid to common shareholders subsequent to
June 10, 1997.
/(2)/ Earnings per share--assuming dilution for the years prior to 1998 are pro
forma and have been computed by reducing net income as reported by pro
forma adjustments to arrive at pro forma net income available to common
shareholders and then dividing this number by the pro forma weighted
average number of common shares outstanding. See Notes to Consolidated
Financial Statements included elsewhere in this document.
/(3)/ Includes all consumer credit products, including unsecured, secured, and
partially secured credit cards, unsecured revolving lines of credit, and
home loans.
/(4)/ Reflects total interest accrued on managed consumer loans, less the
Company's actual cost of funds, costs associated with securitizations,
including investor interest, amortization of fees, and accretion of
discounts, as a percentage of average managed consumer loans.
/(5)/ Reflects delinquencies, i.e., consumer loans which are 30 days or more
past due, at period end, as a percentage of managed consumer loans at
period end.
/(6)/ Represents principal amounts charged off, less recoveries, as a percentage
of average managed consumer loans during the period; fraud losses are not
included.
/(7)/ Average managed assets includes total managed assets of the Company,
including all consumer loan portfolios.
/(8)/ All common share and per common share data have been retroactively
adjusted to reflect the three-for-two stock split in the form of a stock
dividend in December 1998.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
2
<PAGE>
MANAGEMENT'S discussion and analysis of
Financial Condition and Results of Operations
This discussion is intended to further the reader's understanding of the
consolidated financial condition and results of operations of Providian
Financial Corporation (the "Company"). It should be read in conjunction with the
Company's historical financial statements included elsewhere herein and the data
set forth under "Selected Financial Data." In June 1997, Providian Corporation
distributed one share of Providian Financial Corporation common stock for each
share of Providian Corporation common stock held by Providian Corporation's
stockholders of record (the "spin-off"). Prior to the spin-off, the Company
operated as a separate business unit of Providian Corporation, and the
discussion of comparative financial results which includes the twelve months
ended December 31, 1997 and 1996 is based on the historical financial
information of the Company as a business unit of its former parent. The
historical financial statements of the Company prior to the spin-off may not be
indicative of the Company's future performance, nor do they necessarily reflect
what the financial position and results of operations of the Company would have
been had the Company operated as a separate stand-alone entity during the
periods covered. Certain prior year amounts included in the tables herein have
been reclassified to conform to the 1998 presentation.
FORWARD-LOOKING INFORMATION
Certain statements in this Annual Report are 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.
GENERAL
The Company is a leading provider of consumer lending products, including credit
cards, revolving lines of credit, 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.
The Company generates revenue through finance charges assessed on
outstanding loan receivables, through fees paid by customers related to loan
activity (late, overlimit, cash advance, processing, and membership fees) and
from the sale of proprietary fee-based products (currently consisting of Credit
Protection, Home Protection, Providian Health Advantage, DrivePro, and PricePro
/(1)/). Interchange fees related to credit card products are received from
bankcard associations based on customer purchase activity. In addition, the
Company earns interest revenue on its investments held for liquidity purposes.
/(1)/ Home Protection, Providian Health Advantage, DrivePro, and PricePro are
registered service marks of Providian Financial.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
3
<PAGE>
[GRAPH OF
RETURN ON
ASSETS]
The Company's primary expenses are the costs of funding assets, credit
losses, operating expenses, including salaries and employee benefits,
solicitation costs, data processing and communication costs, and income taxes.
Account solicitation costs (such as printing, postage, and credit bureau costs)
are incurred and expensed in advance of successful account acquisitions while
the revenue associated with the accounts is earned over the life of the acquired
account. In accordance with generally accepted accounting principles ("GAAP"),
only the direct, nonsolicitation costs associated with successful account
acquisition efforts are capitalized, offset against up-front processing fees and
amortized over the life of the related account (a maximum of one year for credit
cards). As a result, the majority of account acquisition related costs are
expensed as incurred.
The Company's return on average assets has steadily improved over the past
three years, increasing to 5.10% in 1998. 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 is
responsible for its continued overall superior financial performance.
During 1998, the Company completed purchases of three credit card
portfolios that added approximately 1.7 million accounts to the Company's
customer base. The Company's acquisition strategy is to pursue potential
acquisitions on an opportunistic basis and to apply its return driven approach
to the acquired customer accounts. In determining the price to be paid for a
particular acquisition, the Company takes into account expected future losses on
the acquired portfolio, which, in the case of the acquisitions made during 1998,
are expected to be generally higher than those on loans originated by the
Company.
The Company has received conditional approval to open a London-based
international branch of one of its banking subsidiaries from the Financial
Services Authority of the United Kingdom and the Board of Governors of the
Federal Reserve System, for the purpose of making consumer loans in the United
Kingdom. The Company expects to begin originating loans in the United Kingdom in
the first half of 1999.
[GRAPH OF
RETURN ON
EQUITY]
The Company continued to strengthen its balance sheet in 1998 with
improved profitability, combined with a high level of capital retention, and was
able to increase its return on equity to 42.76% in 1998 from 36.79% in 1997.
On September 14, 1998, the Company's Board of Directors approved a three-
for-two split of the Company's common stock, in the form of a stock dividend
issued on December 15, 1998 to shareholders of record as of December 1, 1998.
Accordingly, all common share and per common share data in the following
discussion includes the effect of the Company's stock split.
EARNINGS SUMMARY
The following discussion provides a summary of 1998 results compared to 1997
results and 1997 results compared to 1996 results. Each component of the results
is discussed in further detail in subsequent sections of this analysis.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net
income for the year ended December 31, 1998 was $296.4 million, representing an
increase of 55% over net income of $191.5 million for the year ended December
31, 1997. This increase was primarily attributable to strong growth in fee
revenue through increased penetration rates for sales of fee-based products to
the Company's existing customer base as well as the introduction of new product
configurations. In addition, the Company continued to increase its earning
assets and strengthen net interest margins while relying less on low
introductory rates to attract customers. Managed loans, which include on-balance
sheet and securitized loans, increased by $3.3 billion, or 34%. This growth was
achieved through strategic acquisitions of credit card portfolios combined with
increases in the Company's loan originations (particularly loans made under
lower line
[GRAPH OF
NET INCOME]
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
4
<PAGE>
MANAGEMENT'S discussion and analysis
credit card products) 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 this environment may
provide many opportunities, the focus of the Company's acquisition strategy will
continue to be its return driven approach.
Repricing programs implemented in 1997 to manage for risk adjusted return
(see "--Risk Adjusted Revenue and Return") continued to contribute to the
Company's managed net interest margin on loans, which increased to 11.80% in
1998 from 11.23% in 1997. The managed net credit loss rate increased to 7.58% in
1998 from 6.32% in 1997, reflecting higher credit loss rates on acquired
portfolios. Core account credit quality and delinquency trends were generally
stable during 1998, with the managed net credit loss rate, excluding acquired
portfolios, remaining virtually unchanged at 6.33% compared to 6.32% in 1997.
Non-interest income represented 43% of managed revenue in 1998, up from 31% in
1997. The dollar contribution to managed revenue from non-interest income
doubled compared to 1997, to $1.0 billion, resulting from 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 $251.1 million during 1998 to $825 million, due to the expenses
associated with servicing a greater number of customers and increased marketing
activity.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Net
income for the year ended December 31, 1997 was $191.5 million, representing an
increase of 20% over the $159.8 million in net income for the year ended
December 31, 1996. This increase was attributable to 40% growth in managed
revenue (managed net interest income plus managed fee income) driven by managed
loan growth, a widening net interest margin and strong fee-based revenues.
Managed loans increased by $602 million, or 6%, despite increased competition
for balances and declining customer loyalty across the industry, with 65% of the
growth coming from secured and partially secured credit card loans, 19% from
home loans, and 16% from unsecured credit card loans.
In managing for risk adjusted return, the Company implemented certain
repricing programs in 1997 to offset a rise in credit losses experienced
industrywide. These programs were reflected in the managed net interest margin
on loans, which increased to 11.23% in 1997 from 10.89% in 1996. The managed net
credit loss rate increased to 6.32% in 1997 from 4.82% in 1996. Non-interest
income made up 31% of managed revenue in 1997, up from 21% in 1996. The dollar
contribution to managed revenue from non-interest income doubled compared to
1996, to $459.7 million, resulting from increased sales of fee-based products,
increased revenue from credit card fees, including annual membership,
processing, cash advance, late, and overlimit fees, and the impact of adopting
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The Company reinvested a portion of the increased managed
revenue to strengthen loan loss reserves, increase marketing investment, and
build infrastructure. Non-interest expense increased $138.8 million during 1997
to $573.4 million, reflecting customer account growth and the addition of a new
marketing channel.
MANAGED CONSUMER LOAN PORTFOLIO AND THE IMPACT OF SECURITIZATION
Since 1989, the Company has securitized unsecured credit cards, revolving lines
of credit, and, since 1996, home equity lines of credit. During 1998, the
Company securitized secured and partially secured credit card receivables for
the first time. 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:
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
YEAR-END BALANCES
On-balance sheet consumer loans $ 5,741,106 $3,410,909 $3,689,634
Securitized consumer loans 7,503,842 6,491,144 5,610,000
-------------------------------------
Total managed consumer loan portfolio $13,244,948 $9,902,053 $9,299,634
=====================================
AVERAGE BALANCES
On-balance sheet consumer loans $ 4,621,709 $3,173,231 $3,522,307
Securitized consumer loans 6,821,800 6,192,243 4,381,720
-------------------------------------
Total average managed consumer loan portfolio $11,443,509 $9,365,474 $7,904,027
=====================================
OPERATING DATA AND RATIOS
Reported:
Average earning assets $ 5,237,785 $3,632,200 $3,708,322
Return on average assets 5.10% 4.57% 4.02%
Net interest margin/(1)/ 11.37% 11.00% 10.64%
Managed:
Average earning assets $12,059,585 $9,824,443 $8,152,986
Return on average assets 2.30% 1.81% 1.91%
Net interest margin/(1)/ 11.29% 10.66% 10.43%
</TABLE>
/(1)/ Net interest margin is equal to net interest income divided by average
earning assets.
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.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
which provided new accounting and reporting standards for securitizations and
similar transactions, effective January 1, 1997. Under SFAS No. 125, 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 loan servicing income.
The effect of SFAS No. 125 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 years ended December 31, 1998,
1997, and 1996, SFAS No. 125 accounting treatment had the effect of: reducing
net interest income by $767 million, $648 million, and $469 million; reducing
the provision for credit losses by $512 million, $473 million, and $275 million;
and increasing non-interest income by $255 million, $175 million, and $194
million. Because credit losses on the securitized loans are reflected as a
reduction in loan servicing 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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
6
<PAGE>
MANAGEMENT'S discussion and analysis
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.
Cash Flow Impact Upon entering into a securitization, the Company receives
cash proceeds from investors net of underwriting or placement fees. The Company
generally uses these proceeds to pay down on-balance sheet liabilities such as
certificates of deposit or bank borrowings or to invest in short-term liquid
investments. The investors' share of finance charge and fee collections
generated by the securitized loans is distributed each month to pay interest to
investors, related credit losses, servicing fees, credit enhancement costs, and
other transaction expenses. Any finance charge and fee cash flow remaining after
such payments is treated as excess servicing income and is generally retained by
or remitted back to the Company. During the revolving period of a
securitization, the Company generally retains principal collections in exchange
for the transfer of additional loan receivables into the securitized pool of
assets. During the amortization or accumulation period of a securitization, the
investors' share of principal collections (in certain cases, up to a specified
amount each month) is either distributed each month to the investors or held in
an account until it accumulates to the total invested amount, at which time it
is paid to the investors in a lump sum.
RISK ADJUSTED REVENUE AND RETURN
The Company has developed targeting and credit risk models designed to identify
qualified consumers who fit the Company's risk parameters. The Company offers
various configurations of credit and related products with multiple pricing
options to optimize the risk/return trade-off. Unsecured, secured, and partially
secured credit card loans and home loans are offered to customer segments under
separate underwriting criteria. Customer finance charge rates are sometimes
adjusted after the account is opened to reflect changes in the credit
environment, and many accounts include performance-based pricing terms pursuant
to which the rates may increase if the customer fails to comply with the terms
of the account agreement.
[GRAPH OF
RISK ADJUSTED
REVENUE]
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 year ended December 31,
1998 were $1,493.8 million and 13.06%, compared to $919.7 million and 9.82% for
the year ended December 31, 1997. The increase during 1998 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 7.58% for the year ended December 31, 1998, compared to 6.32% for the
previous year, reflecting higher credit loss rates on acquired portfolios.
[GRAPH OF
RISK ADJUSTED
RETURN]
Managed risk adjusted revenue and return for the year ended December 31,
1997 were $919.7 million and 9.82%, compared to $709.6 million and 8.98% for the
year ended December 31, 1996. The increase during 1997 reflected an increase in
managed consumer loans, in particular secured and partially secured credit card
loans, which have a greater
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
7
<PAGE>
percentage of fee revenue than unsecured credit card loans. The increase in risk
adjusted revenue was partially offset by an increase in managed net credit
losses, which were 6.32% for the year ended December 31, 1997, compared to 4.82%
for the previous year, consistent with consumer finance industry trends.
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 year ended December 31, 1998 was
$1,361.9 million, compared to $1,047.5 million for the same period in 1997, an
increase of $314.4 million or 30%. Managed net interest margin on average
managed loans increased to 11.80% for the year ended December 31, 1998, from
11.23% for the year ended December 31, 1997. The increase in managed net
interest income and margin reflects an increase in average managed loans, which
increased approximately $2.1 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.
[GRAPH OF
NET INTEREST
MARGIN]
Managed net interest income for the year ended December 31, 1997 was
$1,047.5 million, compared to $863.9 million for the same period in 1996, an
increase of $183.6 million or 21.3%. Managed net interest margin on average
managed loans increased to 11.23% for the year ended December 31, 1997, from
10.89% for the year ended December 31, 1996. The increase in managed net
interest income and margin reflected an increase in average managed loans, which
increased approximately $1.5 billion, combined with slightly higher finance
charge yields. The average yield on consumer loans was affected by a decline in
average introductory rate outstandings during 1997, combined with repricing
programs implemented throughout the year which increased average yields on
selected portfolio segments.
The Company offers both variable rate and fixed rate consumer loan products
and maintains both fixed rate and variable rate funding sources. See "--
Asset/Liability Risk Management" for a discussion of the Company's interest rate
risk management strategy.
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 years ended December 31, 1998,
1997, and 1996. 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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
8
<PAGE>
MANAGEMENT'S discussion and analysis
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------------------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Consumer loans $4,621,709 $807,824 17.48% $3,173,231 $556,918 17.55% $3,522,307 $574,335 16.31%
Interest-earning cash 43,493 2,262 5.20% 88,048 4,812 5.47% 37,269 2,332 6.26%
Federal funds sold 264,669 14,071 5.32% 239,267 13,170 5.50% 90,013 4,455 4.95%
Investment securities 307,914 18,422 5.98% 131,654 7,593 5.77% 58,733 3,060 5.21%
------------------------------------------------------------------------------------------------
Total interest-earning assets 5,237,785 $842,579 16.09% 3,632,200 $582,493 16.04% 3,708,322 $584,182 15.75%
Allowance for loan losses (327,689) (131,602) (104,242)
Other assets 897,403 685,370 366,789
---------- ---------- ----------
Total assets $5,807,499 $4,185,968 $3,970,869
========== ========== ==========
LIABILITIES AND EQUITY
Interest-bearing liabilities
Deposits $3,736,523 $204,335 5.47% $3,014,087 $164,252 5.45% $2,590,038 $140,361 5.42%
Borrowings 712,478 42,931 6.03% 310,017 18,858 6.08% 795,172 49,208 6.19%
------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,449,001 $247,266 5.56% 3,324,104 $183,110 5.51% 3,385,210 $189,569 5.60%
Other liabilities 505,167 196,182 169,948
---------- ---------- ----------
Total liabilities 4,954,168 3,520,286 3,555,158
Capital Securities 160,000 145,096 --
Equity 693,331 520,586 415,711
---------- ---------- ----------
Total liabilities and equity $5,807,499 $4,185,968 $3,970,869
========== ========== ==========
Net interest spread 10.53% 10.53% 10.15%
====== ====== ======
Interest income to average
interest-earning assets 16.09% 16.04% 15.75%
Interest expense to average
interest-earning assets 4.72% 5.04% 5.11%
------ ------ ------
Net interest margins 11.37% 11.00% 10.64%
====== ====== ======
</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 volume and rates:
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 vs. 1997 1997 vs. 1996
---------------------------------------------------------------------------------------
CHANGE DUE TO/(1)/ CHANGE DUE TO/(1)/
INCREASE ---------------------- INCREASE ----------------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Consumer loans $250,906 $253,136 $(2,230) $(17,417) $(59,288) $41,871
Federal funds sold 901 1,347 (446) 8,715 8,168 547
Other securities 8,279 8,220 59 7,013 6,980 33
---------------------------------------------------------------------------------------
Total interest income 260,086 262,703 (2,617) (1,689) (44,140) 42,451
INTEREST EXPENSE
Deposits 40,083 40,666 (583) 23,891 23,110 781
Borrowings 24,073 23,921 152 (30,350) (29,491) (859)
---------------------------------------------------------------------------------------
Total interest expense 64,156 64,587 (431) (6,459) (6,381) (78)
---------------------------------------------------------------------------------------
Net interest income $195,930 $198,116 $(2,186) $ 4,770 $(37,759) $42,529
=======================================================================================
</TABLE>
/(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.
NON-INTEREST INCOME
[GRAPH OF
NON-INTEREST
INCOME]
Non-interest income, which consists primarily of loan servicing income and
credit product fee income, represented approximately 60% and 52% of gross on-
balance sheet revenues for the years ended December 31, 1998 and 1997. Total
non-interest income increased 99.5%, or $631.5 million, to $1,266.2 million in
1998 over 1997. This increase is attributable to increased credit product fee
income realized from proprietary fee-based products, increased late, overlimit,
membership, and processing fees, and higher average securitized loan balances.
In 1997, total non-interest income increased 49.7%, or $210.8 million, to
$634.6 million, over 1996. This increase was primarily attributable to higher
average securitized loan balances, the effects of the adoption of SFAS No. 125,
increased credit product fee income from proprietary fee-based products, and
increased late and overlimit fees.
Servicing and Securitization Income Servicing and securitization income
relates directly to securitized loans. It includes a servicing fee, which
essentially offsets the Company's cost of servicing the securitized loans,
excess servicing income and gains or losses under SFAS No. 125 (see "--Managed
Consumer Loan Portfolio and the Impact of Securitization"). To the extent
subsequent cash flows for excess servicing income exceed the projected amounts,
which were recorded at present value under SFAS No. 125, the Company will
recognize additional loan servicing income during the period in which the
servicing is provided.
The Company has issued $12.6 billion in public and private asset-backed
securities since 1989 and has increased the use of securitization as a funding
source as the amount of total managed loans has increased. As of December 31,
1998, securitizations outstanding provided $7.4 billion in funding, representing
53% of total managed funding, compared with $6.8 billion, or 62%, as of December
31, 1997 and $5.6 billion, or 58%, as of December 31, 1996. The decrease in
securitizations outstanding as a percentage of total managed funding as of
December 31, 1998 was due to the following events during 1998: significant
portfolio acquisitions; fewer securitizations during the third and fourth
quarters due to unfavorable market conditions; growth in loans made under lower
line credit card products; and an increase in the Company's levels of 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
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
10
<PAGE>
MANAGEMENT'S discussion and analysis
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 year ended December 31, 1998, loan servicing income increased
$156.9 million from the prior year, to $559.3 million. This increase reflects
higher overall finance charge and fee revenue on securitized loans and higher
average securitized loan receivables, partially offset by increased net credit
losses and a year over year reduction of the gain on sale upon transfer of
assets recognized pursuant to SFAS No. 125. For the year ended December 31,
1997, loan servicing income increased $109.7 million from the prior year, to
$402.4 million. This increase reflected an increase in average securitized loan
receivables, partially offset by an increase in net credit losses and the impact
of the adoption of SFAS No. 125. See "--Managed Consumer Loan Portfolio and the
Impact of Securitization."
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 loan servicing income. For the years ended
December 31, 1998, 1997, and 1996, credit product fee income was $703.5 million,
$230.8 million, and $123.7 million, reflecting increased volume in fee revenue
associated with asset and account growth and increases in fee rates. While the
Company anticipates significant growth in credit product fee income in 1999,
there can be no assurance that the historic rate of growth reflected in the
Company's 1998 results will continue.
The Company markets a number of proprietary fee-based services that
complement our credit products. For the years ended December 31, 1998, 1997, and
1996, proprietary fee-based product revenue totaled $165.8 million, $59.3
million, and $24.8 million, reflecting increased penetration rates for sales 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 $176.0
million, $80.9 million, and $38.6 million for the years ended December 31, 1998,
1997, and 1996. Annual membership fees, processing fees, cash advance fees, and
interchange income also increased over the three years ended December 31, 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 expenses include loan origination costs, such as printing, postage,
telemarketing, list processing, and credit bureau costs paid to third parties in
connection with direct mail and telemarketing 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 years ended December 31, 1998, 1997, and 1996, the Company
amortized loan origination costs of $44.9 million, $37.7 million, and $41.3
million. For the years ended December 31, 1998, 1997, and 1996, loan origination
costs were $196.5 million, $143.0 million, and $113.9 million, reflecting
increased direct mail volumes and other marketing initiatives.
Non-interest expenses also include salary and benefit expenses, such as
staffing costs associated with marketing, customer service, collections, and
administration. Other non-interest expenses include 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 expenses for the years ended December
31, 1998, 1997, and 1996:
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
--------------------------
NON-INTEREST EXPENSE
<S> <C> <C> <C>
Salaries and employee benefits $265,411 $196,761 $153,849
Solicitation 196,528 142,956 113,892
Occupancy, furniture, and equipment 49,908 37,610 26,039
Data processing and communications 74,603 50,108 37,214
Other 238,550 146,012 103,608
--------------------------
Total $825,000 $573,447 $434,602
==========================
</TABLE>
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 financial
institution 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 financial institution
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 are
scheduled to be completed by March 31, 1999, and infrastructure upgrades 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, and testing of third-party-provided critical systems
is scheduled to be substantially completed by 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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
12
<PAGE>
MANAGEMENT'S discussion and analysis
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 is currently in the process of augmenting its existing business
resumption and disaster recovery plan to include contingency plans with respect
to disruptions that might result from Year 2000 issues. The Company expects
these contingency plans to be substantially completed by March 31, 1999. 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 $7.0 million in Year
2000 project expenses through December 31, 1998. 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 $194.1 million, $119.8 million, and
$97.5 million for the years ended December 31, 1998, 1997, and 1996. The
Company's effective tax rate increased to 39.57% for the year ended December 31,
1998 from 38.50% for the year ended December 31, 1997. See Notes to Consolidated
Financial Statements, included elsewhere herein, for further explanations of the
income tax expense and a reconciliation of reported income taxes to the amount
computed by applying the United States federal statutory rate to income before
taxes.
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 initiatives,
seasoning, and demographic and other factors which are characterized by
delinquency statistics.
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 has recognized allowances for credit losses for acquired loan
portfolios at the time of purchase to reflect the expected credit losses
inherent in such loans, which in the case of the acquisitions made during 1998
are generally expected to be higher than those on loans originated by the
Company. Additionally, the Company
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
143
<PAGE>
adjusts the allowance for credit losses to reflect the sale of securitized loans
and the removal of the related net book value from the statement of financial
condition. During the year ended December 31, 1998, $116 million in additions to
the allowance for credit losses was recognized as a result of loan portfolio
acquisitions, net of securitizations.
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 for collectibility when they become 90 days delinquent,
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. 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.
[GRAPH OF 30+
DELINQUENCY
& CREDIT LOSS
RATIO]
Delinquencies The following table presents the delinquency trends of the
Company's on-balance sheet and managed consumer loan portfolio for the years
ended December 31, 1998, 1997, and 1996. An account is contractually delinquent
if the minimum payment is not received by the next billing date. Total
delinquencies on managed loans increased to 5.33% as of December 31, 1998 from
4.22% as of December 31, 1997, reflecting 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>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
-----------------------------------------------------------------------------------
% OF % OF % OF
LOANS TOTAL LOANS LOANS TOTAL LOANS LOANS TOTAL LOANS
-----------------------------------------------------------------------------------
REPORTED/(1)/
<S> <C> <C> <C> <C> <C> <C>
Loans outstanding $ 5,741,106 100.00% $ 3,410,909 100.00% $ 3,689,634 100.00%
Loans delinquent:
30-59 days $ 116,827 2.03% $ 40,483 1.19% $ 56,079 1.52%
60-89 days 73,784 1.29% 35,310 1.03% 30,875 0.84%
90 or more days 135,980 2.37% 66,421 1.95% 59,207 1.60%
-----------------------------------------------------------------------------------
Total $ 326,591 5.69% $ 142,214 4.17% $ 146,161 3.96%
===================================================================================
MANAGED
Loans outstanding $ 13,244,948 100.00% $ 9,902,053 100.00% $ 9,299,634 100.00%
Loans delinquent:
30-59 days $ 254,329 1.92% $ 139,245 1.41% $ 160,074 1.72%
60-89 days 156,276 1.18% 96,462 0.97% 88,439 0.95%
90 or more days 295,967 2.23% 182,146 1.84% 157,013 1.69%
-----------------------------------------------------------------------------------
Total $ 706,572 5.33% $ 417,853 4.22% $ 405,526 4.36%
===================================================================================
</TABLE>
/(1)/ Includes consumer loans held for securitization.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
14
<PAGE>
MANAGEMENT'S discussion and analysis
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.
[GRAPH OF
NET CREDIT
LOSSES &
PROVISION]
The annualized managed net credit loss rate increased to 7.58% as of
December 31, 1998, compared to 6.32% as of December 31, 1997, reflecting higher
credit loss rates on acquired portfolios. The annualized managed net credit loss
rate increased to 6.32% as of December 31, 1997, compared to 4.82% as of
December 31, 1996, reflecting increased credit loss trends throughout the
consumer finance industry. 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 6.33% for 1998 compared to 6.32% for 1997.
The following table presents the Company's net credit losses for consumer
loans for the periods indicated and is presented both on a financial statement
reporting basis and a managed portfolio basis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
REPORTED/(1)/
Average loans outstanding $ 4,621,709 $ 3,173,231 $ 3,522,307
Net credit losses $ 356,140 $ 118,496 $ 105,468
Net credit losses as a percentage of average loans outstanding 7.71% 3.73% 2.99%
MANAGED
Average loans outstanding $11,443,509 $ 9,365,474 $ 7,904,027
Net credit losses $ 867,611 $ 591,675 $ 380,585
Net credit losses as a percentage of average loans outstanding 7.58% 6.32% 4.82%
</TABLE>
/(1)/ Includes consumer loans held for securitization.
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.
[GRAPH OF
ON-BALANCE SHEET
LOANS & ALLOWANCE
FOR CREDIT LOSSES]
As part of the quantitative evaluation of the allowance for credit losses,
the Company segregates loans by portfolio type. These include portfolios of
various types of credit card products and home loan products and acquired loan
portfolios. The quantitative factors the Company uses to establish portfolio-
level reserves are historical delinquencies, historical credit loss rates, level
of security (if applicable), customer characteristics, and other factors. Home
loans that are 90 or more days past due are also evaluated individually for
collectibility in order to establish an allowance for credit losses. Loan
portfolios are grouped into credit card and home loan pools, and certain
qualitative factors are applied to those pools, consistent with applicable bank
regulatory guidelines. The qualitative factors the Company takes into
consideration in evaluating the need to establish
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
15
<PAGE>
additional allowances on a pool or portfolio include general economic
conditions, trends in loan portfolio volume and seasoning, geographic
concentrations, and recent modifications to loan review and underwriting
procedures. The Company performs subsequent reviews of actual credit loss
performance compared to estimated credit losses, which may result in
modification of its loan loss allowance evaluation model.
The following table sets forth the activity in the allowance for credit
losses for the years and portfolios indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 145,312 $ 114,540 $ 93,429
Provision for credit losses 545,929 149,268 126,579
Reserve acquired (net of securitization) 116,144 -- --
Credit losses (389,587) (132,521) (116,930)
Recoveries 33,447 14,025 11,462
---------------------------------------
Net credit losses (356,140) (118,496) (105,468)
---------------------------------------
Balance at end of year $ 451,245 $ 145,312 $ 114,540
=======================================
Allowance for credit losses to loans at year-end/(1)/ 7.86% 4.91% 3.88%
On-balance sheet consumer loans $ 5,741,106 $ 3,410,909 $ 3,689,634
Loans held for sale -- 450,233 739,706
---------------------------------------
Loan balance $ 5,741,106 $ 2,960,676 $2,949,928
=======================================
</TABLE>
/(1)/ Excludes consumer loans held for securitization.
The allowance for credit losses increased to $451.2 million, or 7.86% of
on-balance sheet loans, as of December 31, 1998, from $145.3 million, or 4.91%
of on-balance sheet loans, as of December 31, 1997. 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, and portfolio acquisitions made
during 1998 (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.
Funding Sources and Maturities 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
[GRAPH OF 1998
FUNDING SOURCES]
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
16
<PAGE>
MANAGEMENT'S discussion and analysis
product categories, funding is diversified in terms of the types of products
offered and the types, industries, and geographical locations of investors.
[GRAPH OF 1997
FUNDING SOURCES]
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 December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
---------------------------------------------------------------------------
DIRECT OTHER TOTAL DIRECT OTHER TOTAL
DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 317,219 $ 165,290 $ 482,509 $ 375,825 $ 170,974 $ 546,799
Over three months
through 12 months 995,587 428,932 1,424,519 494,495 250,250 744,745
Over one year
through five years 856,924 850,278 1,707,202 601,718 329,212 930,930
Deposits without
contractual maturity 969,205 88,863 1,058,068 904,517 85,775 990,292
---------------------------------------------------------------------------
Total Deposits $3,138,935 $1,533,363 $4,672,298 $2,376,555 $ 836,211 $3,212,766
===========================================================================
</TABLE>
Deposits increased to $4.7 billion as of December 31, 1998 from $3.2
billion as of December 31, 1997. This increase is attributable to the Company's
strategic decision to increase deposit funding and the strong demand for FDIC-
insured deposits.
The Company expects to replace the $482.5 million of deposits that will
mature during the first three months of 1999, as well as those maturing during
subsequent periods, from a variety of sources, including retail and
institutional deposits, term federal funds, and asset securitizations, in
accordance with the Company's liability management programs.
In February 1998, the Company, through one of its banking subsidiaries,
established a program for the issuance of senior and subordinated debt
instruments. Under this program, the Company from time to time may issue fixed
or variable rate debt instruments in the aggregate principal amount of up to $4
billion, with maturities ranging from seven days to 15 years. As of December 31,
1998, there were $399.8 million in senior bank notes outstanding.
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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
17
<PAGE>
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 December 31, 1998.
The Company's term securitizations are expected to amortize over the
periods indicated below, based on currently outstanding securitized loan
receivables as of December 31, 1998:
<TABLE>
<CAPTION>
AMOUNT AMORTIZING
YEAR (dollars in millions)
-------------------------------------
<S> <C>
1999 $158
2000 792
2001 1,026
2002 1,380
2003 914
2004 230
</TABLE>
The Company believes that it can attract deposits, borrow funds from other
sources, and issue additional asset-backed securities to fund the amortization
schedule summarized above, although no assurances can be given to that effect.
The Company's strategy of opportunistic acquisitions may from time to time
require funding. Potential sources of funding for such acquisitions by the
Company include the following: cash flow from operations; borrowings under its
revolving credit facilities; asset securitizations; securities issued under its
shelf registration on Form S-3 filed with the Securities and Exchange
Commission; and issuance of privately placed debt or equity securities. There
can be no certainty, however, that funding for future acquisitions will be
available on terms favorable to the Company.
On February 4, 1997, the Company, through a wholly owned subsidiary
statutory business trust, Providian Capital I, issued $160 million in
mandatorily redeemable preferred securities (the "Capital Securities"), which
accumulate accrued distributions at a rate of 9.525% per year. The sole assets
of Providian Capital I are $164.9 million aggregate principal amount of the
Company's 9.525% Junior Subordinated Deferrable Interest Debentures due February
1, 2027 (the "Debentures") and the right to reimbursement of expenses under a
related expense agreement with the Company. The Company has the right to defer
payment of interest on the Debentures under certain circumstances, in which case
distributions on the Capital Securities would also be deferred and the Company's
ability to pay dividends on its common stock would be restricted. The Company
has the right to cause the redemption of the Capital Securities on or after
February 1, 2007, or earlier in the event of certain regulatory changes. The
redemption price depends on several factors, including the date of the
redemption, the present value of the principal and premium payable, and the
accumulated but unpaid distributions on the Capital Securities.
The primary source of funds for payment of accrued distributions on the
Capital Securities and dividends on common stock of the Company is dividends
received from its banking subsidiaries. The amount of dividends that each
banking subsidiary may declare is generally limited to its net income for the
current year combined with its retained net income for the previous two years
less any dividends declared during the related three-year measurement period.
Also, a bank may not declare dividends if such declaration would leave the bank
inadequately capitalized. Therefore, the Company's ability to pay accrued
distributions on Capital Securities and dividends on common stock depends on the
future net income and capital requirements of the Company's banking
subsidiaries.
Backup Liquidity The Company has access to a number of backup liquidity
sources. The Company maintains cash reserves to ensure adequate short-term
liquidity. The Company also maintains a portfolio of high-quality investment
securities such as U.S. government and agency obligations, mortgage-backed
securities, commercial paper, interest-earning deposits with other banks,
federal funds sold, and other cash equivalents. Investment securities
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
18
<PAGE>
MANAGEMENT'S discussion and analysis
increased to $433.7 million as of December 31, 1998 from $172.8 million as of
December 31, 1997. Federal funds sold increased to $297.9 million from $115.0
million over the same period.
The Company has additional backup liquidity in the form of a $1 billion
unsecured committed revolving credit facility (the "Credit Facility") from a
group of financial institutions, which is scheduled to expire in January 2003.
Pursuant to the Credit Facility, the Company's two banking subsidiaries,
Providian National Bank and Providian Bank (collectively, the "Borrowers"), have
access to revolving loans, which bear interest determined by a competitive bid
process or based on the federal funds rate, the London Interbank Offered Rate
("LIBOR"), or the prime rate, plus a spread. The Company guarantees the prompt
and complete payment, when due, of the Borrowers' obligations under the Credit
Facility. During 1998, the average borrowings under the predecessor of the
current Credit Facility were $86.4 million. The Company is also a party to three
separate 364-day credit facilities totaling $275 million, under which short-term
borrowings are available for general corporate purposes. The Company did not
borrow funds under the 364-day credit facilities during 1998.
As a source of additional liquidity, the Company may use reverse
repurchase agreements pursuant to which the Company would pledge an investment
security as collateral for the use of funds during an agreed-upon period of
time. The benefits and risks of such agreements depend on many factors,
including the terms available, the Company's ability to apply the proceeds to
earning assets yielding a higher return, the demand for the investment
securities, and interest rate trends. The Company had no such agreements
outstanding at December 31, 1998 or 1997. The Company has also filed a
registration statement on Form S-3 with the Securities and Exchange Commission,
registering various forms of debt and equity securities in the aggregate amount
of $2 billion. However, there can be no assurance that additional debt or equity
financing will be available on terms attractive to the Company.
The Company has developed a contingency funding plan that defines tests for
management to monitor the Company's liquidity position and prescribes management
actions in times of distress.
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 shareholders' 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 which are used to
measure whether a financial institution is "well capitalized" or "adequately
capitalized":
<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 = or greater than 10% = or greater than 8% less than 10%
Tier 1 Tier 1/Total Risk-Based Assets = or greater than 6% = or greater than 4% less than 6%
Leverage Tier 1/Adjusted average assets = or greater than 5% = or greater than 4% less than 5%
</TABLE>
At December 31, 1998, 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 10.08% 10.58%
Tier 1 9.06% 9.22%
Leverage 11.06% 6.85%
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
19
<PAGE>
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 should 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.
NII simulation is used to measure the banking operations' future earnings
under multiple interest rate scenarios against plan earnings under a baseline
interest rate scenario. NII dispersion is measured on the assumption that
management does not react to the changed interest rate environment with any
action designed to counter its effects. The multiple interest rate scenarios
include changes in the shape of the yield curve, changes of up to 400 basis
points in the general level of interest rates, and changes in the relationship
between the prime rate and LIBOR. The largest simulated reductions in net
interest income generally occur in rapidly rising interest rate scenarios. The
results of these NII simulations are compared to levels deemed appropriate by
management, and are referred to management for appropriate action.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
20
<PAGE>
MANAGEMENT'S discussion and analysis
The MVPE method is complementary to NII simulation. Whereas NII simulation
measures the risk to net interest income of fluctuations in interest rates, MVPE
analysis estimates the risk to the market value of the Company's portfolio
equity, which 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. MVPE measures the impact of immediate changes in
interest rates (shock) on the present value of assets, liabilities, and
off-balance sheet transaction cash flows. The following table presents the
estimated effects of positive and negative parallel shifts in interest rates as
calculated at December 31, 1998 and takes into consideration the Company's
current hedging activity:
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES/(1)/
(in basis points) PERCENTAGE CHANGE IN
-----------------------------
NII/(2)/ MVPE/(3)/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
+200 (3.2)% (5.5)%
Flat 0% 0%
- -200 4.1% 6.6%
</TABLE>
/(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 difference between a
negotiated rate and LIBOR, if positive, 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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
21
<PAGE>
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 agreements and caps
purchased/floors sold for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Beginning Balance $ 955,000 $ 1,290,000 $ 1,404,000
Additions 667,000 263,000 614,000
Maturities 987,000 598,000 728,000
--------------------------------------
Ending Balance $ 635,000 $ 955,000 $ 1,290,000
======================================
Interest rate caps and floors:
Beginning Balance $ 922,000 $ 1,522,000 $ 1,014,000
Additions 659,000 -- 883,000
Maturites 910,000 600,000 375,000
--------------------------------------
Ending Balance $ 671,000 $ 922,000 $ 1,522,000
======================================
</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 risk profile.
The Company manages credit risk arising from derivative transactions
through a rigorous ongoing credit review, approval, and monitoring process.
"Credit risk" 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.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
22
<PAGE>
MANAGEMENT'S responsibilities for financial reporting
The consolidated financial statements appearing in this Annual Report have been
prepared by management, which is responsible for their preparation, integrity,
and fair presentation. The statements have been prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's best estimates and judgments.
Management is responsible for the system of internal controls over
financial reporting at Providian Financial Corporation and its subsidiaries, a
system designed to provide reasonable assurance regarding the preparation of
reliable published financial statements. This system is augmented by written
policies and procedures, including a code of conduct to foster a strong ethical
climate, a program of internal audit, and the selection and training of
qualified personnel. Management believes that the Company's system of internal
controls over financial reporting provides reasonable assurance that the
financial records are reliable for preparing financial statements.
The Audit Committee of the Board of Directors, consisting solely of outside
Directors, meets with the independent auditors, management, and internal
auditors periodically to discuss internal controls over financial reporting,
auditing, and financial reporting matters. The Committee reviews with the
independent auditors the scope and results of the audit effort. The Committee
also meets with the Company's independent auditors and internal auditors without
management present to ensure that these groups have free access to the
Committee.
The independent auditors are recommended by the Audit Committee of the
Board of Directors, selected by the Board of Directors, and ratified by the
shareholders. Based upon their audit of the consolidated financial statements,
the independent auditors, Ernst & Young LLP, have issued their Auditors' Report,
which appears on the following page.
/s/ SHAILESH J. MEHTA
SHAILESH J. MEHTA
Chairman, President and
Chief Executive Officer
/s/ DAVID J. PETRINI
DAVID J. PETRINI
Executive Vice President,
Chief Financial Officer and Treasurer
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
23
<PAGE>
REPORT of independent auditors
Board of Directors
Providian Financial Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Providian Financial Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Providian
Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Francisco, CA
January 20, 1999
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED statements of financial condition
Providian Financial Corporation and Subsidiaries
DECEMBER 31,
(dollars in thousands) 1998 1997
-------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 176,348 $ 112,522
Federal funds sold 297,869 114,960
Investment securities:
Available-for-sale (at market value, amortized cost of $115,396
and $9,482 at December 31, 1998 and 1997) 114,858 9,482
Held-to-maturity (market value of $323,273 and $165,549 at
December 31, 1998 and 1997) 318,817 163,274
Loans held for securitization or sale -- 450,233
Loans receivable, less allowance for credit losses of $451,245 at
December 31, 1998 and $145,312 at December 31, 1997 5,282,014 2,815,364
Premises and equipment, net 82,858 61,625
Interest receivable 51,801 30,192
Due from securitizations 454,374 522,387
Deferred taxes 306,234 66,511
Other assets 146,042 102,863
-------------------------
Total assets $ 7,231,215 $ 4,449,413
=========================
LIABILITIES
Deposits:
Non-interest bearing $ 48,220 $ 32,089
Interest bearing 4,624,078 3,180,677
-------------------------
4,672,298 3,212,766
Short-term borrowings 472,500 232,000
Long-term borrowings 399,757 --
Deferred fees 334,617 64,696
Accrued expenses and other liabilities 388,856 184,837
-------------------------
Total liabilities 6,268,028 3,694,299
Company obligated mandatorily redeemable capital securities
of subsidiary trust holding solely junior subordinated
deferrable interest debentures of the Company
(Capital Securities) 160,000 160,000
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (authorized: 400,000,000
shares; issued and outstanding: December 31, 1998--141,732,008
shares; December 31, 1997--142,734,818 shares) 954 954
Additional paid-in capital -- 4,217
Retained earnings 866,005 599,856
Net unrealized loss on available-for-sale securities (320) --
Common stock held in treasury-at cost: (December 31, 1998--
1,405,972 shares; December 31, 1997--403,163 shares) (63,452) (9,913)
-------------------------
Total shareholders' equity 803,187 595,114
-------------------------
Total liabilities and shareholders' equity $ 7,231,215 $ 4,449,413
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED statements of income
Providian Financial Corporation and Subsidiaries
YEAR ENDED DECEMBER 31,
(dollars in thousands, except per share data) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 807,825 $ 556,918 $ 574,335
Investment securities 34,754 25,575 9,847
---------------------------------------
Total interest income 842,579 582,493 584,182
INTEREST EXPENSE
Deposits 204,335 164,252 140,361
Borrowings 42,931 18,858 49,208
---------------------------------------
Total interest expense 247,266 183,110 189,569
Net interest income 595,313 399,383 394,613
Provision for credit losses 545,929 149,268 126,579
---------------------------------------
Net interest income after provision for credit losses 49,384 250,115 268,034
NON-INTEREST INCOME
Servicing and securitizations 559,305 402,446 292,698
Credit product fee income 703,498 230,786 123,654
Other 3,376 1,400 7,467
---------------------------------------
1,266,179 634,632 423,819
NON-INTEREST EXPENSE
Salaries and employee benefits 265,411 196,761 153,849
Solicitation 196,528 142,956 113,892
Occupancy, furniture, and equipment 49,908 37,610 26,039
Data processing and communication 74,603 50,108 37,214
Other 238,550 146,012 103,608
---------------------------------------
825,000 573,447 434,602
---------------------------------------
Income before income taxes 490,563 311,300 257,251
Income tax expense 194,117 119,839 97,485
---------------------------------------
Net Income $ 296,446 $ 191,461 $ 159,766
=======================================
Earnings per share--basic $ 2.09 N/A N/A
=======================================
Earnings per share--assuming dilution $ 2.04 N/A N/A
=======================================
Cash dividends paid per share $ 0.15 $ 0.07 N/A
=======================================
Weighted average common shares outstanding--basic (000) 141,872 N/A N/A
=======================================
Weighted average shares and assumed conversions (000) 145,184 N/A N/A
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
26
<PAGE>
CONSOLIDATED STATEMENTS of changes in shareholders' equity
Providian Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands, except
per share data)
7.25% CUMULATIVE COMMON
SPECIAL CUMULATIVE ADDITIONAL OTHER STOCK
PREFERRED PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE HELD IN
STOCK STOCK STOCK CAPITAL EARNINGS INCOME TREASURY TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,290 $ 63 $ 5 $ 63,706 $ 284,191 $-- $-- $349,255
Net Income 159,766 159,766
Cash dividend:
Common--paid to then
parent $4 per share (20,000) (20,000)
Preferred--paid to
then parent (4,587) (4,587)
Redemption of preferred stock (1,290) (1,290)
----------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ 63 $ 5 $ 63,706 $ 419,370 $-- $-- $483,144
Net Income 191,461 191,461
Redemption of preferred stock (63) (63,206) (63,269)
Net issuance of shares pursuant
to the Distribution Agreement 948 (499) (449) --
Cash dividend:
Common--$0.07 per share (9,520) (9,520)
Preferred--paid to then parent (1,006) (1,006)
Purchase of 752,040 common
shares for treasury (18,345) (18,345)
Exercise of stock options (1,841) 4,191 2,350
Reimbursement relating to the
conversion of stock options 6,846 6,846
Issuance of restricted and
unrestricted stock less forfeited
shares 1 5,442 4,241 9,684
Deferred compensation related to
grant of restricted and
unrestricted stock less
amortization of $1,280 (8,404) (8,404)
Tax benefit from exercise of
stock options and issuance
of restricted stock 2,173 2,173
----------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- $ -- $ 954 $ 4,217 $ 599,856 $-- $ (9,913) $595,114
Comprehensive income:
Net Income 296,446 296,446
Other comprehensive income,
net of income tax:
Unrealized loss on securities
net of income taxes of $215 (320) (320)
---- ----------
Comprehensive income 296,126
Cash dividend:
Common--$0.15 per share (21,358) (21,358)
Stock dividend:
Dividend rate of 50% par value $0.01 473 (473) --
Purchase of 2,407,083 common shares
for treasury 16,066 (114,037) (97,971)
Exercise of stock options and other
awards (24,974) (8,466) 49,904 16,464
Issuance of restricted and unrestricted
stock less forfeited shares 1,331 10,594 11,925
Deferred compensation related to grant
of restricted and unrestricted stock
less amortization of $4,415 (7,509) (7,509)
Put warrant premium 1,325 1,325
Net tax effect from exercise of
stock options and issuance of
restricted stock 9,071 9,071
----------------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ -- $ 954 $ -- $ 866,005 $ (320) $(63,452) $803,187
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
27
<PAGE>
CONSOLIDATED statements of cash flows
Providian Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 296,446 $ 191,461 $ 159,766
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 545,929 149,268 126,579
Depreciation and amortization of premises and
equipment 19,435 14,984 10,566
Amortization of net loan acquisition costs 44,852 37,728 41,342
Amortization of deferred compensation related to
restricted and unrestricted stock 4,415 1,280 --
Amortization of deferred loan fees (212,915) (55,399) (30,764)
(Increase) decrease in deferred income tax benefit (239,507) 4,981 (11,597)
Increase in deferred fees 482,836 95,028 45,948
Increase in interest receivable (21,609) (23,570) (12,130)
Net increase in other assets (87,700) (56,948) (40,631)
Net increase (decrease) in accrued expenses and
other liabilities 215,265 (7,908) 33,609
---------------------------------------
Net Cash Provided by Operating Activities 1,047,447 350,905 322,688
INVESTING ACTIVITIES
Net increase in money market instrument investments (129,862) -- --
Net cash used for loan originations and principal
collections on loans receivable (1,962,496) (1,496,371) (3,123,206)
Net proceeds from securitization of loans 1,633,766 1,591,250 2,035,893
Net proceeds from sale of home loans -- 64,894 435,000
Portfolio acquisitions (2,233,944) -- --
Decrease (increase) in due from securitizations 68,013 (219,246) (78,102)
Purchases of investment securities (148,907) (473,052) (2,386)
Proceeds from maturities of investment securities 15,137 307,469 140
(Increase) decrease in federal funds sold (182,909) 57,390 (101,050)
Net purchases of premises and equipment (40,668) (26,875) (32,404)
---------------------------------------
Net Cash Used by Investing Activities (2,981,870) (194,541) (866,115)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,459,532 (177,344) 1,232,347
Proceeds from issuance of term federal funds 1,122,500 414,000 308,000
Repayment of term federal funds (800,000) (315,000) (593,000)
Decrease in notes payable to banks (82,000) (33,000) (206,000)
Decrease in notes payable to affiliates -- (42,500) (53,300)
Increase (decrease) in long-term borrowings 399,757 (50,000) (139,880)
Proceeds from the issuance of Capital Securities -- 160,000 --
Redemption of preferred stock -- (63,269) (1,290)
Reimbursement relating to conversion of stock options -- 6,846 --
Purchase of treasury stock (97,971) (18,345) --
Put warrant premium 1,325 -- --
Dividends paid (21,358) (10,526) (24,587)
Proceeds from exercise of stock options 16,464 2,350 --
---------------------------------------
Net Cash Provided (Used) by Financing Activities 1,998,249 (126,788) 522,290
---------------------------------------
Net increase (decrease) in cash and cash equivalents 63,826 29,576 (21,137)
Cash and cash equivalents at beginning of year 112,522 82,946 104,083
---------------------------------------
Cash and cash equivalents at end of year $ 176,348 $ 112,522 $ 82,946
=======================================
SUPPLEMENTAL DISCLOSURES
Interest expense paid $ 228,945 $ 182,209 $ 187,284
=======================================
Income taxes paid $ 310,677 $ 112,426 $ 91,516
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
28
<PAGE>
NOTES TO consolidated financial statements
Providian Financial Corporation and Subsidiaries
December 31, 1998 and 1997
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Providian Financial Corporation (the "Company") is a Delaware corporation, with
executive offices located in San Francisco, California. Through its banking and
non-banking subsidiaries, the Company provides banking and other financial
services to consumers throughout the United States. The Company's principal
wholly owned subsidiaries are Providian National Bank ("PNB") and Providian Bank
("PB"). The Company markets consumer loans, deposit products, and other
financial services using mail, telephone, and other direct response channels.
Consumer loans include credit cards, revolving lines of credit, home loans, and
secured and partially secured credit cards. The Company also provides money
market deposit accounts to retail customers and certificates of deposit to both
retail and institutional customers.
Prior to June 10, 1997, the Company was a wholly owned subsidiary of
Providian Corporation. As a condition of Providian Corporation's merger with
AEGON N.V., Providian Corporation distributed to its shareholders one share of
common stock of the Company, together with an associated Preferred Share
Purchase Right, for each share of common stock of Providian Corporation held as
of June 10, 1997 (the "spin-off"). The Preferred Share Purchase Rights are only
exercisable if triggered by an attempt to take over the Company.
The consolidated financial statements for the years ended December 31, 1997
and 1996 reflect the results of operations, changes in shareholders' equity and
cash flows, and the financial condition of the Company as a separate entity from
its former parent, Providian Corporation. The consolidated financial statements
have been prepared using the historical basis for assets and liabilities and the
historical results of operations for the Company. The consolidated financial
statements for the years ended December 31, 1997 and 1996 include certain
expenses related to administrative services provided to the Company by Providian
Corporation. All material intercompany transactions and accounts have been
eliminated in consolidation. The consolidated financial statements for periods
prior to the spin-off may not necessarily reflect the consolidated results of
the Company's operations, financial condition, changes in shareholders' equity,
or cash flows in the future or what they would have been had the Company been a
separate stand-alone company during such periods.
Effective January 1, 1998, Providian National Bank was merged into First
Deposit National Bank, with the surviving entity changing its name to Providian
National Bank. This merger streamlined the Company's corporate structure in a
manner consistent with its strategic objectives. Prior to the merger, no
material intercompany transactions existed between Providian National Bank and
First Deposit National Bank.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents: Cash and cash equivalents include cash on hand and
short-term investments convertible into cash upon demand. The Company is
required to maintain reserves with the Federal Reserve Bank based on a
percentage of its deposit liabilities.
Investment securities: Investment securities available-for-sale consist
primarily of mortgage-backed securities and are stated at fair value with
unrealized gains and losses, net-of-tax, included in "comprehensive income" on
the Company's consolidated statements of changes in shareholders' equity.
Investment securities which the Company has the positive intent and ability to
hold to maturity consist primarily of U.S. Treasury and other government agency
obligations that are reported at amortized cost and classified as held-to-
maturity.
Securitizations: The Company securitizes loans and records such securitizations
as sales. On January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"), effective
for securitizations and other financial asset sales occurring after December 31,
1996. SFAS No. 125 requires that upon completion of a securitization, the
transferor must continue to carry any retained interest in the transferred
assets at an amount equal to an allocated portion of the previous carrying
amount. Newly created interests or instruments initially are recorded at
allocated fair value. The Company records gains or losses on the securitization
of loans based on the estimated fair value of assets obtained and liabilities
incurred in the sale. The Company recognizes gains or losses
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
29
<PAGE>
at the time it enters into a securitization and at the time of each subsequent
transfer of loans, representing the present value of estimated cash flows the
Company expects to retain for a period equal to the estimated outstanding life
of the loans. This excess cash flow essentially represents an interest-only
strip, consisting primarily of the difference between finance charges received
from the accountholders less the yield paid to securitization investors, credit
losses, and a servicing fee, which is generally retained by the Company. Gains
from such loan sales are included in "servicing and securitizations" on the
Company's consolidated statements of income and the related asset is included as
a component of "due from securitizations" on its consolidated statements of
financial condition.
Loans held for securitization or sale: Loans held for securitization or sale are
those loans eligible for securitization which management intends to securitize
or sell, generally within six months. These assets are reported at the lower of
cost or fair market value.
Income on loans: Interest income on loans is recognized based upon the principal
amount outstanding in accordance with the terms of the applicable account
agreement until the outstanding balance is paid or charged off.
Net direct loan origination costs are deferred and amortized on a straight-
line basis over the estimated life of the loan (generally one year for credit
card loans, five years for line of credit loans, and four years for home loans).
Amortization of deferred loan origination costs is accelerated when the
associated assets are securitized or sold. Deferred loan origination costs are
included in "other assets" on the Company's consolidated statements of financial
condition and were $30.5 million and $36.5 million at December 31, 1998 and
1997.
Allowance for credit losses: The allowance for credit losses is maintained at a
level that, in management's judgment, is adequate to provide for estimated
probable net credit losses from known and inherent risks in the loan portfolios.
In evaluating the adequacy of the allowance for credit losses, management takes
into consideration several factors, including historical delinquencies,
historical credit loss rates, level of security (if applicable), and customer
characteristics.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization expense
are computed using the straight-line method over the estimated useful life of
the related 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, interchange activity, and other miscellaneous
fees. Fee revenue realized from securitized loans is not included in credit
product fee income but is instead recorded as part of "servicing and
securitizations" on the Company's consolidated statements of income.
Annual membership fees are recognized over the life of the membership
period, while cash advance 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. Proprietary fee-based product
revenue is recognized ratably over the term of the product privilege period,
beginning after the end of the free or money-back guarantee period, if any. At
December 31, 1998 and 1997, deferred fee income was $334.6 million and $64.7
million.
Interest rate risk management instruments: The Company uses a combination of
interest rate swap and cap agreements to manage interest rate risk related to
loans, deposits, and loan servicing income relating to securitized loans.
When interest rate swap and cap agreements are used to hedge on-balance
sheet assets and liabilities, interest rate differentials to be paid or received
are accrued and recognized as an adjustment of interest expense related to the
liabilities being hedged. Interest rate cap premiums paid are amortized to
interest expense ratably during the life of the agreement. In the event of an
unanticipated sale of loans designated with respect to an interest rate swap or
cap agreement, any gain or loss from the termination of the swap or cap
agreement would be recognized as income coincident with the loan sale gain or
loss.
When interest rate swap and cap agreements are used to hedge the servicing
income received from loan securitizations, interest rate differentials to be
paid or received are accrued and recognized as an adjustment to loan
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
30
<PAGE>
NOTES TO consolidated financial statements
servicing income. Interest rate cap premiums paid are amortized to loan
servicing income ratably during the life of the cap agreement. In the event that
additional loans are securitized or repricing occurs that impacts the Company's
hedging position, any gain or loss upon termination of the related interest rate
swap or cap agreements is deferred and amortized to loan servicing income over
the remaining term of the related securitization.
These hedging instruments are designed to reduce risk at the level of the
specific transaction with effectiveness expected at inception of the hedge and
on an ongoing basis. Hedge effectiveness is assessed by matching the basis and
terms of the hedging instruments with those of the underlying exposure. If a
high level of correlation is not being achieved, hedge accounting will be
terminated.
Income taxes: Income taxes are accounted for using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are settled or realized.
Comprehensive income: Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components (revenues, expenses,
gains, and losses) in the financial statements. The adoption of SFAS No. 130
resulted in a change in the presentation of the Company's consolidated
statements of changes in shareholders' equity to include comprehensive income,
net of related income taxes.
Use of estimates in the preparation of financial statements: The preparation of
the Company's consolidated financial statements in accordance with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect reported amounts. These estimates are based on
information available as of the date of the consolidated financial statements.
Therefore, actual results could differ from those estimates.
Reclassifications: Certain prior years' amounts have been reclassified to
conform with the 1998 presentation.
NOTE 3. RECENTLY ISSUED ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for
financial statements for fiscal years beginning after June 15, 1999. SFAS No.
133 will require the Company to record all derivatives on its balance sheet at
fair value. Changes in derivative fair values will either be recognized in
income as offsets to the changes in fair value of related hedged assets,
liabilities, and firm commitments or, for forecasted transactions, deferred and
recorded as a component of comprehensive income in shareholders' equity until
the hedged transactions occur and are recognized in income. The ineffective
portion of a hedging derivative's change in fair value will be immediately
recognized in income. The impact of SFAS No. 133 on the Company's financial
statements will depend on a variety of factors, including the level of future
hedging activity, the types of hedging instruments used, and the effectiveness
of such instruments. However, the Company does not believe the effect of
adopting SFAS No. 133 will be material to its financial condition.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
31
<PAGE>
NOTE 4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale and held-to-
maturity investments and the related unrealized holding gains and losses were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
Mortgage-backed securities $107,648 $ 17 $554 $107,111
Equity securities 7,307 -- -- 7,307
Tax exempt and other 438 4 2 440
--------------------------------------------------
Total securities available-for-sale $115,393 $ 21 $556 $114,858
==================================================
Securities held-to-maturity:
United States Treasury and
federal agencies $188,485 $4,458 $ 2 $192,941
Commercial paper 129,862 -- -- 129,862
Tax exempt and other 470 -- -- 470
--------------------------------------------------
Total securities held-to-maturity $318,817 $4,458 $ 2 $323,273
==================================================
DECEMBER 31,
(dollars in thousands) 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
Securities available-for-sale:
Equity securities $ 9,482 -- -- $ 9,482
Tax exempt and other -- -- -- --
--------------------------------------------------
Total securities available-for-sale $ 9,482 -- -- $ 9,482
==================================================
Securities held-to-maturity:
United States Treasury and
federal agencies $163,146 $2,277 $ 2 $165,421
Tax exempt and other 128 -- -- 128
--------------------------------------------------
Total securities held-to-maturity $163,274 $2,277 $ 2 $165,549
==================================================
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
32
<PAGE>
NOTES TO consolidated financial statements
The amortized cost and estimated fair value as of December 31, 1998 of the
Company's available-for-sale and held-to-maturity securities by estimated
maturity dates are presented in the following table:
<TABLE>
<CAPTION>
(dollars in thousands)
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $205,542 $205,790
Due after one year through five years -- -- 113,275 117,483
Due after five years through ten years 36 37 -- --
Due after ten years 402 403 -- --
--------------------------------------------------
Subtotal 438 440 318,817 323,273
Mortgage-backed securities 107,651 107,111 -- --
Equity securities 7,307 7,307 -- --
--------------------------------------------------
Total securities $ 115,396 $ 114,858 $318,817 $323,273
==================================================
</TABLE>
NOTE 5. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
The following is a summary of the Company's loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
-----------------------------
<S> <C> <C>
Credit card and line of credit loans $5,129,835 $2,362,078
Home loans 606,657 563,552
Other 4,614 35,046
-----------------------------
5,741,106 2,960,676
Allowance for credit losses (451,245) (145,312)
Net deferred origination fees (7,847) --
-----------------------------
$5,282,014 $2,815,364
=============================
</TABLE>
During 1998, the Company completed three purchases of unsecured credit card
loan portfolios. The three portfolios include approximately 1.7 million account
relationships and related records and other rights. The Company recorded the
allowance for credit losses for acquired loan portfolios upon purchase to
reflect its evaluation of the credit quality and expected collectibility of the
related loans.
The activity in the allowance for credit losses for the years ended
December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 145,312 $ 114,540 $ 93,429
Provision for credit losses 545,929 149,268 126,579
Reserves acquired (net of securitization) 116,144 -- --
Credit losses (389,587) (132,521) (116,930)
Recoveries 33,447 14,025 11,462
---------------------------------
Balance at end of year $ 451,245 $ 145,312 $ 114,540
=================================
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
33
<PAGE>
NOTE 6. SECURITIZATION OR SALE OF RECEIVABLES
The Company regularly securitizes its loan receivables. During 1998, 1997, and
1996, the Company securitized $1.6 billion, $1.7 billion, and $2.5 billion of
loans. The total amount of securitized loans as of December 31, 1998 and 1997
was $7.5 billion and $6.5 billion.
During the initial period of a securitization (reinvestment period), the
Company generally retains principal collections in exchange for the transfer of
additional loan receivables into the securitized pool of assets. During the
amortization or accumulation period of a securitization, the investors' share of
principal collections (in certain cases, up to a maximum specified amount each
month) is either distributed each month to the investors or held in an account
until it accumulates to the total amount, at which time it is paid to the
investors in a lump sum. Currently, none of the Company's securitizations are in
an amortization or accumulation period. The Company's outstanding
securitizations are scheduled to begin their amortization or accumulation
periods at various times between 1999 and 2003.
"Due from securitizations" consists primarily of spread accounts
receivable, interest-only strip receivables, and retained subordinated interests
as shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
------------------
<S> <C> <C>
Spread accounts receivable $181,021 $265,400
Interest-only strip receivables 68,930 62,805
Retained subordinated interest 122,210 --
Interest receivable on securitized loans 63,191 50,242
Advances to trust -- 125,000
Other 19,022 18,940
------------------
$454,374 $522,387
==================
</TABLE>
Spread accounts receivable represents interest-earning deposits that are
held by a trustee or agent and are used to absorb losses related to securitized
loans should they exceed the available net cash flows arising from the
securitized loans. The spread account deposit is generally released as investors
are repaid, although some spread account deposits are released when investors
have been paid in full. None of these spread account deposits were required to
be used to cover losses on securitized loans in the three-year period ended
December 31, 1998.
Interest-only strip receivables represent the present value of the
projected excess servicing income of the securitized loans and are amortized
into income as the securitized loans are repaid. During securitization
reinvestment periods, additional interest-only strip receivable assets are
recognized each month as additional receivables are transferred to investors. As
a result of the adoption of SFAS No. 125, servicing and securitization income
decreased $0.6 million and increased $62.8 million during the years ended
December 31, 1998 and 1997.
During 1998, the Company entered into a securitization transaction in which
it retained an interest subordinate to the investors. The retained subordinated
interest represents loans receivable with respect to which the related cash flow
is subordinate to the investors' interest and which may be used to absorb the
investors' portion of loan losses should they exceed available net cash flows
arising from the securitized loans.
NOTE 7. LOAN COMMITMENTS
Loan commitments are agreements to lend to a customer subject to the customer's
compliance with the Company's account agreements. Credit card and unsecured line
of credit commitments can be reduced or terminated by the Company upon providing
the required prior notice to the customers, which is generally no more than 30
days, or without notice if permitted by law. Home equity revolving line of
credit commitments generally have fixed expiration dates or other termination
clauses and generally may not be reduced or terminated unless the customer
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
34
<PAGE>
NOTES TO consolidated financial statements
fails to comply with the terms of the account agreement or there is an adverse
development regarding the value of the mortgaged property or the customer's
financial circumstances. The unfunded commitments represent the total unused
portion of the lines of credit available to customers. The Company has not
experienced and does not anticipate that all of its customers will borrow the
entire line of credit available to them at any one time. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
The Company's total unfunded commitments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
------------------------
<S> <C> <C>
Credit card and line of credit loans $16,260,479 $13,971,909
Home loans 154,611 153,270
Other 575 393
------------------------
$16,415,665 $14,125,572
========================
</TABLE>
NOTE 8. SIGNIFICANT CONCENTRATION OF CREDIT RISK
The Company is active in originating consumer loans primarily in the United
States. The Company has credit risk on unsecured loans to the extent that
borrowers fail to repay amounts owed and such amounts are not recovered through
collection procedures. The Company has credit risk on secured and partially
secured credit cards, which require collateral in the form of a cash deposit,
and on home loans to the extent that the borrower defaults and the outstanding
loan balance exceeds the collateral value. The Company has no significant
regional concentrations of credit risk.
NOTE 9. PREMISES, EQUIPMENT, AND LEASE COMMITMENTS
The following is a summary of the Company's premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
------------------
<S> <C> <C>
Premises $ 34,209 $ 27,711
Equipment and furniture 95,405 66,040
Leasehold improvements 9,524 6,673
Land 2,723 2,723
------------------
141,861 103,147
Less accumulated depreciation and amortization 59,003 41,522
------------------
$ 82,858 $ 61,625
==================
</TABLE>
The Company generally leases office space and equipment under long-term
operating leases. The office lease agreements have expiration dates ranging from
January 31, 1999 through November 30, 2003, in some cases with five-year renewal
options. Some of these lease agreements contain rent escalation clauses. Rent
includes the pass- through of operating expenses and property taxes and totaled
$20.2 million, $14.2 million, and $8.9 million for the years ended December 31,
1998, 1997, and 1996.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
35
<PAGE>
The Company's approximate future minimum rental payments under
noncancelable operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
amount
year (dollars in thousands)
- ----------------------------------------------------------------
<S> <C>
1999 $ 23,422
2000 20,353
2001 14,915
2002 8,550
2003 5,314
Thereafter 349
-------------
$ 72,903
=============
</TABLE>
NOTE 10. DEPOSITS
The Company accepts time deposits with terms in excess of one year. Time
certificates of deposit in amounts of $100,000 or more totaled $2.1 billion and
$1.4 billion at December 31, 1998 and 1997. The aggregate amount of time
deposits by maturity as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
AMOUNT
YEAR (dollars in thousands)
- ----------------------------------------------------------------
<S> <C>
1999 $1,907,028
2000 658,994
2001 431,783
2002 230,293
2003 and thereafter 386,133
-------------
$3,614,231
=============
</TABLE>
NOTE 11. SHORT-TERM AND LONG-TERM BORROWINGS
Short-term borrowings consist primarily of federal funds purchased that mature
in more than one business day. Long-term borrowings consist of three-year and
five-year fixed rate senior bank notes, which are direct, unconditional,
unsecured general obligations of PNB ("Bank Notes"), and are not subordinated to
any other indebtedness of PNB. At December 31, 1998, PNB had $399.8 million of
Bank Notes outstanding, with interest rates ranging from 6.25% to 6.70%.
Interest is payable semiannually. During 1998, PNB made interest payments of
$13.3 million on its outstanding Bank Notes.
In June and August 1998, the Company renewed various short-term unsecured
revolving credit agreements with a borrowing capacity totaling $275 million. The
Company pays facility fees based on the total credit line. Interest on
outstanding balances is based upon LIBOR. The agreements expire 364 days from
their respective effective dates. The Company did not borrow against these
commitments during 1998 or 1997.
Before the spin-off, the Company maintained revolving credit agreements
with its then parent, Providian Corporation. Interest on the outstanding balance
was based on the greater of Providian Corporation's internal fund rate or the
applicable federal funds rate. The Company paid facility fees to Providian
Corporation of $0.1 million and $0.3 million in 1997 and 1996. The Company did
not borrow against these revolving agreements during 1997. Interest totaling
$2.8 million was paid during 1996.
The Company's banking subsidiaries maintain an unsecured revolving credit
agreement, guaranteed by the Company, with various financial institutions. The
Company pays facility fees based on the total commitment and utilization fees
based on outstanding borrowings which exceed 50% of the total commitment.
Interest on outstanding borrowings is based upon a competitive bid process or on
the federal funds rate, LIBOR, or the prime rate, plus a spread. The total
commitments from the lenders under the revolving credit agreement was $1.2
billion in 1998
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
36
<PAGE>
NOTES TO consolidated financial statements
and 1997. There was no outstanding balance drawn on this line as of December 31,
1998. A total of $82 million was drawn on the line at December 31, 1997.
Interest expense on the line of credit totaled $5.1 million, $7.3 million, and
$24.6 million for the years ended December 31, 1998, 1997, and 1996. In January
1999, the Company reduced the total available commitments to $1.0 billion in
connection with the execution of a new agreement that expires in January 2003.
The following table summarizes all outstanding short-term borrowings and
the weighted average interest rate on those borrowings as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
---------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
BALANCE RATE BALANCE RATE
---------------------------------------------
<S> <C> <C> <C> <C>
Federal funds purchased $472,500 5.27% $150,000 5.79%
Fixed rate senior bank notes maturing as follows:
2001 $199,883 6.25% -- --
2002 -- -- -- --
2003 $199,874 6.70% -- --
Notes payable to banks -- -- $ 82,000 6.18%
</TABLE>
Before the spin-off, the Company maintained several long-term notes with
Providian Corporation. The notes to Providian Corporation were repaid in
February 1997. Interest expense associated with notes to affiliates totaled $0.4
million and $3.5 million for the years ended December 31, 1997 and 1996.
NOTE 12. COMPANY OBLIGATED MANDATORILY REDEEMABLE CAPITAL
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES OF THE COMPANY
On February 4, 1997, the Company, through a wholly owned subsidiary statutory
business trust, Providian Capital I, issued $160 million in mandatorily
redeemable preferred securities (the "Capital Securities"), which accumulate
accrued distributions at a rate of 9.525% per year that are payable
semiannually. The sole assets of Providian Capital I are $164.9 million
aggregate principal amount of the Company's 9.525% Junior Subordinated
Deferrable Interest Debentures due February 1, 2027 (the "Debentures") and the
right to reimbursement of expenses under a related expense agreement with the
Company. The Company has the right to defer payment of interest on the
Debentures at any time and from time to time, for a period not exceeding ten
consecutive semiannual periods with respect to each deferral period, provided
that no extension period may extend beyond the stated maturity of the
Debentures. During any such extension period, distributions on the Capital
Securities would also be deferred and the Company's ability to pay dividends on
its common stock would be restricted. The Company has the right to cause the
redemption of the Capital Securities on or after February 1, 2007, or earlier in
the event of certain regulatory changes. The redemption price depends on several
factors, including the date of the redemption, the present value of the
principal and premium payable, and the accumulated but unpaid distributions on
the Capital Securities.
During 1998 and 1997, distributions totaling $15.2 million and $13.7
million on the Capital Securities were included in "other non-interest expense"
in the Company's consolidated statements of income. The Company's obligations
under the Debentures, the related indenture, the related trust agreement, the
related expense agreement, and the related guarantee, taken together, constitute
a full and unconditional guarantee by the Company of Providian Capital I's
obligations under the Capital Securities.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
37
<PAGE>
NOTE 13. INCOME TAXES
The components of the Company's income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Current:
Federal $ 369,087 $ 93,509 $ 95,512
State 64,538 21,349 13,570
-------------------------------
433,625 114,858 109,082
Deferred:
Federal (212,048) 7,124 (12,082)
State (27,460) (2,143) 485
-------------------------------
(239,508) 4,981 (11,597)
-------------------------------
$ 194,117 $ 119,839 $ 97,485
===============================
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred loan origination costs $ 11,995 $ 13,021
Gain on sale of loans 24,471 24,705
Other 2,316 7,985
------------------
38,782 45,711
Deferred tax assets:
Allowance for credit losses 172,982 57,160
Deferred fees 115,891 25,449
Discount on securitized loans 29,024 --
Long-term incentive accruals 17,465 16,390
Other 9,439 13,223
------------------
344,801 112,222
------------------
Net deferred tax assets before unrealized
losses on securities available-for-sale 306,019 66,511
Unrealized losses on securities
available-for-sale 215 --
------------------
Net deferred tax assets $306,234 $ 66,511
==================
</TABLE>
The Company believes that it will fully realize its total deferred income
tax assets as of December 31, 1998 based upon the Company's recoverable taxes
from prior carryback years, its total deferred income tax liabilities, and its
current level of operating income.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
38
<PAGE>
NOTES TO consolidated financial statements
The following is a reconciliation of the federal statutory income tax rate
to the Company's actual effective income tax rate:
<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
1998 1997 1996
-------------------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
State income taxes 5.0 4.0 3.6
Other (0.4) (0.5) (0.7)
-------------------
Effective tax rate 39.6% 38.5% 37.9%
===================
</TABLE>
NOTE 14. INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company's principal objective in entering into off-balance sheet interest
rate risk management instruments is to reduce interest rate risk by more closely
aligning the repricing characteristics of the Company's assets and liabilities.
The operations of the Company are subject to the risk of interest rate
fluctuations to the extent that there is a difference in the repricing
characteristics of interest-earning assets and interest-bearing deposits and
other liabilities. The goal is to maintain levels of net interest income while
reducing interest rate risk and facilitating the funding needs of the Company.
To achieve that objective, the Company uses a combination of interest rate risk
management instruments, including interest rate swap and cap agreements, with
maturities ranging from 1999 to 2003.
When interest rate risk management instruments are used to hedge on-balance
sheet assets and liabilities, the net receipts or payments are recognized as an
adjustment to interest expense. As of December 31, 1998 and 1997, the Company
had $635 million and $955 million notional amount of interest rate swaps
outstanding.
The average effective interest rate on the Company's interest-bearing
liabilities after giving effect to the swaps was 5.56%, 5.51%, and 5.60% for the
three years ended December 31, 1998, 1997, and 1996. For the years ended
December 31, 1998, 1997, and 1996, the impact to interest expense as a result of
the interest rate swap agreements was a decrease of $2.1 million, $1.3 million,
and $1.2 million.
When interest rate risk management instruments are used to hedge the excess
servicing income received from loan securitizations, the net receipts or
disbursements are recognized as an adjustment to loan servicing income. Net
amounts received in connection with these agreements during 1998, 1997, and 1996
were $1.2 million, $2.1 million, and $1.4 million.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
39
<PAGE>
The following table summarizes the expected or contractual maturities and
weighted average interest rates associated with amounts to be received or paid
on interest rate swaps used by the Company to manage its asset and liability
interest rate exposure:
<TABLE>
<CAPTION>
BALANCE AT BALANCES MATURING IN
DECEMBER 31, ------------------------------------------------
(dollars in thousands) 1998 1999 2000 2001 THEREAFTER
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional value $ 500,000 -- -- -- $ 500,000
Weighted average pay rate 5.48% -- -- -- 5.48%
Weighted average receive rate/(1)/ 5.54% -- -- -- 5.54%
RECEIVE FIXED/PAY VARIABLE
Notional value $ 135,000 $ 85,000 $ 10,000 $ 20,000 $ 20,000
Weighted average pay rate/(1)/ 5.27% 5.25% 5.20% 5.30% 5.35%
Weighted average receive rate 7.28% 7.73% 6.94% 6.62% 6.99%
TOTAL
Notional value $ 635,000 $ 85,000 $ 10,000 $ 20,000 $ 520,000
Weighted average pay rate/(1)/ 5.43% 5.25% 5.20% 5.30% 5.47%
Weighted average receive rate/(1)/ 5.91% 7.73% 6.94% 6.62% 5.57%
</TABLE>
/(1)/ Variable rates are held constant for future periods at their effective
rates as of their most recent reset prior to December 31, 1998.
In addition, the Company has entered into interest rate cap agreements,
the effect of which is to establish maximum interest rates on a portion of its
managed funding sources. To the extent the Company has funded fixed rate
receivables with variable rate deposits or debt, the interest rate caps are
designed to protect net interest margin. To the extent the Company has
securitized fixed rate receivables using variable rate instruments, the interest
rate caps are designed to protect loan servicing income. As of December 31, 1998
and 1997, the Company had $671 million and $922 million notional amount of
interest rate caps outstanding. For the years ended December 31, 1998, 1997, and
1996, the Company amortized $0.1 million, $0.6 million, and $0.9 million related
to interest rate cap fees paid. No interest rate cap agreement interest payments
were received by the Company in 1998, 1997, or 1996.
The following is a summary of the Company's interest rate cap agreement
maturity distributions as of December 31, 1998:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT MATURING WEIGHTED AVERAGE
YEAR (dollars in thousands) STRIKE RATE
------------------------------------------------------------------------
<S> <C> <C>
1999 $ 264,000 11.91%
2000 363,000 11.92%
2001 36,000 8.21%
Thereafter 8,000 7.12%
</TABLE>
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the agreement. This
credit risk is measured as the gross unrealized gain on the financial
instruments. The Company had gross unrealized gains on interest rate swap
agreements of $4.0 million and $4.8 million at December 31, 1998 and 1997. The
Company has reduced credit risk in these instruments by entering into interest
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
40
<PAGE>
NOTES TO consoldiated financial stsatements
risk management agreements with nationally recognized financial institutions and
dealers that carry at least investment grade ratings. Also, the Company's policy
is to diversify its credit risk exposure across a number of counterparties. The
Company determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with credit risk. The Company
does not anticipate default by any counterparties.
NOTE 15. CAPITAL REQUIREMENTS
The Company's banking subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Under these
requirements, the Company's banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's banking subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators with
respect to components, risk weightings, and other factors. Failure to meet
minimum capital requirements can result in mandatory and additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Company's consolidated financial statements.
The quantitative measures established by applicable regulatory guidelines
to ensure capital adequacy require that the Company's banking subsidiaries
maintain minimum ratios of Total and Tier 1 risk-based capital to risk-weighted
assets (Total and Tier 1 Risk-Based Capital Ratios) and of Tier 1 risk-based
capital to adjusted average total assets (Leverage Ratio). The Company's banking
subsidiaries met all regulatory capital adequacy requirements to which they were
subject at December 31, 1998 and 1997. At December 31, 1998 and 1997, the
Company's banking subsidiaries met the "well capitalized" requirements under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," the Company's banking subsidiaries must maintain minimum capital
requirements as set forth in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TIER 1 TIER 1 TOTAL TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE RISK-BASED RISK-BASED LEVERAGE
CAPITAL CAPITAL RATIO/(1)/ CAPITAL CAPITAL RATIO/(1)/
----------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PROVIDIAN NATIONAL BANK
Actual $741,222 10.08% $666,424 9.06% 666,424 11.06% $746,946 13.20% $675,467 11.94% $675,467 17.61%
Minimum capital adequacy 588,541 8.00% 294,270 4.00% 240,919 4.00% 452,606 8.00% 226,303 4.00% 153,462 4.00%
Minimum well-capitalized 735,676 10.00% 441,405 6.00% 301,148 5.00% 565,757 10.00% 339,454 6.00% 191,827 5.00%
PROVIDIAN BANK
Actual 27,508 10.58% 23,968 9.22% 23,968 6.85% 15,890 23.24% 14,942 21.86% 14,942 14.88%
Minimum capital adequacy 20,805 8.00% 10,403 4.00% 14,001 4.00% 5,469 8.00% 2,735 4.00% 4,015 4.00%
Minimum well-capitalized 26,006 10.00% 15,604 6.00% 17,501 5.00% 6,837 10.00% 4,102 6.00% 5,019 5.00%
</TABLE>
/(1) Minimum capital adequacy ratio is 3% for the highest rated institutions.
NOTE 16. SHAREHOLDERS' EQUITY
In September 1998, the Company's Board of Directors approved a three-for-two
split of the Company's common stock, in the form of a stock dividend, issued on
December 15, 1998 to shareholders of record as of December 1, 1998. Accordingly,
all common share and per common share data have been retroactively adjusted to
include the effect of the Company's stock split.
In April 1998, the Company entered into an agreement to sell equity put
warrants for 375,000 shares of the Company's common stock. The warrants entitle
the holder to sell to the Company, by physical delivery, a specified
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
41
<PAGE>
number of shares of the Company's common stock at a price of $43.07 per share.
These put warrants may be exercised only on the expiration date, which is
February 26, 1999.
In June 1998, the Company entered into a forward purchase agreement for
750,000 shares of its common stock. At the Company's election, the agreement
allowed settlements 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 was higher
(lower) than the forward purchase price, the net differential was received
(paid) by the Company. In September 1998, a final settlement of this forward
purchase agreement was entered into and the agreement was terminated. While the
forward purchase agreement was in effect, the Company completed a series of
physical settlements that, in the aggregate, resulted in the purchase by the
Company of 750,000 shares of its common stock at an effective price of $47.40
per share.
In July 1998, the Company entered into a forward purchase agreement for an
additional 750,000 shares of its common stock. At the Company's election, the
agreement may be settled on a physical basis or, subject to certain conditions,
on a net basis in shares of 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 net differential is received by the
Company. 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 premium amount is
paid by the Company. As of December 31, 1998, the agreement covered 567,232
shares of the Company's common stock at a forward price of $72.56 per share. The
agreement has a term of one year but may be settled earlier at the Company's
option. If this agreement were settled on a net share basis at the December 31,
1998 market price of the Company's common stock ($75 per share), the Company
would receive approximately 18,400 shares of its common stock. During the year
ended December 31, 1998, settlements from this forward purchase agreement
resulted in the Company receiving 182,768 shares of its common stock and paying
premium amounts of $1.0 million, which were recorded as adjustments to
additional paid-in capital.
In connection with the spin-off, the Company issued 142,871,414 shares of
common stock to its sole shareholder, Providian Corporation, and the par value
of the Company's common stock was restated from $1.00 to $0.01, which required
the Company to reclassify amounts from additional paid-in capital and retained
earnings to common stock. Providian Corporation distributed to its shareholders
one share of the Company's common stock for each share of Providian Corporation
common stock held on the record date for the spin-off.
During 1996, the Company redeemed all outstanding shares of its special
preferred stock. Subsequently, the Company adopted a restated certificate of
incorporation that effected certain changes in its capital structure, including
the elimination of the special preferred stock and the authorized but unissued
Class B common stock, and the number of authorized common and preferred shares
was reduced.
NOTE 17. EARNINGS PER SHARE
Historical earnings per share are not presented for the years ending December
31, 1997 and 1996 because before the spin-off, all of the Company's common stock
was held by its then parent, Providian Corporation, and such information would
not be meaningful. Pro forma earnings per share with and without dilution for
the years ended December 31, 1997 and 1996 have been computed by reducing net
income as reported for those periods using the pro forma adjustments as noted,
and then dividing the pro forma income available to common stockholders by the
pro forma weighted average number of common shares outstanding for the
applicable period.
In determining the pro forma number of common shares outstanding before the
spin-off, the number of shares of Providian Corporation common stock was used,
since shareholders of Providian Corporation received one share of the Company's
common stock for each share of Providian Corporation common stock held on the
record date for the spin-off. Included in the computation of fully diluted
common shares prior to the spin-off are Providian Corporation options which were
exercised between January 1, 1997 and June 10, 1997. These options
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
42
<PAGE>
NOTES TO consolidated financial statements
have been included because, upon their exercise, they became eligible to be
converted to the Company's common stock on the spin-off distribution date. For
the year ended December 31, 1996, all Providian Corporation options issued and
outstanding were included in the fully diluted computations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA (UNAUDITED)
(dollars in thousands, except per share data) 1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Net Income/(1)/ $ 296,446 $ 191,461 $ 159,766
Less net pro forma adjustments/(2)/ -- -- 7,252
------------------------------------
Income available to common stockholders $ 296,446 $ 191,461 $ 152,514
====================================
Weighted average shares outstanding--basic 141,872 142,144 140,496
Effect of dilutive securities
Restricted stock issued--non vested 540 219 --
Employee stock options 2,772 1,229 1,050
------------------------------------
Dilutive potential common shares 3,312 1,448 1,050
------------------------------------
Adjusted weighted average shares and assumed conversions 145,184 143,592 141,546
====================================
Earnings per share--basic $ 2.09 $ 1.35 $ 1.09
====================================
Earnings per share--assuming dilution $ 2.04 $ 1.33 $ 1.08
====================================
</TABLE>
/(1)/ For purposes of pro forma earnings per share, net income has not been
adjusted for preferred stock dividends as a result of the February 1997
transaction in which the Company issued mandatorily redeemable Capital
Securities and used the proceeds to repay borrowings under notes payable
to affiliates and to redeem the preferred stock.
/(2)/ Adjustments to net income reflect, for the periods presented, the proceeds
of Capital Securities, assumed to be issued as of January 1, 1996, and the
repayment of borrowings and redemption of preferred stock to Providian
Corporation as of the same date because both of these obligations were
repaid from the proceeds of the February 1997 issuance of Capital
Securities. Pro forma adjustments also include increased non-interest
expenses to reflect estimated additional administrative costs associated
with operation as a stand-alone public company and a reduction in non-
interest expenses related to a reimbursement of certain previously
recognized employee costs by Providian Corporation in connection with the
spin-off. All adjustments reflect a combined estimated tax effect of 38%.
NOTE 18. STOCK OWNERSHIP AND STOCK OPTION PLANS
During 1997, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company has
elected to account for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations ("APB Opinion No. 25"), as SFAS No. 123
permits. Accordingly, because the exercise price of the Company's employee stock
options is the fair market value of the underlying stock on the date of grant,
no compensation expense is recognized by the Company in connection with such
options. In addition, the Company does not recognize compensation expense for
its employee stock purchase plan since it qualifies as a non-compensatory plan
under APB Opinion No. 25. The Company, as required, follows the pro forma net
income, pro forma earnings per share, and stock-based compensation plan
disclosure requirements set forth in SFAS No. 123.
At December 31, 1998, the Company had three stock-based compensation plans:
the Company's 1997 Stock Option Plan, Stock Ownership Plan, and 1997 Employee
Stock Purchase Plan.
The Company's 1997 Stock Option Plan (the "Option Plan") provides for
grants of incentive and nonqualified stock options to employees and non-employee
directors. Stock options granted under the Option Plan have an exercise price
equal to the market value of the Company's common stock at the date of grant and
a maximum term of ten years. During 1998, the Company granted nonqualified
options to purchase 2,543,157 shares of the Company's common stock to employees
and non-employee directors under the Option Plan.
The Option Plan permits the issuance of options to purchase a total of
17,906,286 shares of the Company's common stock issuable in conjunction with the
exercise of stock options. As of December 31, 1998, the number of common shares
available for future grants under the Option Plan was 8,223,211 shares.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
43
<PAGE>
The Company's Stock Ownership Plan (the "Stock Ownership Plan") provides
for grants of restricted and nonrestricted stock to employees and non-employee
directors. A maximum of 6,000,000 shares of the Company's common stock are
permitted to be issued under the Stock Ownership Plan. Restricted stock is
subject to forfeiture during the vesting period. During 1998, the Company
granted 273,902 shares of restricted stock and 7,185 shares of nonrestricted
stock to employees and non-employee directors under the Stock Ownership Plan.
The Company records the market value of restricted stock grants as deferred
compensation at the time of grant and amortizes such amount over the applicable
vesting period.
The Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan")
is available for eligible employees. A maximum of 1,500,000 shares of common
stock are permitted to be issued under the Stock Purchase Plan. Under the Stock
Purchase Plan, shares of the Company's common stock may be purchased at the end
of each offering period at 85% of the lower of the fair market value on the
first or the last day of such offering period. Eligible employees may designate
a portion of their compensation, not to exceed 7% of their gross compensation
during an offering period, to purchase shares. The offering periods begin every
six months, on each January 1 and July 1, and have a duration of one year,
except that the first offering period began on October 1, 1997 and ended on June
30, 1998. The Company intends to use common stock held in treasury to provide
shares for issuance under the Stock Purchase Plan.
The following is a summary of options outstanding and exercisable under the
Stock Option Plan at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.41-16.00 1,767,560 6.41 $ 14.19 1,582,153 $ 14.15
16.01-30.00 4,203,754 5.83 21.50 1,745,063 21.48
30.01-45.00 2,457,950 9.34 39.07 2,700 30.15
45.01-63.00 52,500 9.77 50.74 -- --
------------------------------------------------------------------------------------------
8,481,764 6.99 $ 25.25 3,329,916 $ 18.00
==========================================================================================
</TABLE>
Presented below are the changes to the Company's stock options for the
years ending December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of year/1)/ 7,266,762 $ 18.59 2,906,286 $ 13.41
Granted 2,543,157 39.35 5,101,197 21.52
Exercised (1,031,297) 13.63 (170,014) 13.46
Forfeited (296,858) 23.66 (570,707) 19.80
----------------------------------------------------------------
Outstanding at the end of year 8,481,764 $ 25.25 7,266,762 $ 18.59
================================================================
</TABLE>
/(1)/ For 1997, the beginning of the year number of shares represents Providian
Corporation stock options held by employees and certain directors of the
Company that were converted into Company stock options in connection with
the spin-off.
The following table reflects on a pro forma basis the Company's net income
and earnings per common share with and without dilution, as if compensation
costs for stock options had been recorded based on the fair value at the date of
grant or election under the Stock Option Plan or the Stock Purchase Plan,
consistent with the provisions
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
44
<PAGE>
NOTES TO consolidated financial statements
of SFAS No. 123. Since pro forma compensation costs relate to all periods over
which the grants vest, the initial impact on the Company's pro forma net income
may not be representative of compensation costs in subsequent years, when the
effect of the amortization of multiple awards would be reflected.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands, except per share data)
1998 1997/(1)/ 1996/(1)/
----------------------------------------
<S> <C> <C> <C>
Net Income $ 296,446 $ 191,461 $ 152,514
Pro forma net income adjusted per SFAS No. 123 $ 280,938 $ 186,084 $ 151,173
Net income per common share:
As reported--basic $ 2.09 $ 1.35 $ 1.09
As reported--assuming dilution $ 2.04 $ 1.33 $ 1.08
Pro forma net income per common
share--adjusted for SFAS No. 123:
Basic $ 1.98 $ 1.31 $ 1.08
Assuming dilution $ 1.94 $ 1.30 $ 1.07
</TABLE>
/(1)/ See Note 17. Earnings per Share for additional information about 1997 and
1996 pro forma net income.
The fair value of the stock options granted by the Company was estimated at
the grant/rollover date using the Black-Scholes modeling technique with the
following assumptions: for the year ended December 31, 1998, risk-free weighted
average interest rate of 5.55%; weighted average dividend yield of 0.80%;
weighted average expected volatility of 55%; expected option life of 5 years;
and expected life for an offering under the Stock Purchase Plan of one year. For
the year ended December 31, 1997, risk-free weighted average interest rate of
6.21%; weighted average dividend yield of 0.99%; weighted average expected
volatility of 35%; expected option life of 4 years; and expected life for an
offering under the Stock Purchase Plan of nine months.
The weighted average grant date fair values of the options granted by the
Company during 1998 and 1997 were $19.40 and $7.03 per share. The exercise price
of each option is the market price of the Company's common stock on the date of
grant with the exception of the Providian Corporation options that were
converted into Company stock options in connection with the spin-off, which had
an average converted exercise price of $13.41. Expiration dates ranged from
August 7, 2001 to December 9, 2008 for options outstanding at December 31, 1998.
NOTE 19. DEFINED CONTRIBUTION 401(K) PLAN
The Company sponsors a defined contribution 401(k) plan (the "Plan") offering
tax-deferred investment opportunities to substantially all of its employees who
have completed at least three months of service. Employees may elect to make
both pre-tax and after-tax contributions based on certain limits set by the
Internal Revenue Service. The Company has a policy of matching 55% of the first
6% of compensation contributed to the Plan by employees with Company common
stock. As of December 31, 1998, the Plan held 548,877 shares of the Company's
common stock with a market value of $41.2 million. For the year ended December
31, 1998, the Plan received $0.1 million in dividend income from the Company for
shares of common stock held. Employee contributions are invested at the
direction of the employee participant. Total Plan expenses for the years ended
December 31, 1998, 1997, and 1996 were $3.2 million, $2.3 million, and $1.9
million.
In addition, the Company makes retirement contributions to the Plan for
employees with at least one year of employment regardless of whether such
employees make contributions to the Plan. The Company made retirement
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
45
<PAGE>
contributions to the Plan of $6.2 million, $5.4 million, and $3.9 million during
1998, 1997, and 1996. The retirement contributions vest 20% on completion of the
third year of employment, increasing 20% for each completed year of employment
thereafter until fully vested.
NOTE 20. 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 marketing or
credit card 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.
It is the Company's practice to analyze its financial performance on a
managed basis. Segment information is presented below on the Company's managed
loan portfolios. As described in Note 1. above, the Company securitizes certain
loans and records such securitizations as sales, which has the effect of
removing such loans from the Company's balance sheet.
The following is a summary of the Company's managed loan segment activity
for the years ending December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
CREDIT HOME
(dollars in thousands) CARD LOAN OTHER TOTAL
--------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Revenue/(1)/ $ 2,265,286 83,182 929 $ 2,349,397
Net interest income $ 1,263,940 72,046 (145) $ 1,335,841
Provision $ 1,058,165 13,496 -- $ 1,071,661
Profit or loss $ 568,851 7,275 (155) $ 575,971
Assets $12,138,380 1,106,568 16,072 $13,261,020
YEAR ENDED DECEMBER 31, 1997
Revenue/(1)/ $ 1,414,548 79,767 -- $ 1,494,315
Net interest income $ 971,699 65,184 -- $ 1,036,883
Provision $ 840,822 10,214 -- $ 851,036
Profit or loss $ 343,071 27,837 -- $ 370,908
Assets $ 8,838,607 1,063,446 -- $ 9,902,053
YEAR ENDED DECEMBER 31, 1996
Revenue/(1)/ $ 1,020,093 54,569 -- $ 1,074,662
Net interest income $ 796,496 53,736 -- $ 850,232
Provision $ 512,940 6,537 -- $ 519,477
Profit or loss $ 296,899 (5,746) -- $ 291,153
Assets $ 8,348,252 951,372 -- $ 9,299,624
</TABLE>
/(1)/ Segment revenue consists of interest income less interest expense, less an
allocated portion of the Capital Securities distributions, plus non-
interest income realized on all operating segments.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
46
<PAGE>
NOTES TO consolidated financial statements
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 and financial condition of the Company for the years ending December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
REVENUES
Total segment revenue(1) $ 2,349,397 $ 1,494,315 $ 1,074,662
Revenue from securitized loans (511,520) (473,208) (275,178)
Other 23,615 12,908 18,948
---------------------------------------------
Total consolidated revenues $ 1,861,492 $ 1,034,015 $ 818,432
=============================================
NET INTEREST INCOME
Total segment net interest income $ 1,335,841 $ 1,036,883 $ 850,232
Net interest income from securitized loans (766,592) (648,153) (469,261)
Interest income--other -- -- 9,847
Other 26,064 10,653 3,795
---------------------------------------------
Total consolidated net interest income $ 595,313 $ 399,383 $ 394,613
=============================================
PROVISION FOR CREDIT LOSSES
Total segment provision $ 1,071,661 $ 851,036 $ 519,477
Net credit losses from securitized loans (525,732) (701,815) (393,491)
Other -- 47 593
---------------------------------------------
Total consolidated provision $ 545,929 $ 149,268 $ 126,579
=============================================
PROFIT OR LOSS
Total segment profits $ 575,971 $ 370,908 $291,153
Corporate and other (85,408) (59,608) (33,902)
---------------------------------------------
Income before income taxes $ 490,563 $ 311,300 $ 257,251
=============================================
ASSETS
Total assets for reportable segments $ 13,261,020 $ 9,902,053 $ 9,299,624
Securitized loans (7,503,842) (6,491,144) (5,610,000)
Allowance for credit losses (451,245) (145,312) (114,540)
Other assets 1,925,282 1,183,816 776,658
---------------------------------------------
Total consolidated assets $ 7,231,215 $ 4,449,413 $ 4,351,742
=============================================
</TABLE>
/(1)/ Total segment revenue consists of interest income less interest expense,
less an allocated portion of Capital Securities distributions, plus non-
interest income realized on all operating segments.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
47
<PAGE>
NOTE 21. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), the
estimated fair values of the Company's financial instruments are disclosed
below. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, might not be realized in immediate settlement of the
instrument. In addition, these values do not consider the potential income taxes
or other expenses that might be incurred upon an actual sale of an asset or
settlement of a liability. SFAS No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not necessarily represent or
affect the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and cash equivalents: Cash and cash equivalents are carried at an amount
that approximates fair value.
Federal funds sold: Federal funds sold are carried at an amount that
approximates fair value.
Investment securities: The estimated fair values of investment securities by
type are provided in Note 4. Investment Securities. Fair value is based on
quoted market prices when available, or if unavailable, fair value is estimated
using quoted market prices of comparable instruments.
Loans receivable and loans held for securitization or sale: The fair value of
loans is estimated by discounting the estimated future cash flows adjusted for
differences in loan characteristics.
Due from securitizations and interest receivable: The carrying amounts reported
in the Company's consolidated statements of financial condition approximate fair
value.
Deposits: The fair values disclosed for demand deposits (money market deposit
accounts and certain savings accounts) are equal to the amount payable on demand
at the reporting date (carrying amount). Fair value for fixed rate certificates
of deposit and other fixed rate deposits are estimated using a discounted cash
flow calculation that applies interest rates at an assumed marginal market
funding rate.
Short-term borrowings: The carrying amounts of federal funds purchased
approximate fair value.
Long-term borrowings: The fair value of fixed rate senior bank notes is
estimated using a discounted cash flow calculation that applies interest rates
at an assumed marginal market funding rate.
Capital Securities: The fair value of the Company's Capital Securities is
estimated using a discounted cash flow calculation that applies interest rates
at an assumed marginal market funding rate.
Off-balance sheet instruments: The fair value of the Company's off-balance sheet
instruments (interest rate swaps, interest rate caps, and lending commitments)
is based on valuation models, if material, using discounted cash flows (swaps);
an assessment of current replacement costs (caps); and valuation models as
previously described for loans receivable (lending commitments). Credit card and
line of credit lending commitments were determined to have no fair value.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
48
<PAGE>
NOTES TO consolidated financial statements
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
-------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 176,348 $ 176,348 $ 112,522 $ 112,522
Federal funds sold 297,869 297,869 114,960 114,960
Investment securities:
Available-for-sale 114,858 114,858 9,482 9,482
Held-to-maturity 318,817 323,273 163,274 165,549
Loans held for securitization or sale -- -- 450,233 512,655
Loans receivable 5,282,014 7,086,561 2,815,364 3,193,248
Interest receivable 51,801 51,801 30,192 30,192
Due from securitizations 454,374 454,374 522,387 522,387
LIABILITIES
Deposits 4,672,298 4,664,957 3,212,766 3,211,636
Short-term borrowings 472,500 472,500 232,000 232,000
Long-term borrowings 399,757 412,832 -- --
Capital Securities 160,000 231,149 160,000 176,702
OFF-BALANCE SHEET INSTRUMENTS
Interest rate swaps -- (3,287) -- 4,544
Interest rate caps -- 23 -- 9
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
49
<PAGE>
NOTE 22. PROVIDIAN FINANCIAL CORPORATION (PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands) 1998 1997
-------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 100,090 $ 25,459
Investment securities:
Held-to-maturity 148,283 52,175
Loans receivable 272 1,329
Investment in subsidiaries 744,998 743,504
Deferred income taxes 306,234 66,511
Prepaid expenses and other assets 10,635 11,250
-------------------------
Total assets $1,310,512 $ 900,228
=========================
LIABILITIES
Due to affiliates $ 120,091 $ 23,975
Long-term borrowings 164,949 164,949
Income taxes payable 153,626 39,746
Accrued expenses and other liabilities 68,659 76,444
-------------------------
Total liabilities 507,325 305,114
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share (authorized: 400,000,000 shares;
issued and outstanding: December 31, 1998--141,732,008 shares;
December 31, 1997--142,734,818 shares) 954 954
Additional paid-in capital -- 4,217
Retained earnings 866,005 599,856
Net unrealized loss on available-for-sale securities (320) --
Common stock held in treasury--at cost: December 31, 1998--
1,405,972 shares; December 31, 1997--403,163 shares (63,452) (9,913)
-------------------------
Total shareholders' equity 803,187 595,114
-------------------------
Total liabilities and shareholders' equity $1,310,512 $ 900,228
=========================
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
50
<PAGE>
NOTES TO consolidated financial statements
STATEMENTS OF INCOME (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries $ 320,000 $ -- $ 70,000
Income on investments 5,907 3,945 1,071
Interest on loans 259 310 476
Other income (103) 9,551 6,249
------------------------------------------------
326,063 13,806 77,796
EXPENSES
Salaries and employee benefits 10,832 15,973 9,728
Provision for possible credit losses -- -- (82)
Interest expense -- 392 2,839
General and administration 37,424 13,319 (2,919)
------------------------------------------------
48,256 29,684 9,566
------------------------------------------------
Income before income taxes and
equity in earnings of subsidiaries 277,807 (15,878) 68,230
Income tax benefit (16,819) (6,022) (1,664)
Equity in undistributed earnings of subsidiaries 1,820 201,317 89,872
------------------------------------------------
Net Income $ 296,446 $ 191,461 $ 159,766
================================================
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
51
<PAGE>
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(dollars in thousands) 1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 296,446 $ 191,461 $ 159,766
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses -- -- (82)
Equity in undistributed earnings of subsidiaries (1,820) (201,317) (89,872)
Amortization of deferred compensation 4,415 1,280 --
Decrease (increase) in other assets 1,676 (2,299) (1,478)
(Increase) decrease in accrued expenses and other liabilities (5,610) (276) 7,811
(Increase) decrease in deferred income taxes receivable (239,507) 4,981 (11,597)
Increase in taxes payable 122,951 2,428 17,566
Due to (due from) affiliates 96,116 (738) 1,746
-----------------------------------------------
Net Cash Provided (Used) by Operating Activities 274,667 (4,480) 83,860
INVESTING ACTIVITIES
Purchases of investment securities (98,496) (58,000) (2,175)
Proceeds from sales/maturities of investment securities -- 8,000 --
Net decrease (increase) in investment in subsidiaries -- 24,678 (55,500)
-----------------------------------------------
Net Cash Used for Investing Activities (98,496) (25,322) (57,675)
FINANCING ACTIVITIES
Net decrease in notes payable to affiliates -- (42,500) (8,300)
Redemption of preferred stock -- (63,270) (1,290)
Reimbursement relating to conversion of stock options -- 6,846 --
Proceeds from exercise of stock options 16,464 2,350 --
Purchase of common stock for treasury (97,971) (18,345) --
Put warrant premium 1,325 -- --
Proceeds from the issuance of junior subordinated debentures -- 164,949 --
Dividends paid to shareholders (21,358) (10,526) (24,587)
-----------------------------------------------
Net Cash (Used) Provided by Financing Activities (101,540) 39,504 (34,177)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 74,631 9,702 (7,992)
Cash and cash equivalents at beginning of year 25,459 15,757 23,749
-----------------------------------------------
Cash and cash equivalents at end of year $ 100,090 $ 25,459 $ 15,757
===============================================
</TABLE>
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
52
<PAGE>
QUARTERLY and common stock data
QUARTERLY DATA (UNAUDITED)
SUMMARY OF CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998/(1)/
Interest income $ 176,577 $ 194,220 $ 218,226 $ 253,556
Interest expense 54,756 61,531 61,150 69,829
Net interest income 121,821 132,689 157,076 183,727
Provision for credit losses 57,656 117,851 168,217 202,205
Non-interest income 210,703 278,009 357,300 420,167
Non-interest expense 182,053 188,925 210,506 243,516
Income before income taxes 92,815 103,922 135,653 158,173
Net Income $ 56,108 $ 62,863 $ 82,561 $ 94,914
Earnings per share--basic $ 0.39 $ 0.44 $ 0.58 $ 0.67
Earnings per share--assuming dilution $ 0.39 $ 0.43 $ 0.57 $ 0.66
Weighted average common shares
outstanding--basic (000) 142,262 142,047 142,044 141,116
Weighted average shares and
assumed conversions (000) 144,771 145,169 145,500 144,811
1997/(1)/
Interest income $ 152,171 $ 139,699 $ 142,679 $ 147,944
Interest expense 50,098 44,321 44,248 44,443
Net interest income 102,073 95,378 98,431 103,501
Provision for credit losses 33,802 38,950 43,071 33,445
Non-interest income 132,997 135,082 179,402 187,151
Non-interest expense 132,787 119,128 155,801 165,731
Income before income taxes 68,481 72,382 78,961 91,476
Net Income $ 43,162 $ 45,724 $ 48,564 $ 54,011
Earnings per share--basic/(2)/ $ 0.31 $ 0.32 $ 0.34 $ 0.38
Earnings per share--assuming dilution/(2)/ $ 0.30 $ 0.32 $ 0.34 $ 0.37
Weighted average common shares
outstanding--basic (000)/(2)/ 141,246 142,487 142,571 142,325
Weighted average shares and
assumed conversions (000)/(2)/ 141,837 143,057 144,089 144,201
</TABLE>
/(1)/ All common share and per common share data have been retroactively
adjusted for a three-for-two stock split in the form of s stock dividend
in December 1998.
/(2)/ Earnings per share for the three months ended March 31, 1997 and June 30,
1997 are presented on a pro forma basis.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
53
<PAGE>
COMMON STOCK PRICE RANGES AND DIVIDENDS (UNAUDITED)
<TABLE>
<CAPTION>
DIVIDENDS DECLARED
HIGH LOW PER COMMON SHARE
------------------------------------------------------------------
<S> <C> <C> <C>
1998/(1)/
First quarter $ 41 21/64 $ 29 11/64 $ 0.03
Second quarter 52 3/8 38 37/64 0.03
Third quarter 58 19/64 37 5/64 0.03
Fourth quarter 75 33 43/64 0.05
1997/(1)/
First quarter N/A N/A N/A
Second quarter/(2)/ $ 22 3/8 $ 20 --
Third quarter 26 11/24 20 17/24 $ 0.03
Fourth quarter 30 17/24 24 5/24 0.03
</TABLE>
/(1)/ All common share and per common share data have been retroactively
adjusted for a three-for-two stock split in the form of a stock dividend
in December 1998 .
/(2)/ From June 10, 1997 spin-off date through June 30, 1997.
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "PVN." There were 9,391 common stockholders of record as of February 26,
1999.
PROVIDIAN FINANCIAL 98 ANNUAL REPORT
54
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PROVIDIAN FINANCIAL CORPORATION
Providian National Bank (U.S.)
Providian Bank (Utah)
Providian Credit Corporation (Delaware)
First Select Corporation (California)
First Deposit Life Insurance Company (Arkansas)
Providian Capital I (Delaware)
Providian Investment Corporation (Delaware)
Providian Mauritius Investment Ltd. (Mauritius)
Providian Bancorp Services (California)
Commonwealth Premium Finance (California)
Providian Services Corporation (Delaware)
Providian Services LLC
Robena LP
Robena LLC
Robena Feedstock LLC
Getsmart.com, Inc. (Delaware)
Providian Financing I (Delaware)
Providian Financing II (Delaware)
Providian Financing III (Delaware)
Providian Financing IV (Delaware)
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-28767) pertaining to Providian Financial Corporation 1997 Stock
Option Plan and the Providian Financial Corporation Stock Ownership Plan,
Registration Statement (Form S-8 No. 333-57409) pertaining to Providian
Financial Corporation 1997 Employee Stock Purchase Plan and the Providian
Financial Corporation Registration Statement (Form S-3 No. 333-55937) of our
report dated January 20, 1999, with respect to the consolidated financial
statements of Providian Financial Corporation incorporated by reference in the
Annual Report on Form 10-K for the year ended December 31, 1998.
/s/ Ernst & Young LLP
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN FINANCIAL CORPORATION
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 176,348
<SECURITIES> 433,675
<RECEIVABLES> 5,733,259
<ALLOWANCES> 451,245
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 82,858
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 7,231,215
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 802,233
<TOTAL-LIABILITY-AND-EQUITY> 7,231,215
<SALES> 0
<TOTAL-REVENUES> 2,108,758
<CGS> 0
<TOTAL-COSTS> 825,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 545,929
<INTEREST-EXPENSE> 247,266
<INCOME-PRETAX> 490,563
<INCOME-TAX> 194,117
<INCOME-CONTINUING> 296,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296,446
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.04
<FN>
<F1>NON-CLASSIFIED BALANCE SHEET
<F2>PP&E SHOWN NET
</FN>
</TABLE>
