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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
[_] 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
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. [X]
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As of March 13, 2000, 142,432,920 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 $9,130,534,374, 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to stockholders for the year ended
December 31, 1999, 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 10, 2000 (to be filed pursuant to
Regulation 14A) are incorporated by reference into Part III of this Report.
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PROVIDIAN FINANCIAL CORPORATION
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1 Business................................................................................................... 4
Executive Officers of the Registrant ...................................................................... 17
ITEM 2 Properties................................................................................................. 18
ITEM 3 Legal Proceedings ......................................................................................... 18
ITEM 4 Submission of Matters to a Vote of Security Holders ....................................................... 20
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters .................................... 20
ITEM 6 Selected Financial Data .................................................................................. 20
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 20
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk ............................................... 20
ITEM 8 Financial Statements and Supplementary Data .............................................................. 21
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 21
PART III
ITEM 10 Directors and Executive Officers of the Registrant....................................................... 21
ITEM 11 Executive Compensation................................................................................... 21
ITEM 12 Security Ownership of Certain Beneficial Owners and Management .......................................... 21
ITEM 13 Certain Relationships and Related Transactions........................................................... 22
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 22
Signatures............................................................................................................ 27
</TABLE>
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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 provider of lending
and deposit products to customers throughout the United States and offers credit
cards in the United Kingdom. The Company serves a broad, diversified market
with its loan products, which include credit cards and membership services
products. The Company also offers various deposit products. With over $23
billion in assets under management and over twelve million customers, the
Company ranks as the sixth largest bankcard issuer in the United States.
The Company conducts its business through its wholly owned subsidiaries.
The Company's lending and deposit-taking 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 PNB, PB and other affiliates.
BUSINESS STRATEGY
The Company seeks to build shareholder value by generating profitable
growth in its core markets, developing marketing, credit, and profitability
management capabilities that provide competitive advantages, and making
acquisitions on an opportunistic basis. The Company invests for long-term
growth by focusing on the areas that management views as having the highest
potential value, including the continuous improvement of operations,
infrastructure and technology.
The Company`s market-driven business strategy gives us the ability to serve
a broad market spectrum, from established revolvers and convenience users with
strong credit histories to consumers in need of entry credit or credit
rehabilitation. Within this broad market, the Company focuses on market segments
offering the greatest growth potential, including segments that may be
underserved by traditional financial institutions. The Company`s customer
focused approach allows us to identify potential customers and their particular
needs, and to customize products to meet those needs. The Company's dynamic risk
management capabilities allow us to utilize proprietary customer segmentation
and credit risk models to address the individual customer's risk profile in
product pricing, account management and collections. Through our primary lender
strategy the Company focuses on deepening our relationship with each customer,
with the goal of improving customer retention and the lifetime value of each
customer relationship. We strive to meet that goal by offering product
enhancements and services to meet the customer's evolving needs and through our
commitment to customer satisfaction. The Company invests in its customer
satisfaction infrastructure through systems and processes designed to support
high levels of service, with the goal of maintaining sustainable, quality
customer relationships in its chosen markets.
This business approach, which the Company first applied to its core credit
card business, utilizes proprietary technology and business processes which have
been adapted for use in the Company's other product lines. From a one-market,
one-product company in 1985, when it introduced its first product, the Company
has evolved into a multi-market, multi-product provider of consumer financial
services. One of the latest steps in this evolution is the
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Company's new E-Commerce business, where the core strategy is to utilize
database and "off-line" marketing skills to attract new customers, develop a
customer-focused Web site experience, and serve a broad spectrum of customers
through various credit and deposit product offerings. In 1999, the Company also
launched a number of initiatives to enhance customer service and satisfaction,
including enhancements to product offerings and the complaint resolution
process.
The Company markets its products to consumers throughout the United States
through direct mail, telemarketing and other channels, including television and
the Internet. In the United Kingdom, the Company markets its products primarily
through direct mail. By using these marketing channels rather than a branch-
based distribution system, the Company seeks to avoid high overhead costs and to
maintain the flexibility to easily enter and exit geographic markets.
PRODUCTS AND SERVICES
The Company operates primarily through the following businesses:
Credit Card, Emerging Businesses, E-Commerce and United Kingdom. The Company's
primary segments are Credit Card, which offers credit cards in the United
States, and Emerging Businesses, which includes a portfolio of home loan
products and the First Select charged off receivables business. For segment
reporting purposes, the Credit Card and the Emerging Businesses segments include
membership services product revenue derived from the credit products included in
such segments. Financial information about operations that are not individually
reportable under applicable accounting guidelines, including the Company's E-
Commerce and United Kingdom businesses, is included under the "Other" caption in
Note 21 to Consolidated Financial Statements on pages 63 and 64 of the Company's
Annual Report to stockholders for the year ended December 31, 1999.
Credit Cards
The Company offers credit card loans generated primarily through Visa
and MasterCard credit cards. The Credit Card 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, 1999, the Company's Credit Card
business had $19 billion of managed loans outstanding (of which $10.1 billion
were included in loans reported on the Company's statement of financial
condition).
The Company serves a broad spectrum of customers with its credit card
products, which range from platinum cards to classic and secured credit cards.
Consumers who qualify for platinum credit cards may receive a credit line of
$5,000 or more, interest at fixed or variable rates, and other features and
services. Classic and secured credit cards are designed to serve individuals
who have limited access to credit due to past credit problems or little or no
credit history. Through its proprietary customer segmentation and credit risk
models, the Company is able to identify customers in this population that it
believes will have significantly lower default rates than the average for such
population generally. This allows the Company to offer a prudent mix of product
features designed to meet the customer's needs, while adhering to the Company's
profitability and risk guidelines. Products offered to this population
generally have processing fees 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 credit card products offered through direct mail and
telemarketing channels generally begins with a "prescreening" review to identify
consumers who, based on proprietary credit and segmentation criteria, are likely
to be interested in and eligible for an account. In addition to direct mail and
telemarketing, the Company uses television and the Internet to market to
consumers. Customers who respond are reviewed according to the Company's credit
and underwriting criteria. The Company establishes pricing and credit limits
based on the customer's credit profile, loan feature preferences and
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price sensitivity and on the Company's profitability and risk guidelines. The
Company monitors customers' risk profiles and may adjust product features and/or
pricing as the relationship evolves in order to strengthen profitable
relationships and reduce loss exposure over time. For example, the Company may
periodically increase or decrease credit limits based on its evaluation of a
customer's credit behavior, or it may offer product upgrades for qualifying
customers, particularly customers of the Company's classic and secured cards. In
cases where the customer fails to comply with the account agreement, the Company
may increase the interest rate. The Company typically charges late fees,
returned check fees and overlimit fees, and may charge other fees when
appropriate, in accordance with the terms of the account agreement. The account
agreement reserves to the Company the right to change or terminate any terms,
conditions, services or features of the account (including increasing or
decreasing periodic finance charges, other charges or minimum payment
requirements).
Collections efforts focus on the action or inaction of the customer, rather
than on the passage of time. Under current collections policy for credit card
products, 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, or, 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."
Emerging Businesses
Membership Services Products
The Company markets a number of membership services products to customers
of its credit card products to enhance those products. Membership services
products focus on broad themes such as home, health, credit, auto and travel and
generally offer a package of benefits and services that the Company assembles
from internal sources or third-party vendors. Among the benefits and services
offered are health-related credit and prescription and other health-related
discounts and referrals, credit card registration services, and a program that
offers nonaccrual of interest and deferral of payments on credit card loans
payable to the Company in case of unemployment, disability or hospitalization.
Home Loan Products
As of December 31, 1999, the Company had $2 billion of managed home loans
outstanding (of which $1.5 billion were included in loans reported on the
Company's statement of financial condition). The existing home loan portfolio
consists of home equity lines of credit and home equity loans originated by the
Company, which provide homeowners having high levels of unsecured debt with an
opportunity to consolidate their debt and, in some cases, to gain tax
advantages. The home equity lines of credit and home equity loans generally have
higher loan-to-value ratios, which in some cases exceed 100%. In general, the
home equity lines of credit are structured with a revolving period of 10 years
or more 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.
On February 29, 2000, the Company announced that it is realigning resources
previously dedicated to its home loan business. The Company expects to continue
to service the existing home loan portfolio and to provide access to home loan
products to new and existing customers through its GetSmart.com Web site. As a
result, the Company will refer home loans to other lenders rather than
originating them. See "--E-Commerce Business."
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First Select
Through its First Select business, the Company purchases recently charged-
off credit card assets from other lenders, with the expectation that it will be
able to use its collections and account management capabilities to increase
their value.
E-Commerce Business
The Company offers credit cards, certificates of deposit and money
market accounts through its E-Commerce business and also offers an online
referral service through Getsmart.com, which provides consumers with product
information and lender connections. During 1999, the E-Commerce business
developed the infrastructure to acquire and service credit card customers on-
line, and improved the Company's ability to attract and service retail deposit
customers over the Internet. New on-line credit card customers have been
acquired under the Aria/1/ brand name, while on-line deposit customers continue
to apply for and renew Providian branded deposit products.
The Company acquired GetSmart.com in February 1999. GetSmart.com
facilitates a connection between individual consumers seeking a specific
product, such as a home loan, and lenders seeking new customers. Customers are
generally attracted to the GetSmart.com Web site through customary Internet
methods, such as banner advertisements, and non-Internet marketing methods, such
as television commercials.
U.K. Business
In June 1999, the Company began originating loans by direct mail
through an international branch of PNB headquartered in London, England. The
Company currently offers a platinum card and a classic card to consumers in the
United Kingdom. As an enhancement to the credit card account, customers are
offered a membership services product that offers nonaccrual of interest and
deferral of payments on credit card loans payable to the Company in case of
unemployment, disability or hospitalization.
GEOGRAPHIC DIVERSITY
The Company's loan portfolios are geographically diverse, with no
significant regional concentration of credit risk.
COMPETITION
The Company faces intense and increasing competition from other consumer
lenders and financial institutions. 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 competes, to a lesser
extent, with issuers of single purpose cards, such as department stores and oil
companies. The trend toward consolidation in the credit card industry 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). Traditional
consumer lenders have increased or improved their on-line offerings and new on-
line credit providers have been established, competing with the Company's E-
Commerce products. Competition for customers in the classic and secured credit
card
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/1/ Aria is a service mark of the Company.
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market has also increased as additional lenders have been attracted to this
market or increased their offerings in this market.
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 consumer loans receivable.
FUNDING AND LIQUIDITY
The Company offers deposit products directly to its deposit customers.
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 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 Web site.
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 offers directly-placed and broker-placed CDs and
negotiable CDs to institutional investors.
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 loans receivable 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 loans receivable or notes collateralized by the loans receivable.
The Company has access to funding through term federal funds, overnight
federal funds, bank notes and a committed revolving credit facility (which the
Company reduced from $1 billion to $750 million in March 2000). Under the bank
note program, PNB issued $630 million of medium-term bank notes in 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 $291 million (including the U.S. dollar
equivalent of a facility denominated in sterling). 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, customer service, collections, and
related services for its affiliates on a cost reimbursement basis.
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In addition, the Company purchases charged-off credit card accounts through
First Select, Inc., a wholly owned subsidiary of PNB, and operates the
GetSmart.com online marketplace through GetSmart.com, Inc., a wholly owned
subsidiary of the Company.
EMPLOYEES
As of December 31, 1999, the Company (on a consolidated basis) had 10,790
employees and a total workforce, including temporaries and contract employees,
of 11,785.
REGULATORY MATTERS
PNB is a national bank and is subject to regulation by its primary
regulator, the Office of the Comptroller of the Currency (the "Comptroller").
PNB's deposits 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. PNB is a member of
the Federal Reserve System and 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 are subject to
regulation and supervision by the Financial Services Authority of the United
Kingdom and the Comptroller.
PB is an FDIC-insured Utah industrial loan corporation and 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 of Financial
Institutions. PB's deposits are insured up to applicable limits by the BIF.
Accordingly, PB is subject to assessment for deposit insurance premiums. 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
The Company is the holding company of PNB and PB, but it is not required to
register as a bank holding company under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). Before 1987, PNB was a so-called "nonbank bank"; that
is, it was not a "bank" under the BHCA, even though it is a national banking
association, because it did not both accept demand deposits and make commercial
loans. The Competitive Equality Banking Act of 1987 ("CEBA") revised the
definition of "bank" to include generally all FDIC-insured institutions.
However, CEBA grandfathered the rights of companies that owned "nonbank banks"
on March 5, 1987, allowing them to retain ownership of such nonbank banks
without registering as a bank holding company, subject to certain restrictions.
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 restrictions on CEBA-grandfathered nonbank banks were liberalized by
the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). Under the GLB Act, PNB will
be permitted to engage in new activities, which it was not permitted to do under
CEBA, so long as it does not both accept demand deposits and make commercial
loans. The GLB Act also eased CEBA restrictions on PNB's ability to incur
overdrafts on behalf of affiliates and eliminated CEBA limitations on PNB's
ability to cross-market its products and services with the products and services
of its affiliates. In addition, the GLB Act increased the Company's ability to
acquire the assets of additional insured depository institutions, effectively
eliminating the CEBA restriction that prevented the Company from acquiring more
than 5% of the assets of another insured depository institution. See "--
Legislative Developments."
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The Company could be required to register as a bank holding company under
the BHCA if PNB ceases to observe the CEBA restrictions, as modified by the GLB
Act, or if the Company or any of its affiliates acquires control of an
additional insured depository institution (excluding exempt institutions such as
credit card banks). 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. These BHCA restrictions, if they were to apply to the Company, would
not be expected to have a material adverse effect on the Company's business as
currently conducted. If the Company were required to register as a bank holding
company, it could elect, if it met certain eligibility requirements, to become a
financial holding company under the GLB Act and thereby be permitted to engage
in a more expansive list of activities than are permitted for bank holding
companies under the BHCA. See "--Legislative Developments."
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. The
Company's CEBA grandfather rights are nontransferable. Thus, 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. As noted above,
however, if the Company became a financial holding company under the GLB Act, it
would be permitted to engage in a more expansive list of activities than are
permitted for bank holding companies under the BHCA. See "--Legislative
Developments."
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 standards. See "--
Capital Requirements." PB is subject to similar Utah laws governing industrial
loan corporations.
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Capital Requirements
PNB is subject to risk-based capital guidelines adopted by the Comptroller.
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. Higher levels of capital are
required for the categories defined 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." The Company's
banking subsidiaries' capital amounts and classifications are also subject to
qualitative judgments by the regulators with respect to components, risk
weightings and other factors.
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.
These risk-based capital guidelines are subject to change by the applicable
regulators and may be increased from time to time, generally or with respect to
specific types of assets. 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 prescribing a minimum leverage ratio 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, 1999, PNB had a total risk-based capital
ratio of 11.17%, a Tier 1 risk-based capital ratio of 9.79% and a leverage ratio
of 10.88%, and PB had a total risk-based capital ratio of 15.08%, a Tier 1 risk-
based capital ratio of 13.78% and a leverage ratio of 10.54%.
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 March 2000 the
federal banking regulators published for comment proposed 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 loans receivable and may impose certain capital requirements based on
the amount of securitized assets under management, while possibly reducing the
cost of senior securities issued in such transactions. The Company is unable at
this time to assess what impact this proposal may have on its business.
In June 1999, the Basle Committee on Bank Supervision proposed a new
capital adequacy framework for banks, which would significantly revise the
global risk-based capital rules set forth in the 1988 Basle Accord. If
implemented, the new rules, among other changes, would replace the current risk
weightings for most credit risks with a system based on external ratings, and
expose banks that securitize assets to new capital charges. Changes in U.S.
capital standards resulting from the Basle Committee's proposal are not expected
before 2002. The Company is unable at this time to assess what impact this
proposal may 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-
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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, 1999, 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, 1999, PNB had brokered deposits of $4.7
billion and PB had brokered deposits of $0.7 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 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% or more of total assets in trading
activity or $1 billion or more in trading activity are required to use internal
risk measurement models to calculate their capital exposure for market risk 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 such as PNB and PB 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. The FICO assessment rate applicable to BIF-insured deposits is
0.0212% per annum for the first quarter of 2000 and may be adjusted quarterly to
reflect a change in assessment base for the BIF.
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. These
statutes also 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
12
<PAGE>
may be assessed and on the use of consumer credit reports. In addition, the GLB
Act requires federal regulators to promulgate regulations governing the privacy
of consumer information. See "--Legislative Developments." In the United
Kingdom, the Data Protection Act of 1998 places restrictions on the electronic
transfer of personal data to any country outside the European Union. These
restrictions are not expected to have a material effect on the Company's
business or operations as currently conducted.
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 a 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 consumer
credit loans. 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. The Company is
unable to predict the outcome of these cases or the effect of such outcome on
PB's ability to impose certain fees.
Legislative Developments
The GLB Act became law on November 12, 1999. The GLB Act repeals the
Glass-Steagall Act of 1933, which separated commercial and investment banking,
and eliminates the BHCA's prohibition on insurance underwriting by bank holding
companies. As a result, the GLB Act permits the affiliation of commercial
banks, securities firms and insurance companies. This change may increase the
ability of insurance companies and securities firms to acquire, or otherwise
affiliate with, commercial banks and may increase the number of competitors in
the banking industry and the level of competition for banking products,
including credit cards.
The GLB Act creates a new type of bank holding company, a "financial
holding company," that may engage in a range of activities that are financial in
nature, including insurance and securities underwriting, insurance sales,
merchant banking, and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to a financial activity, or complementary to a financial
activity. The GLB Act establishes the Federal Reserve Board as the primary
regulator of financial holding companies, with state insurance authorities
continuing to oversee insurance affiliates and the Securities and Exchange
Commission continuing to regulate broker-dealer affiliates.
The GLB Act also establishes new privacy requirements applicable to all
financial institutions and requires federal regulators to promulgate regulations
to implement these requirements by November 12, 2000. The GLB Act also
expressly permits the states to adopt privacy requirements that are more
stringent than under federal law. A large number of states have taken, or may
take, action to propose legislation containing stricter requirements. However,
these actions are at an early stage and the extent and nature of such
requirements, if they are adopted, cannot be predicted.
Legislation has been proposed in Congress to substantially revise the laws
governing consumer bankruptcy. The U.S. House of Representatives and the U.S.
Senate have approved different versions of new bankruptcy reform legislation. In
general, both bills contain provisions establishing a means test for consumer
bankruptcy filings, which are intended to curb a perceived abuse in the current
bankruptcy system, and include new requirements for consumer lending
disclosures. Whether or not a Conference Committee of the two chambers will be
able to resolve differences in the two bills is uncertain.
From time to time, members of Congress have introduced regulatory
restructuring proposals as well as legislation to impose a statutory cap on
credit card interest rates and fees and legislation to require
13
<PAGE>
additional disclosures and prohibit certain practices with respect to open-end
credit plans. In recent years state legislatures have entertained similar
proposals, as well as proposals 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 any certainty.
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 competition. As a result, the rate at which the Company originates
new loans may decrease, or the rate at which customers repay their loans may
increase, which could hurt the Company's profitability.
The GLB Act, which permits the affiliation of commercial banks, securities
firms and insurance companies, may increase the number of competitors in the
banking industry and the level of competition for banking products, including
credit cards. To the extent that the GLB Act promotes competition or
consolidation among financial service providers active in the consumer credit
market, the Company could experience increased competition for customers,
employees and funding. However, the Company is unable to predict at this time
the scope or extent of any such impact.
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 credit
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
competing networks. MasterCard and Visa have stated that they consider the suit
without merit, and have denied the allegations of the complaint. The case is
now in the discovery stage. 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.
14
<PAGE>
Increased Delinquencies and Credit Losses
The delinquency rate on the Company's consumer loans, as well as the rate
at which the Company's consumer loans are charged off as uncollectible (referred
to as the credit loss rate), may increase, depending on 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 also occur 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. Such a
reduction could result from slower growth in new loan originations, an increase
in acquisitions of seasoned portfolios, or 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 telemarketing and data processing providers, 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 for its funding 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 the rate it
pays for its funding 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."
Cost and Availability of Funding
The Company obtains funding for its lending operations primarily from
depositors, securitizations, institutional investors and commercial lenders.
Changes in the deposit market, credit market or the securitization market,
including the way in which the Company is perceived in those markets, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Funding and Liquidity."
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, consumer protection
and debtor relief laws limit the manner in which the Company may offer, extend,
manage and collect loans. Congress, the states and other jurisdictions in which
the Company operates 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
15
<PAGE>
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
capital requirements and 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 membership services products and lower
line credit card products. Competition in these markets is likely to intensify.
The growth in membership services revenue is unlikely to continue at the rates
experienced in recent periods, and there can be no assurance 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
historical growth in managed loans and customer accounts resulted from portfolio
acquisitions. There can be no assurance that the Company will continue to
acquire loan portfolios, that the acquired portfolios will perform as expected,
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, facilities expansions, increased funding or staffing costs and
other internal and external factors.
Litigation
The Company faces the risk of governmental proceedings and 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. In particular, state attorneys
general and other government prosecutors have shown an increased interest in the
enforcement of consumer protection laws, including laws relating to lending
practices and privacy. The Company faces litigation and compliance costs and may
be required to change specific business practices, depending on the outcome of
such litigation and proceedings. For legal proceedings currently affecting the
Company, see the discussion under the heading "Legal Proceedings."
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. The financial services industry
as a whole is characterized by rapidly changing technologies. System
disruptions and failures may interrupt or delay the Company's ability to provide
services to our customers. In particular, the Company faces technological
challenges in the developing online credit card market. The secure transmission
of confidential information over the Internet is essential to maintain consumer
confidence in the products and services offered by our E-Commerce business.
Security breaches, acts of vandalism, and developments in computer capabilities
could result in a compromise or breach of the technology used by the Company to
protect customer transaction data. Consumers generally are concerned with
security breaches and privacy on the Internet, and Congress or individual states
could enact new laws regulating the electronic commerce market that could
adversely affect the Company.
16
<PAGE>
___________________________________________________
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: 50 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.
David Alvarez President, Credit Cards, of the Company since October 1999.
Age: 31 Mr. Alvarez was Executive Vice President of the Company from
June 1997 to October 1999, 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.
Seth A. Barad President, Emerging Businesses, of the Company since October
Age: 44 1999. Mr. Barad was Executive Vice President of the Company
from January 1997 to October 1999, 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 1994.
Ellen Richey Vice Chairman of the Company since October 1999 and General
Age: 51 Counsel and Secretary of the Company since January 1995.
Ms. Richey was Executive Vice President of the Company from
June 1997 to October 1999, Senior Vice President 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.
James V. Elliott Executive Vice President of the Company and Managing
Age: 56 Director of the Company's U.K. Business since August 1998.
Mr. Elliott has been a member of the Company's Board of
Directors since 1995 and was an attorney-at-law in private
practice from 1997 to August 1998. He was Senior Vice
President and General Counsel of Providian Corporation from
1995 to 1997, Senior Vice President of the Company from 1993
through 1994, and General Counsel of the Company from 1989
through 1994.
David J. Petrini Executive Vice President and Chief Financial Officer of the
Age: 39 Company since December 1998 and Treasurer of the Company
from December 1998 to March 1999. 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>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
James P. Redmond Executive Vice President and Chief Risk Management Officer
Age: 55 since 1998. Mr. Redmond joined the Company in April 1998 as
Senior Vice President and was promoted to Executive Vice
President in December 1998. Mr. Redmond was Senior Credit
Officer, U.S. Bankcards, at Citibank, N.A. from 1996 to
1998. Prior to that, he held positions as Senior Credit
Officer and Senior Vice President at Bank of America.
James H. Rowe Executive Vice President, E-Commerce, of the Company since
Age: 41 October 1999 and Chief Executive Officer of GetSmart.com
since February 1999. Mr. Rowe was Senior Vice President of
the Company from February 1998 to February 1999, with
responsibility for the marketing and development of the
Company's membership services products. From March 1997 to
February 1998, Mr. Rowe was Senior Vice President, Corporate
Development and Investor Relations, and from March 1994 to
February 1995 he was Vice President, Corporate Development
and Bank Relations. From February 1995 to March 1997, Mr.
Rowe was Vice President, Corporate Development and Planning
at Providian Corporation. He joined the Company in 1994.
</TABLE>
ITEM 2. PROPERTIES
The Company leases its executive offices at 201 Mission Street, San
Francisco, California, currently consisting of approximately 164,000 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 owns its headquarters office located at 295 Main Street,
Tilton, New Hampshire and has branches located at 44 Main Street, Belmont, New
Hampshire and 25 Old Broad Street, London, England, which are leased. PB's
offices, which are leased, are located at 5215 Wiley Post Way, Salt Lake City,
Utah. GetSmart.com's offices are located at 1412 and 1440 Chapin Street,
Burlingame, California.
Significant operations centers and other properties are located at the
following leased premises: 2700 Gateway Oaks Drive, Sacramento, California
(91,174 square feet); 1333 Broadway, Oakland, California (144,903 square feet);
425, 427, 431 and 435 Executive Court North, Fairfield, California (60,272
square feet); 324 Campus Lane, Suite C, Fairfield, California (15,864 square
feet); 4450 Rosewood Drive, Pleasanton, California (108,195 square feet); 3801
South Collins Boulevard, Arlington, Texas (127,072 square feet); 4300
Centerview, San Antonio, Texas (56,962 square feet); 6500 Tracor Lane, Austin,
Texas (60,000 square feet); 2280 Corporate Circle, Henderson, Nevada (63,959
square feet); 53 and 54 Regional Drive, Concord, New Hampshire (27,671 square
feet); 1531 Ormsby and 1600 Ormsby Road, Louisville, Kentucky (90,531 square
feet); 10400 Linn Station Road, Louisville, Kentucky (34,323 square feet);
Crawley, England (58,391 square feet); 150 Spear Street, San Francisco,
California (130,629 square feet); 123 Mission Street, San Francisco, California
(91,207 square feet); and 160 Spear Street, San Francisco, California (60,713
square feet).
ITEM 3. LEGAL PROCEEDINGS
Beginning in May 1999, the Company was the subject of media coverage
concerning complaints made by some customers of the Company's banking
subsidiaries regarding certain sales and collections practices. Following the
initial media coverage, the San Francisco District Attorney's Office began an
investigation into the Company's sales and collections practices, including the
marketing of certain membership services products and the posting of customer
payments. In November 1999, the Company
18
<PAGE>
received an inquiry from the Connecticut Attorney General's Office seeking
information in connection with a civil investigation into the Company's credit
card issuance and billing practices. The remedies available to the San Francisco
District Attorney's Office and the Connecticut Attorney General's Office
include, but are not limited to, damages, penalties, fines and/or injunctive
relief. The Company continues to cooperate and have discussions with the San
Francisco District Attorney's Office. The Comptroller has recently joined these
discussions. There can be no certainty as to the outcome of these discussions.
The Company also has met with and is cooperating with the Connecticut Attorney
General's Office.
Since May 1999, a number of lawsuits have been filed against the Company
and, in some cases, against certain of the Company's subsidiaries by current and
former customers of the Company's banking subsidiaries. A consolidated putative
class action lawsuit (In re Providian Credit Card Litigation) (the "Consolidated
Action") was filed in August 1999 in California state court in San Francisco
against the Company, Providian National Bank and certain other subsidiaries, and
seeks unspecified damages, including actual and punitive damages, attorney's
fees and injunctive relief. The complaint alleges unfair and deceptive business
practices, including failure to credit payments in a timely fashion, adding
products and charging fees without customer authorization, changing rates and
terms without proper notice or authorization, and misleading or deceptive sales
practices. A few similar actions filed in other California counties have been
transferred to San Francisco County and coordinated with the Consolidated
Action.
As of March 28, 2000, six similar putative class actions were pending in
state courts, three of which were filed in San Francisco Superior Court and are
expected to be coordinated with the Consolidated Action. Another similar state
case, filed in San Mateo County, California, was not coordinated with the
Consolidated Action and will proceed separately. In addition, one putative
class action was filed in Cook County, Illinois. The Company's motions to
dismiss this action have been granted twice, although the plaintiff has been
given leave to amend both times. The Company's third motion to dismiss this
action is pending. Another putative class action is pending in Bullock County,
Alabama. As of March 28, 2000, one consolidated putative class action was
pending in federal court. The federal action (the "Multidistrict Action") is a
consolidation of several different actions that had been filed in various
federal courts, and have been transferred by the Federal Judicial Panel on
Multidistrict Litigation to the Eastern District of Pennsylvania. A
consolidated complaint in the Multidistrict Action was filed on February 4,
2000.
These other state and federal actions contain substantially the same
allegations as those alleged in the Consolidated Action; certain of the actions
also allege one or more of the following: that the account agreement with
customers contained unconscionable or improper terms and fees, that statements
sent to customers failed to include Credit Protection and other add-on fees in
the calculation of the annual percentage rate disclosed in those statements,
refusal to honor cancellation requests, improper obtaining of credit reports,
breached promises to raise credit limits, and breached promises of high credit
limits.
A putative class action (In re Providian Securities Litigation), which is a
consolidation of complaints filed in the United States District Court for the
Eastern District of New York in June 1999, alleges, in general, that the Company
and certain of its officers made false and misleading statements concerning the
Company's future prospects and financial results in violation of the federal
securities laws. The putative class, which is alleged to have acquired the
Company's stock between January 15, 1999 and May 26, 1999, seeks damages in an
unspecified amount, in addition to pre-judgment and post-judgment interest,
costs and attorneys fees. As of March 28, 2000, the consolidated complaint had
not been filed. By order dated February 8, 2000, the Federal Judicial Panel on
Multidistrict Litigation transferred the consolidated securities cases to the
Eastern District of Pennsylvania for inclusion with the Multidistrict Action
currently pending in that court.
The lawsuits described above are at a very early stage. No specific
measure of damages has been demanded and, in most cases, a response is not yet
due. An informed assessment of the ultimate outcome or potential liability
associated with these matters is not feasible at this time. Due to the
uncertainties of litigation, there can be no assurance that the Company will
prevail on all the claims made against it.
19
<PAGE>
However, management believes that the Company has substantive defenses and
intends to defend the actions vigorously.
In addition, the Company is commonly subject to various other pending and
threatened legal actions arising from the conduct of its normal business
activities. In the opinion of the Company, any liability that is likely to
arise with respect to these additional 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 68 of the
registrant's Annual Report to stockholders for the year ended December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
Information concerning selected financial data is incorporated by reference
to the information under the caption "Selected Financial Data," on page 26 of
the registrant's Annual Report to stockholders for the year ended December 31,
1999.
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 27 through 42 of the registrant's
Annual Report to stockholders for the year ended December 31, 1999.
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 41 and 42 of the registrant's Annual
Report to stockholders for the year ended December 31, 1999.
20
<PAGE>
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 pages 46 and 47; "Consolidated Statements of Cash Flows," on page
48; "Notes to Consolidated Financial Statements," on pages 49 through 67;
"Quarterly Data," on page 68; and "Report of Independent Auditors," on page 43,
of the registrant's Annual Report to stockholders for the year ended December
31, 1999.
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 2000 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 2000 Annual Meeting of Stockholders.
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 "Security Ownership of
Management" in the registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
21
<PAGE>
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 2000 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 67 of the
Annual Report to stockholders for the year ended December 31, 1999, are
incorporated by reference herein:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 43
Consolidated Statements of Financial Condition 44
December 31, 1999 and 1998
Consolidated Statements of Income 45
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity 46-47
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows 48
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 49-67
</TABLE>
(a)(2) Financial Statement Schedules.
None.
(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).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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), as amended by Certificate of Amendment to
the Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1999).
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).
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).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.2* Form of Change of Control Employment Agreement, as entered into between the
Company and certain executive officers of the Company (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997), and a schedule of the executive officers
of the Company having such an agreement with the Company, indicating the
differences from the form of agreement filed (as permitted by Instruction 2
to Item 601 of Regulation S-K).
10.3* 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); and Providian Financial Corporation 1997 Stock
Option Plan UK Sub-Plan and First Amendment to Providian Financial
Corporation 1997 Stock Option Plan (as amended and restated June 4, 1997),
adopted May 11, 1999 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.4* 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); and Providian Financial Corporation Stock Ownership
Plan UK Sub-Plan and First Amendment to the Providian Financial Corporation
Stock Ownership Plan (as amended and restated June 23, 1998), adopted May
11, 1999 (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.5* Providian Financial Corporation Amended and Restated 2000 Stock Incentive
Plan.
10.6* 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); and Providian Financial Corporation Amended and
Restated 2000 Management Incentive Plan.
10.7* Providian Financial Corporation Deferred Compensation Plan for Senior
Executives and Directors, as amended and restated effective April 1, 1999
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999).
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); and Providian
Financial Corporation 1997 Employee Stock Purchase Plan UK Sub-Plan and
First Amendment to the Providian Financial Corporation 1997 Employee Stock
Purchase Plan, adopted June 29, 1999 (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.9* Providian Financial Corporation 1999 Non-Officer Equity Incentive Plan
adopted May 11, 1999 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999).
10.10 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).
10.11 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 (incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.12 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).
10.13 Distribution Agreement, dated as of May 14, 1999, between the Company and
the Agents named therein (incorporated by reference to Exhibit 1.3 to the
Company's Current Report on Form 8-K filed May 19, 1999).
10.14 Senior Indenture, dated as of May 1, 1999, between the Company and The First
National Bank of Chicago (incorporated by reference to Exhibit 4.25 to the
Company's Current Report on Form 8-K filed May 19, 1999).
10.15 Subordinated Indenture, dated as of May 1, 1999, between the Company and
Chase Manhattan Bank and Trust Company, National Association (incorporated
by reference to Exhibit 4.26 to the Company's Current Report on Form 8-K
filed May 19, 1999).
10.16 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).
11 Computation of Earnings Per Share (included in Exhibit 13).
12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividend Requirements
(incorporated by reference to Exhibit 12.1 to the Company's Current Report
on Form 8-K dated February 3 , 2000).
13 Portions incorporated herein of the Annual Report to stockholders for the
year ended December 31, 1999.
21 Subsidiaries of the Company.
23 Consent of independent auditors.
27 Financial Data Schedule
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
(b) Reports on Form 8-K.
The Company filed on November 1, 1999 a Current Report on Form 8-K dated
October 21, 1999, enclosing its press release dated October 21, 1999, its press
release dated October 25, 1999, and reporting recent development regarding legal
developments.
The Company filed on February 3, 2000 a Current Report on Form 8-K dated
February 3, 2000, reporting the Company's earnings to fixed charges and the
related computations, enclosing the financial statements and other financial
information released by the Company on January 20, 2000, and reporting recent
developments regarding legal proceedings.
26
<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 30, 2000 PROVIDIAN FINANCIAL CORPORATION
By /s/ Shailesh J. Mehta
__________________________________
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 30, 2000
__________________________ Executive Officer (Principal
Shailesh J. Mehta Executive Officer) and
Director
/s/ David J. Petrini Executive Vice President and March 30, 2000
__________________________ Chief Financial Officer
David J. Petrini (Principal Financial Officer)
/s/ Daniel Sanford Senior Vice President and March 30, 2000
_________________________ Controller (Principal
Daniel Sanford Accounting Officer)
/s/ Christina L. Darwall Director March 30, 2000
_________________________
Christina L. Darwall
/s/ James V. Elliott Director March 30, 2000
__________________________
James V. Elliott
/s/ Lyle Everingham Director March 30, 2000
_________________________
Lyle Everingham
/s/ J. David Grissom Director March 30, 2000
_________________________
J. David Grissom
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ F. Warren McFarlan Director March 30, 2000
__________________________
F. Warren McFarlan
/s/ Ruth M. Owades Director March 30, 2000
_________________________
Ruth M. Owades
/s/ Larry D. Thompson Director March 30, 2000
_________________________
Larry D. Thompson
/s/ John L. Weinberg Director March 30, 2000
_________________________
John L. Weinberg
</TABLE>
28
<PAGE>
EXHIBIT 10.2
Schedule
Change of Control Employment Agreements
The following executive officers of the Company executed a Change of
Control Employment Agreement substantially identical to the form of Change of
Control Employment Agreement incorporated herein by reference to Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1997,
except that the number set forth in clause (a) of subparagraphs B. and C. in
Section 6(a)(i) is as set forth below:
<TABLE>
<CAPTION>
Officer Date of Agreement Section 6(a)(i)B and C
- ------------------ ---------------------- --------------------------
<S> <C> <C>
David Alvarez August 19, 1997 Three
Seth A. Barad August 19, 1997 Three
David J. Petrini August 19, 1997 Three
James Rowe August 19, 1997 Three
Ellen Richey August 29, 1997 Three
James Redmond May 6, 1998 Two
</TABLE>
<PAGE>
EXHIBIT 10.5
PROVIDIAN FINANCIAL CORPORATION
2000 STOCK INCENTIVE PLAN
EFFECTIVE AS OF FEBRUARY 16, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. INTRODUCTION...................................................................... 1
SECTION 2. DEFINITIONS....................................................................... 1
(a) "Affiliate"....................................................................... 1
(b) "Award"........................................................................... 1
(c) "Board"........................................................................... 1
(d) "Cause"........................................................................... 1
(e) "Change In Control"............................................................... 2
(f) "Code"............................................................................ 2
(g) "Committee"....................................................................... 3
(h) "Common Stock".................................................................... 3
(i) "Company"......................................................................... 3
(j) "Consultant"...................................................................... 3
(k) "Director"........................................................................ 3
(l) "Disability"...................................................................... 3
(m) "Employee"........................................................................ 3
(n) "Exchange Act".................................................................... 3
(o) "Exercise Price".................................................................. 3
(p) "Fair Market Value"............................................................... 3
(q) "Grant"........................................................................... 4
(r) "Incentive Stock Option" or "ISO"................................................. 4
(s) "Key Employee".................................................................... 4
(t) "Non-Employee Director"........................................................... 4
(u) "Nonstatutory Stock Option" or "NSO".............................................. 4
(v) "Option".......................................................................... 4
(w) "Optionee"........................................................................ 4
(x) "Parent".......................................................................... 4
(y) "Participant"..................................................................... 4
(z) "Plan"............................................................................ 4
(aa) "Retirement"...................................................................... 4
(bb) "SAR Agreement"................................................................... 4
(cc) "Securities Act".................................................................. 4
(dd) "Service"......................................................................... 5
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
(ee) "Share"........................................................................... 5
(ff) "Stock Appreciation Right" or "SAR"............................................... 5
(gg) "Stock Grant"..................................................................... 5
(hh) "Stock Grant Agreement"........................................................... 5
(ii) "Stock Option Agreement".......................................................... 5
(jj) "Subsidiary"...................................................................... 5
(kk) "10-Percent Shareholder".......................................................... 5
SECTION 3. ADMINISTRATION.................................................................... 5
(a) Committee Composition............................................................. 5
(b) Authority of the Committee........................................................ 6
(c) Indemnification................................................................... 6
SECTION 4. ELIGIBILITY....................................................................... 6
(a) General Rules..................................................................... 6
(b) Incentive Stock Options........................................................... 7
(c) Non-Employee Director Stock....................................................... 7
SECTION 5. SHARES SUBJECT TO PLAN............................................................ 8
(a) Basic Limitation.................................................................. 8
(b) Additional Shares................................................................. 8
(c) Dividend Equivalents.............................................................. 8
(d) Limits on Options................................................................. 8
(e) Limits on Stock Grants............................................................ 8
(f) Limits on SARs.................................................................... 8
SECTION 6. TERMS AND CONDITIONS OF OPTIONS................................................... 8
(a) Stock Option Agreement............................................................ 8
(b) Number of Shares.................................................................. 8
(c) Exercise Price.................................................................... 9
(d) Exercisability and Term........................................................... 9
(e) Modifications or Assumption of Options............................................ 9
(f) Transferability of Options........................................................ 9
(g) No Rights as Stockholder.......................................................... 9
(h) Restrictions on Transfer.......................................................... 10
SECTION 7. PAYMENT FOR OPTION SHARES......................................................... 10
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) General Rule...................................................................... 10
(b) Surrender of Stock................................................................ 10
(c) Cashless Exercise................................................................. 10
(d) Promissory Note................................................................... 10
(e) Other Forms of Payment............................................................ 10
SECTION 8. TERMS AND CONDITIONS FOR STOCK GRANTS............................................. 10
(a) Time, Amount and Form of Awards................................................... 10
(b) Agreements........................................................................ 11
(c) Payment for Stock Grants.......................................................... 11
(d) Vesting Conditions................................................................ 11
(e) Assignment or Transfer of Stock Grants............................................ 11
(f) Trusts............................................................................ 11
(g) Voting and Dividend Rights........................................................ 11
(h) Performance Based Stock Grants.................................................... 12
SECTION 9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS................................. 12
(a) SAR Agreement..................................................................... 12
(b) Number of Shares.................................................................. 12
(c) Exercise Price.................................................................... 12
(d) Exercisability and Term........................................................... 12
(e) Exercise of SARs.................................................................. 13
(f) Modification or Assumption of SARs................................................ 13
SECTION 10. PROTECTION AGAINST DILUTION....................................................... 13
(a) Adjustments....................................................................... 13
(b) Participant Rights................................................................ 13
SECTION 11. EFFECT OF A CHANGE IN CONTROL..................................................... 14
(a) Merger or Reorganization.......................................................... 14
(b) Acceleration...................................................................... 14
SECTION 12. LIMITATIONS ON RIGHTS............................................................. 14
(a) Retention Rights.................................................................. 14
(b) Stockholders' Rights.............................................................. 14
(c) Regulatory Requirements........................................................... 14
SECTION 13. WITHHOLDING TAXES................................................................. 14
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
(a) General........................................................................... 14
(b) Share Withholding................................................................. 15
SECTION 14. DURATION AND AMENDMENTS........................................................... 15
(a) Term of the Plan.................................................................. 15
(b) Right to Amend or Terminate the Plan.............................................. 15
SECTION 15. EXECUTION......................................................................... 15
APPENDIX A PROVIDIAN FINANCIAL CORPORATION UK SUB-PLAN....................................... A-1
</TABLE>
-iv-
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
2000 STOCK INCENTIVE PLAN
EFFECTIVE AS OF FEBRUARY 16, 2000
SECTION 1. INTRODUCTION.
The Company's Board of Directors adopted the Providian Financial
Corporation 2000 Stock Incentive Plan on February 16, 2000 (the "Adoption
Date"). The Plan is an amendment and restatement of the 1997 Stock Option
Plan and the Stock Ownership Plan into this single document. The Plan is
effective on the Adoption Date; provided, however, that certain provisions
will be effective upon stockholder approval.
The purpose of the Plan is to promote the long-term success of the Company
and the creation of shareholder value by offering Key Employees an
opportunity to acquire a proprietary interest in the success of the
Company, or to increase such interest, and to encourage such Key Employees
to continue to provide services to the Company and to attract new
individuals with outstanding qualifications.
The Plan seeks to achieve this purpose by providing for Awards in the form
of Stock Grants, Stock Appreciation Rights and Options (which may
constitute Incentive Stock Options or Nonstatutory Stock Options).
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except its choice-of-law provisions).
Capitalized terms shall have the meaning provided in Section 2 unless
otherwise provided in this Plan or any related Stock Option Agreement, SAR
Agreement or Stock Grant Agreement.
SECTION 2. DEFINITIONS.
(a) "Affiliate" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity. For
purposes of determining an individual's "Service," this definition shall
include any entity other than a Subsidiary, if the Company, a Parent and/or
one or more Subsidiaries own not less than 50% of such entity.
(b) "Award" means any award of an Option, SAR or Stock Grant under the
Plan.
(c) "Board" means the Board of Directors of the Company, as constituted
from time to time.
(d) "Cause" means a felony conviction of a Participant or the failure of a
Participant to contest prosecution for a felony, or a Participant's willful
misconduct or dishonesty (as such terms are defined by the Committee in its
sole discretion), any of which is
<PAGE>
determined by the Committee to be directly and materially harmful to the
business or reputation of the Company or its Subsidiaries or Affiliates.
(e) "Change In Control" except as may otherwise be provided in a Stock
Option Agreement, SAR Agreement or Stock Grant Agreement, means the
occurrence of any of the following:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 60% of the combined voting power of the
continuing or surviving entity's securities outstanding immediately
after such merger, consolidation or other reorganization is owned by
persons who were not stockholders of the Company immediately prior to
such merger, consolidation or other reorganization;
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(iii) A change in the composition of the Board, as a result of
which fewer that one-half of the incumbent directors are directors who
either (i) had been directors of the Company on the date 24 months
prior to the date of the event that may constitute a Change in Control
(the "original directors") or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a
majority of the aggregate of the original directors who were still in
office at the time of the election or nomination and the directors
whose election or nomination was previously so approved;
(iv) Any transaction as a result of which any person becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at
least 20% of the total voting power represented by the Company's then
outstanding voting securities. For purposes of this Paragraph (iv),
the term "person" shall have the same meaning as when used in Sections
13(d) and 14(d) of the Exchange Act but shall exclude:
(A) A trustee or other fiduciary holding securities under
an employee benefit plan of the Company or a subsidiary of the
Company;
(B) A corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions
as their ownership of the common stock of the Company; and
(C) The Company; or
(v) A complete liquidation or dissolution of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended, and the
regulations and interpretations promulgated thereunder.
2
<PAGE>
(g) "Committee" means a committee consisting of one or more members of the
Board that is appointed by the Board (as described in Section 3) to
administer the Plan.
(h) "Common Stock" means the Company's common stock, $0.01 par value per
Share, and such other class(es) of the Company's common stock as may be
authorized by the Board.
(i) "Company" means Providian Financial Corporation, a Delaware
corporation.
(j) "Consultant" means an individual who performs bona fide services to
the Company, a Parent, a Subsidiary or an Affiliate, other than as an
Employee or Director or Non-Employee Director.
(k) "Director" means a member of the Board who is also an Employee.
(l) "Disability" means that the Key Employee is classified as disabled
under a long-term disability policy of the Company or, if no such policy
applies, the Key Employee is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.
(m) "Employee" means any individual who is a common-law employee of the
Company, a Parent, a Subsidiary or an Affiliate.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Exercise Price" means, in the case of an Option, the amount for which
a Share may be purchased upon exercise of such Option, as specified in the
applicable Stock Option Agreement. "Exercise Price," in the case of an
SAR, means an amount, as specified in the applicable SAR Agreement, which
is subtracted from the Fair Market Value of a Share in determining the
amount payable upon exercise of such SAR.
(p) "Fair Market Value" means the market price of Shares, determined by
the Committee as follows:
(i) If the Shares were traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the average of the
high and low trading price reported by the applicable composite
transactions report for such date;
(ii) If the Shares were traded over-the-counter on the date in
question and were classified as a national market issue, then the Fair
Market Value shall be equal to the average of the high and low trading
price quoted by the NASDAQ system for such date;
(iii) If the Shares were traded over-the-counter on the date in
question but were not classified as a national market issue, then the Fair
Market Value
3
<PAGE>
shall be equal to the mean between the last reported representative bid and
asked prices quoted by the NASDAQ system for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in the Western Edition of The Wall
--------
Street Journal. Such determination shall be conclusive and binding on all
--------------
persons.
(q) "Grant" means any grant of an Award under the Plan.
(r) "Incentive Stock Option" or "ISO" means an incentive stock option
described in Code Section 422(b).
(s) "Key Employee" means an Employee, Director, Non-Employee Director or
Consultant who has been selected by the Committee to receive an Award under
the Plan.
(t) "Non-Employee Director" means a member of the Board who is not an
Employee.
(u) "Nonstatutory Stock Option" or "NSO" means a stock option that is not
an ISO.
(v) "Option" means an ISO or NSO granted under the Plan entitling the
Optionee to purchase Shares.
(w) "Optionee" means an individual, estate or other entity that holds an
Option.
(x) "Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company, if each of the corporations
other than the Company owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be considered a
Parent commencing as of such date.
(y) "Participant" means an individual or estate or other entity that holds
an Award.
(z) "Plan" means this Providian Financial Corporation 2000 Stock Incentive
Plan as it may be amended from time to time.
(aa) "Retirement" means retirement by a Participant in accordance with the
terms of the Company's retirement or pension plans or pursuant to a written
agreement.
(bb) "SAR Agreement" means the agreement described in Section 9 evidencing
each Award of a Stock Appreciation Right.
(cc) "Securities Act" means the Securities Act of 1933, as amended.
4
<PAGE>
(dd) "Service" means service as an Employee, Director, Non-Employee
Director, Outside Director or Consultant.
(ee) "Share" means one share of Common Stock.
(ff) "Stock Appreciation Right" or "SAR" means a stock appreciation right
awarded under the Plan.
(gg) "Stock Grant" means Shares awarded under the Plan.
(hh) "Stock Grant Agreement" means the agreement described in Section 8
evidencing each Award of a Stock Grant.
(ii) "Stock Option Agreement" means the agreement described in Section 6
evidencing each Award of an Option.
(jj) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.
(kk) "10-Percent Shareholder" means an individual who owns more than 10% of
the total combined voting power of all classes of outstanding stock of the
Company, its Parent or any of its Subsidiaries. In determining stock
ownership, the attribution rules of Section 424(d) of the Code shall be
applied.
SECTION 3. ADMINISTRATION.
(a) Committee Composition. A Committee appointed by the Board shall
administer the Plan. The Board shall designate one of the members of the
Committee as chairperson. Unless the Board provides otherwise, the Human
Resources Committee shall be the Committee. If no Committee has been
approved, the entire Board shall constitute the Committee. Members of the
Committee shall serve for such period of time as the Board may determine
and shall be subject to removal by the Board at any time. The Board may
also at any time terminate the functions of the Committee and reassume all
powers and authority previously delegated to the Committee.
With respect to officers or directors subject to Section 16 of the Exchange
Act, the Committee shall consist of those individuals who shall satisfy the
requirements of Rule 16b-3 (or its successor) under the Exchange Act with
respect to Awards granted to persons who are officers or directors of the
Company under Section 16 of the Exchange Act.
The Board may also appoint one or more separate committees of the Board,
each composed of one or more directors of the Company who need not qualify
under Rule
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16b-3, who may administer the Plan with respect to Key Employees who are
not considered officers or directors of the Company under Section 16 of the
Exchange Act, may grant Awards under the Plan to such Key Employees and may
determine all terms of such Awards.
Notwithstanding the foregoing, the Board shall constitute the Committee and
shall administer the Plan with respect to all Awards granted to Non-
Employee Directors.
(b) Authority of the Committee. Subject to the provisions of the Plan, the
Committee shall have full authority and discretion to take any actions it
deems necessary or advisable for the administration of the Plan. Such
actions shall include:
(i) selecting Key Employees who are to receive Awards under the
Plan;
(ii) determining the type, number, vesting requirements and other
features and conditions of such Awards;
(iii) interpreting the Plan;
(iv) making all other decisions relating to the operation of the
Plan; and
(v) adopting such plans or subplans as may be deemed necessary or
appropriate to provide for the participation by non-U.S.
employees of the Company and its Subsidiaries and Affiliates,
which plans and/or subplans shall be attached hereto as
Appendices.
The Committee may adopt such rules or guidelines, as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan shall
be final and binding on all persons.
(c) Indemnification. Each member of the Committee, or of the Board, shall
be indemnified and held harmless by the Company against and from (i) any
loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim,
action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act
under the Plan or any Stock Option Agreement, SAR Agreement or Stock Grant
Agreement, and (ii) from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such claim, action, suit, or proceeding
against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or
she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or Bylaws, by contract, as a matter
of law, or otherwise, or under any power that the Company may have to
indemnify them or hold them harmless.
SECTION 4. ELIGIBILITY.
(a) General Rules. Only Employees, Directors, Non-Employee Directors and
Consultants shall be eligible for designation as Key Employees by the
Committee.
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(b) Incentive Stock Options. Only Key Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for
the grant of ISOs. In addition, a Key Employee who is a 10-Percent
Shareholder shall not be eligible for the grant of an ISO unless the
requirements set forth in Section 422(c)(5) of the Code are satisfied.
(c) Non-Employee Director Stock. Each Non-Employee Director and each non-
employee director of Providian National Bank, Providian Bank and any other
Subsidiary of the Company (each an "Outside Director"), may be awarded a
Stock Grant in accordance with the terms and conditions contained in this
Section 4(c).
(i) Participation Elections. Each Outside Director may elect to
receive a fully vested Stock Grant under the Plan in lieu of payment of a
portion of his or her annual retainer. Such an election may be for any
dollar or percentage amount equal to at least 25% of the Outside Director's
annual retainer (up to a limit of 50% of the annual retainer of Outside
Directors who are non-employee directors of affiliates). The election must
be made prior to the beginning of the annual board cycle (the "Board
Cycle"), which is currently June 1 to May 31 for the Company and the
calendar year for Providian National Bank and Providian Bank. Any amount of
the annual retainer not elected to be received as a Stock Grant shall be
payable in cash.
(ii) Grants of Stock. On a quarterly basis during a Board Cycle,
each Outside Director who has made the election described in Section
4(c)(i) with respect to that Board Cycle shall be granted a number of fully
vested Shares pursuant to a Stock Grant having a Fair Market Value on the
date of grant equal to 25% of the amount of the annual retainer elected to
be received as a Stock Grant under Section 4(c)(i) for such Board Cycle,
rounded down to the nearest full Share. The date of grant shall be the
first day of each quarter of the Board Cycle on which the Common Stock is
traded on the New York Stock Exchange.
(iii) Matching Stock Grants. Each Outside Director receiving a Stock
Grant under Section 4(c)(ii) shall also receive, on the date of each such
quarterly Stock Grant, a number of unvested Shares pursuant to a Stock
Grant having a Fair Market Value on the date of grant equal to one-
sixteenth (1/16) of the Outside Director's annual retainer for the full
Board Cycle with respect to which the Stock Grant is granted under Section
4(c)(ii), rounded down to the nearest full Share.
(iv) Vesting. Shares pursuant to a Stock Grant awarded under Section
4(c)(iii) shall vest with respect to 50% of the Shares under each Stock
Grant three years from the first day of the Board Cycle to which the
election to receive a Stock Grant under Section 4(c)(i) corresponds (the
"Vesting Commencement Date"). The remaining 50% of the Shares under each
Stock Grant awarded under Section 4(c)(iii) shall vest six years from the
Vesting Commencement Date.
(v) Escrow. Shares granted under this Section 4(c) may be held in
escrow and shall be subject to such forfeiture restrictions as the Board
determines in a uniform and nondiscriminatory manner.
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(vi) Other Terms. Shares granted under this Section 4(c) shall
otherwise be subject to the terms of the Plan applicable to Non-Employee
Directors or to Participants generally (other than provisions specifically
applying only to Employees).
SECTION 5. SHARES SUBJECT TO PLAN.
(a) Basic Limitation. The stock issuable under the Plan shall be
authorized but unissued Shares or treasury Shares. The aggregate number of
Shares reserved for Awards under the Plan shall not exceed 23,906,286;
provided, that only 6,000,000 Shares may be used for Stock Grants and,
pending stockholder approval of the combined Share pool, only 17,906,986
Shares may be used for Options.
(b) Additional Shares. If Awards are forfeited or terminate for any other
reason before being exercised, then the Shares underlying such Awards shall
again become available for Awards under the Plan. If SARs are exercised,
then only the number of Shares (if any) actually issued in settlement of
such SARs shall reduce the number available under Section 5(a) and the
balance shall again become available for Awards under the Plan.
(c) Dividend Equivalents. Any dividend equivalents distributed under the
Plan shall not be applied against the number of Shares available for
Awards.
(d) Limits on Options. No Key Employee shall receive Options to purchase
Shares during any fiscal year covering in excess of 1,384,800 Shares.
(e) Limits on Stock Grants. No Key Employee shall receive Stock Grants
during any fiscal year covering in excess of 225,000 Shares (in addition to
Stock Grants awarded under Section 8(h)).
(f) Limits on SARs. No Key Employee shall receive Awards of SARs for more
than 50% of the Shares subject to the corresponding Option.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreement. Each Grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and
conditions of the Plan and may be subject to any other terms and conditions
that are not inconsistent with the Plan and that the Committee deems
appropriate for inclusion in a Stock Option Agreement. The provisions of
the various Stock Option Agreements entered into under the Plan need not be
identical. The Stock Option Agreement shall also specify whether the
Option is an ISO or an NSO.
(b) Number of Shares. Each Stock Option Agreement shall specify the number
of Shares that are subject to the Option and shall be subject to adjustment
of such number in accordance with Section 10.
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(c) Exercise Price. An Option's Exercise Price shall be established by the
Committee and set forth in a Stock Option Agreement. To the extent required
by applicable law, the Exercise Price of an ISO shall not be less than 100%
of the Fair Market Value (110% for 10-Percent Shareholders) of a Share on
the date of Grant.
(d) Exercisability and Term. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option;
provided that the term of an Option shall in no event exceed 10 years from
the date of Grant. Notwithstanding the previous sentence, an ISO that is
granted to a 10-Percent Shareholder shall have a maximum term of five
years. Unless the applicable Stock Option Agreement provides otherwise, the
following rules shall govern the exercisability and term of Options: if the
Service of an Optionee is terminated for Cause, then the Option shall
terminate immediately. If the Service of an Optionee is terminated for any
reason other than for Cause, death, Disability or Retirement, then the
Option may be exercised by such Optionee or his or her personal
representative within 90 days after the date of such termination. In the
event of the Retirement of an Optionee, the Option may be exercised within
five years after the date of Retirement. In the event of the death or
Disability of an Optionee while providing Service, the Option shall become
fully vested and immediately exercisable, and may be exercised within five
years after the date of death or determination of Disability. In the event
of a termination due to Disability, an ISO will be treated as an NSO one
year and one day after such termination. In the event of a termination due
to Retirement, an ISO will be treated as an NSO 91 days after such
termination. In the event of a Change in Control, all Options shall vest
and become immediately exercisable. Notwithstanding any other provision of
the Plan, no Option can be exercised after the expiration date provided in
the applicable Stock Option Agreement. In no event shall the Company be
required to issue fractional Shares upon the exercise of an Option.
(e) Modifications or Assumption of Options. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the
Company or by another issuer) in return for the grant of new Options for
the same or a different number of Shares and at the same or a different
Exercise Price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair his or
her rights or obligations under such Option.
(f) Transferability of Options. Except as otherwise provided in the
applicable Stock Option Agreement and then only to the extent permitted by
applicable law, no Option shall be transferable by the Optionee other than
by will or by the laws of descent and distribution. Except as otherwise
provided in the applicable Stock Option Agreement, an Option may be
exercised during the lifetime of the Optionee only or by the guardian or
legal representative of the Optionee. No Option or interest therein may be
assigned, pledged or hypothecated by the Optionee during his or her
lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
(g) No Rights as Stockholder. An Optionee, or a transferee of an Optionee,
shall have no rights as a stockholder with respect to any Common Stock
covered by an Option until
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such person becomes entitled to receive such Common Stock by filing a
notice of exercise and paying the Exercise Price pursuant to the terms of
such Option.
(h) Restrictions on Transfer. Any Shares issued upon exercise of an Option
shall be subject to such rights of repurchase, rights of first refusal and
other transfer restrictions as the Committee may determine. Such
restrictions shall apply in addition to any restrictions that may apply to
holders of Shares generally and shall also comply to the extent necessary
with applicable law.
SECTION 7. PAYMENT FOR OPTION SHARES.
(a) General Rule. The entire Exercise Price of Shares issued upon exercise
of Options shall be payable in cash at the time when such Shares are
purchased, except as follows:
(i) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made
in any form(s) described in this Section 7.
(ii) In the case of an NSO granted under the Plan, the Committee may,
in its discretion at any time, accept payment in any form(s) described in
this Section 7.
(b) Surrender of Stock. To the extent that this Section 7(b) is
applicable, payment for all or any part of the Exercise Price may be made
with Shares which have already been owned by the Optionee for such duration
as is necessary to avoid a charge to the Company's earnings. Such Shares
shall be valued at their Fair Market Value on the date prior to the date of
exercise (or as of such other date as the Committee in a uniform and
nondiscriminatory manner shall determine).
(c) Cashless Exercise. To the extent that this Section 7(c) is
applicable, payment for all or a part of the Exercise Price may be made
through a "cashless exercise" program established by the Company.
(d) Promissory Note. To the extent that this Section 7(d) is applicable,
payment for all or any part of the Exercise Price may be made with a full-
recourse promissory note.
(e) Other Forms of Payment. To the extent that this Section 7(e) is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
SECTION 8. TERMS AND CONDITIONS FOR STOCK GRANTS.
(a) Time, Amount and Form of Awards. Awards under this Section 8 may be
granted in the form of a Stock Grant. A Stock Grant may also be awarded in
combination with NSOs, and such an Award may provide that the Stock Grant
will be forfeited in the event that the related NSOs are exercised.
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(b) Agreements. Each Stock Grant awarded under the Plan shall be evidenced
by a Stock Grant Agreement between the Participant and the Company. Such
Awards shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions that are not
inconsistent with the Plan that the Committee deems appropriate for
inclusion in the applicable Stock Grant Agreement. The provisions of the
Stock Grant Agreements entered into under the Plan need not be identical.
(c) Payment for Stock Grants. Stock Grants may be issued with or without
cash consideration under the Plan.
(d) Vesting Conditions. Each Stock Grant shall become vested, in full or
in installments, upon satisfaction of the conditions specified in the
applicable Stock Grant Agreement. Unless the Stock Grant Agreement
provides otherwise, in the event of a Change in Control, all Stock Grants
shall fully vest. If a Participant who is not an Outside Director ceases
to provide Service by reason of death, Disability or Retirement, or an
Outside Director ceases to be a director for any reason other than for
cause (as determined by the disinterested members of the Board or the
applicable Subsidiary's board of directors), then the Stock Grant(s) held
by the Participant shall fully vest.
(e) Assignment or Transfer of Stock Grants. Except as provided in Section
13, or in a Stock Grant Agreement, or as required by applicable law, a
Stock Grant awarded under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any
creditor's process, whether voluntarily, involuntarily or by operation of
law. Any act in violation of this Section 8(e) shall be void. However,
this Section 8(e) shall not preclude a Participant from designating a
beneficiary who will receive any outstanding Stock Grant Awards in the
event of the Participant's death, nor shall it preclude a transfer of Stock
Grant Awards by will or by the laws of descent and distribution.
(f) Trusts. Notwithstanding this Section 8 or any other provisions of the
Plan, but subject to advance written approval by the Committee, in its sole
discretion (and such conditions as the Committee may specify), a
Participant may transfer or assign a Stock Grant to the trustee of a trust
that is revocable by such Participant alone. Stock Grants held by such
trustee shall be subject to all of the conditions and restrictions set
forth in the Plan and in the applicable Stock Grant Agreement, as if such
trustee were a party to such Stock Grant Agreement.
(g) Voting and Dividend Rights. The holder of a Stock Grant awarded under
the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Stock Grant Agreement, however, may
require that the holder of such Stock Grant invest any cash dividends
received in additional Shares subject to the Stock Grant. Such additional
Shares subject to the Stock Grant shall be subject to the same conditions
and restrictions as the Stock Grant with respect to which the dividends
were paid. Such additional Shares subject to the Stock Grant shall not
reduce the number of Shares available under Section 5.
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(h) Performance Based Stock Grants. Subject to stockholder approval of
this Section 8(h), the Committee, in its discretion, also may make
discretionary Stock Grants to Employees. Such discretionary Stock Grants
may be made only (i) as a hiring bonus, (ii) as a reward for extraordinary
performance, or (iii) to provide additional incentives for future
performance. Any Stock Grant made pursuant to this Section 8(h) will be
subject to the achievement of performance objectives established by the
Committee. Such performance objectives shall be established pursuant to
the requirements of Code Section 162(m). The performance objectives with
respect to any performance periods (which may be up to 36 months in
duration) shall be based upon the Company's (and/or a business unit's)
earnings, earnings per share, revenue, expenses, net interest margin or
return on equity, as well as any individual performance objectives which
the Committee may establish, and shall be calculated in accordance with the
formula established for such performance period. An Employee shall only be
entitled to receive a Stock Grant pursuant to this Section 8(h) upon
attainment of the pre-established performance objectives. Before any
Shares of a Stock Grant are issued with respect to a performance period,
the Committee shall certify in writing that the performance objectives for
such period have been satisfied. In no event shall the Committee award to
any Employee Stock Grants for more than 276,961 Shares in any performance
period under this Section 8(h).
SECTION 9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.
(a) SAR Agreement. Each Award of an SAR under the Plan shall be evidenced
by an SAR Agreement between the Participant and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to
any other terms that are not inconsistent with the Plan. The provisions of
the various SAR Agreements entered into under the Plan need not be
identical. SARs may be granted in consideration of a reduction in the
Participant's other compensation.
(b) Number of Shares. Each SAR Agreement shall specify the number of
Shares to which the SAR pertains and is subject to adjustment of such
number in accordance with Section 10.
(c) Exercise Price. Each SAR Agreement shall specify the Exercise Price.
An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
(d) Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may
provide for accelerated exercisability in the event of the Participant's
death, Disability or Retirement or other events and may provide for
expiration prior to the end of its term in the event of the termination of
the Participant's Service. SARs shall be awarded in combination with
Options or Stock Grants, and such an Award shall provide that the SARs will
not be exercisable unless the related Options or Stock Grants are
forfeited. An SAR may be included in an ISO only at the time
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of Grant but may be included in an NSO at the time of Grant or at any
subsequent time, but not later than six months before the expiration of
such NSO. An SAR granted under the Plan may provide that it will be
exercisable only in the event of a Change in Control.
(e) Exercise of SARs. If, on the date when an SAR expires, the Exercise
Price under such SAR is less than the Fair Market Value on such date but
any portion of such SAR has not been exercised or surrendered, then such
SAR shall automatically be deemed to be exercised as of such date with
respect to such portion. Upon exercise of an SAR, the Participant (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (i) Shares, (ii) cash or (iii) any combination of
Shares and cash, as the Committee shall determine. The amount of cash
and/or the Fair Market Value of Shares received upon exercise of SARs
shall, in the aggregate, be equal to the amount by which the Fair Market
Value (on the date of surrender) of the Shares subject to the SARs exceeds
the Exercise Price.
(f) Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of outstanding SARs (including stock appreciation
rights granted by another issuer) in return for the grant of new SARs for
the same or a different number of Shares and at the same or a different
Exercise Price. The foregoing notwithstanding, no modification of an SAR
shall, without the consent of the Participant, alter or impair his or her
rights or obligations under such SAR.
SECTION 10. PROTECTION AGAINST DILUTION.
(a) Adjustments. In the event of a subdivision of the outstanding Shares,
a declaration of a dividend payable in Shares, a declaration of a dividend
payable in a form other than Shares in an amount that has a material effect
on the price of Shares, a combination or consolidation of the outstanding
Shares (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in
one or more of:
(i) the number of Shares available for future Awards under Section
5;
(ii) the per person limits on Awards in Section 5 and Section 8(h);
(iii) the number of Shares covered by each outstanding Award; or
(iv) the Exercise Price under each outstanding SAR or Option.
(b) Participant Rights. Except as provided in this Section 10, a
Participant shall have no rights by reason of any issue by the Company of
stock of any class or securities convertible into stock of any class, any
subdivision or consolidation of shares of stock of any class, the payment
of any stock dividend or any other increase or decrease in the number of
shares of stock of any class.
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SECTION 11. EFFECT OF A CHANGE IN CONTROL.
(a) Merger or Reorganization. In the event that the Company is a party to
a merger or other reorganization, outstanding Awards shall be subject to
the agreement of merger or reorganization. Such agreement may provide,
without limitation, for the assumption of outstanding Awards by the
surviving corporation or its parent, for their continuation by the Company
(if the Company is a surviving corporation), for accelerated vesting or for
their cancellation with or without consideration, in all cases without the
consent of the Participant.
(b) Acceleration. The Committee may determine, at the time of granting an
Award or thereafter, that such Award shall become fully vested as to all
Shares subject to such Award in the event that a Change in Control occurs
with respect to the Company.
SECTION 12. LIMITATIONS ON RIGHTS.
(a) Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent, a Subsidiary or an
Affiliate. The Company and its Parents and Subsidiaries and Affiliates
reserve the right to terminate the Service of any person at any time, and
for any reason, subject to applicable laws, the Company's Certificate of
Incorporation and Bylaws and a written employment agreement (if any).
(b) Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Shares
covered by his or her Award prior to the issuance of such Shares. No
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date when such Shares are issued, except as
expressly provided in Section 10.
(c) Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Shares or other
securities under the Plan shall be subject to all applicable laws, rules
and regulations and such approval by any regulatory body as may be
required. The Company reserves the right to restrict, in whole or in part,
the delivery of Shares or other securities pursuant to any Award prior to
the satisfaction of all legal requirements relating to the issuance of such
Shares or other securities, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
SECTION 13. WITHHOLDING TAXES.
(a) General. A Participant shall make arrangements satisfactory to the
Company for the satisfaction of any withholding tax obligations that arise
in connection with his or her Award. The Company shall not be required to
issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.
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(b) Share Withholding. If a public market for the Company's Shares
exists, the Committee may permit a Participant to satisfy all or part of
his or her withholding or income tax obligations by having the Company
withhold all or a portion of any Shares that otherwise would be issued to
him or her or by surrendering all or a portion of any Shares that he or she
previously acquired. Such Shares shall be valued based on the value of the
actual trade or, if there is none, the Fair Market Value as of the previous
day. Any payment of taxes by assigning Shares to the Company may be subject
to restrictions, including, but not limited to, any restrictions required
by rules of the Securities and Exchange Commission.
SECTION 14. DURATION AND AMENDMENTS.
(a) Term of the Plan. The Plan, as set forth herein, shall become
effective on the date of its adoption by the Board; provided, however,
that, as provided in Sections 5(a) and 8(h), certain provisions are subject
to the approval of the Company's stockholders. To the extent required by
applicable law, the Plan shall terminate on the date that is 10 years after
its original adoption by the Board and may be terminated on any earlier
date pursuant to Section 14(b).
(b) Right to Amend or Terminate the Plan. The Board may amend or terminate
the Plan at any time and for any reason. The termination of the Plan, or
any amendment thereof, shall not affect any Award previously granted under
the Plan. No Awards shall be granted under the Plan after the Plan's
termination. An amendment of the Plan shall be subject to the approval of
the Company's stockholders only to the extent required by applicable laws,
regulations or rules.
SECTION 15. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its
duly authorized officer to execute this Plan on behalf of the Company.
PROVIDIAN FINANCIAL CORPORATION
By _________________________________
Title ______________________________
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APPENDIX A
PROVIDIAN FINANCIAL CORPORATION
UK SUB-PLAN
SECTION 1. BACKGROUND AND PURPOSE.
(a) The Company's Board of Directors adopted the Providian Financial
Corporation 2000 Stock Incentive Plan (the "Plan") on February 16, 2000.
The Plan is an amendment and restatement of the 1997 Stock Option Plan and
the Stock Ownership Plan into a single document.
(b) On May 11, 1999 the Company's Board of Directors adopted a UK sub-plan
both in respect of the 1997 Stock Option Plan and the Stock Ownership Plan,
as an amendment and restatement of the two aforementioned plans. This
document constitutes the additional provisions (the "UK Sub-Plan") that are
to be read in conjunction with the Plan and are applicable to those
Participants under the Plan who are liable to income tax in the United
Kingdom. This UK Sub-Plan was adopted by the Company on March 24, 2000, as
an amendment and restatement of the Plan.
(c) The purpose of this UK Sub-Plan is to advance the interest of the
Company by enabling it and its operating companies to attract and retain
the best available personnel for positions of substantial responsibility in
the United Kingdom and to provide key directors and employees of the
Company and its operating companies, in the United Kingdom, with an
opportunity for investment in the Company; thereby giving them an
additional incentive to increase their efforts on behalf of the long term
success of the Company and its operating companies.
SECTION 2. DEFINITION AND CONSTRUCTION.
(a) All terms used in this UK Sub-Plan shall have the meaning ascribed to
them in the Plan, and if not defined in the Plan, shall be given their
normal and ordinary meaning except that:
(i) "Cause" means a conviction of a Participant of an offence
triable on indictment or triable either way under the laws of
the United Kingdom or any other comparable offence under the
laws of any other country or a Participant's wilful misconduct
or dishonesty (as such terms are defined by the Committee in its
sole discretion), any of which is determined by the Committee to
be directly and materially harmful to the business or reputation
of the Company or its Subsidiaries or its Affiliates;
(ii) "Consultant" means an individual who performs bona fide services
to the Company, a Parent, a Subsidiary or an Affiliate, other
than as an Employee or Director or Non-Employee Director, who in
any such case is liable to income tax in the United Kingdom in
respect of an Award;
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(iii) "Director" means a member of the Board who is also an Employee
and who is liable to income tax in the United Kingdom in respect
of an Award;
(iv) "Employee" means an individual who is a full-time or part-time
employee of the Company or a subsidiary, who in any case is
liable to income tax in the United Kingdom in respect of an
Award;
(v) "Non-Employee Director" means a member of the Board who is not
an Employee but who is liable to income tax in the United
Kingdom in respect of an Award;
(vi) "Non-statutory Stock Option" or "NSO" means a United Kingdom
share option which has not received the approval of the Inland
Revenue for the purposes of Section 185 Income and Corporation
Taxes Act 1988.
(vii) "UK Sub-Plan" means the provisions contained herein to be known
as the Providian Financial Corporation 2000 Stock Incentive Plan
UK Sub-Plan, as the same may be amended from time to time;
(b) Any references to Incentive Stock Options or ISOs in the Plan shall be
ignored for the purposes of this UK Sub-Plan.
(c) Any reference to a liability to income tax in the United Kingdom in
respect of an Award shall be deemed to include any such liability arising
in respect of Grant, vesting, exercise or any other event.
SECTION 3. INCORPORATION OF PLAN.
This UK Sub-Plan shall be ancillary and secondary to the Plan, and the
provisions of this UK Sub-Plan shall be applicable to any Key Employee, Optionee
or Participant who has or shall have a liability to United Kingdom income tax in
respect of his or her Award, in which case the provisions of this UK Sub-Plan
shall equally apply as well as the provisions of the Plan under which the Award
was granted. For the avoidance of doubt, this UK Sub-Plan does not apply to any
Key Employees, Optionees or Participants who do not have a United Kingdom income
tax liability in respect of their Award.
SECTION 4. VESTING PERIOD.
Any vesting period, when defined by the passage of time, pursuant to Section 8
of the Plan, in respect of a Stock Grant, shall not exceed a period of five
years from the date the Stock Grant is awarded, unless the Committee expressly
determines otherwise.
SECTION 5. WITHHOLDING.
(a) A Participant shall indemnify and keep indemnified, the Company, the
Parent, the Subsidiaries and the Affiliates (collectively the "Group"), on
demand in respect of any
A-2
<PAGE>
income tax or primary Class I National Insurance contribution for which any
such company is liable to account to the Inland Revenue under the Pay-As-
You-Earn ("PAYE") system and for which it would not have been liable to
account but for the Participant's participation in the Plan (save to the
extent that any such company has already recovered any such income tax or
National Insurance contribution by deduction under the PAYE system).
(b) Any company in the Group shall be entitled, if it wishes, to deduct
and retain any amount to which it is entitled under this Section 5 from any
payment which is due from it to the Participant.
(c) The Company (in its own right and as trustee for any other company in
the Group) shall have a lien over any Shares, whether fully or partly paid,
which have been issued, or are to be issued, to a Participant as security
for an amount to which any company in the Group is entitled under this
Section 5 from the Participant. The Company shall be entitled to register
in the names of such nominee for the Participant as the Company shall
direct such number of shares to be issued upon exercise of the Option as
the Company determines will have sufficient value, after taking into
account any expenses of sale, to cover any amount under this Section 5,
such shares (the "Indemnity Shares") to be held by the nominee on the
following basis:
(i) if the Participant makes full payment of any sum due under this
Section 5 within 30 days of written demand therefor being made by
the Company, the Indemnity Shares shall be re-registered in the
Participant's name; and
(ii) if the Participant does not make payment as specified above, then
the nominee shall be authorised and instructed to sell such
number of the Indemnity Shares as the Company may direct be sold
and shall account to (a) the relevant company for the proceeds of
sale up to the amount required to satisfy the Participant's
liability under this Section 5 and (b) the Participant for any
balance of any said proceeds after deducting any expenses of
sale.
(d) For the avoidance of doubt, this Section 5 shall apply in addition to
the provisions of Section 3(c) of the Plan.
A-3
<PAGE>
Appendix B to Schedule 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
filed by
Providian Financial Corporation
The following "2000 Management Incentive Plan" is being filed with the
Securities and Exchange Commission pursuant to Instruction 3 of Item 10 of
Schedule 14A. It is not to be deemed to be "soliciting material" or "filed"
with the Commission.
<PAGE>
EXHIBIT 10.6
PROVIDIAN FINANCIAL CORPORATION
2000 MANAGEMENT INCENTIVE PLAN
(AMENDED AND RESTATED FEBRUARY 16, 2000)
1. PURPOSE
The purpose of this amended and restated Plan is to motivate and reward eligible
employees for good performance by making a portion of their cash compensation
dependent on the achievement of certain Performance Goals related to the
performance of Providian Financial Corporation (the "Company") and its operating
units. This Plan is designed to ensure that the incentives paid hereunder to
executive officers of the Company are deductible under Section 162(m) of the
Internal Revenue Code of 1986, as amended, and the regulations and
interpretations promulgated thereunder (the "Code"). Accordingly, the adoption
of this Plan as to "covered employees" under Code Section 162(m) is subject to
the approval of the Company's stockholders pursuant to Code Section 162(m).
2. PARTICIPANTS
The participants in this Plan shall be key employees of the Company, as
determined by the Committee.
3. THE COMMITTEE
The Committee shall consist of at least two outside directors of the Company
that satisfy the requirements of Code Section 162(m). The Committee shall have
the sole discretion and authority to administer and interpret this Plan in
accordance with Code Section 162(m). Unless the Board provides otherwise, the
Human Resources Committee of the Company's Board of Directors shall be the
Committee.
4. AMOUNT OF BONUS
A participant's bonus payment, if any, is based on (i) an individual target set
by the Committee in writing with respect to the Performance Period and (ii) the
Performance Goal or Goals for the Performance Period (increased or decreased, in
each case in accordance with factors adopted by the Committee with respect to
the Performance Period that relate to unusual items). However, no bonus in
excess of 200% of the annualized highest rate of base salary paid to any
executive of the Company with respect to 1999 as reported in the Company's proxy
statement for the 2000 Annual Meeting will be paid to any participant with
respect to a Performance Period. The Committee may also reduce an individual's
maximum bonus calculated under the preceding formula in its sole discretion.
This Plan's "Performance Goals" may include one or more of the following: (i)
earnings; (ii) earnings per share; (iii) revenue; (iv) expenses; (v) net
interest margin; and (vi) return on equity, each with respect to the Company
and/or any operating unit(s) of the Company, as determined by the Committee in
its sole discretion. A "Performance Period" shall be, with respect to a
participant, any period not exceeding 36 months, as determined by the Committee
in its sole discretion. Bonuses to be paid to participants who are not subject
to the
<PAGE>
limitations of Code Section 162(m) may take into account other factors. The
Committee, in its sole discretion, may permit a participant to defer receipt of
cash that would otherwise be delivered to the participant under this Plan. Any
such deferral elections shall be subject to such rules and procedures as
determined by the Committee in its sole discretion. The selection and adjustment
of applicable Performance Goals, and the establishment of targets, shall occur
in compliance with the rules of Code Section 162(m).
5. PAYMENT OF BONUS
Subject to the Committee's discretion, the payment of a bonus generally requires
that the participant be on the Company's payroll as of the date the bonus is to
be paid. The Committee may make exceptions to this requirement in the case of
retirement, death or disability or under other circumstances, as determined by
the Committee in its sole discretion. Bonus payments may be made (i) in cash,
(ii) in shares of Company stock granted under the Company's 2000 Stock Incentive
Plan, as replaced, modified, amended or supplemented from time to time (the
"2000 Stock Plan") or under the Company's 1999 Non-Officer Equity Incentive
Plan, as replaced, modified, amended or supplemented from time to time (the
"1999 Non-Officer Plan"), and/or (iii) in options to purchase Company stock
granted under the Company's 2000 Stock Plan or the 1999 Non-Officer Plan, as
determined by the Committee in its sole discretion. The number of shares granted
shall be determined by dividing the cash amount forgone by the fair market value
(as defined under the 2000 Stock Plan or the 1999 Non-Officer Plan) of a share
on the date in question. Options granted pursuant to this Section 5 shall have a
fair value equal to the amount of cash forgone, which fair value shall be based
on the Black-Scholes or other objective method determined by the Committee, in
its sole discretion. No bonus shall be paid unless and until the Committee
certifies in writing the extent to which the Performance Goal(s) applicable to a
participant have been achieved or exceeded. The Committee may establish
different Performance Periods for different participants, and the Committee may
establish concurrent or overlapping Performance Periods.
6. AMENDMENT AND TERMINATION
The Board of Directors reserves the right to amend or terminate this Plan at any
time with respect to future services of participants. Plan amendments will
require stockholder approval only to the extent required by applicable law.
7. LEGAL CONSTRUCTION
Except where otherwise indicated by the context, any masculine term used herein
also shall include the feminine; the plural shall include the singular and the
singular shall include the plural. In the event any provision of this Plan shall
be held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of this Plan, and this Plan shall be construed
and enforced as if the illegal or invalid provision had not been included. The
granting of awards under this Plan shall be subject to all applicable laws,
rules and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required. This Plan and all awards shall
be construed in accordance with and governed by the laws of the State of
Delaware, but without regard to its conflict of law provisions. Captions are
2
<PAGE>
provided herein for convenience only, and shall not serve as a basis for
interpretation or construction of this Plan.
3
<PAGE>
Exhibit 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 1,624,276 $ 842,579 $ 582,493 $ 584,182 $ 470,513
Interest expense 449,070 247,266 183,110 189,569 157,883
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,175,206 595,313 399,383 394,613 312,630
Provision for credit losses 1,099,131 545,929 149,268 126,579 79,917
Non-interest income 2,412,476 1,266,179 634,632 423,819 344,805
Non-interest expense 1,571,126 825,000 573,447 434,602 362,655
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 917,425 490,563 311,300 257,251 214,863
Income tax expense 367,153 194,117 119,839 97,485 79,411
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 550,272 $ 296,446 $ 191,461 $ 159,766 $ 135,452
=================================================================================================================================
Cash dividends declared per common share/(1)/ $ 0.20 $ 0.15 $ 0.07 -- --
=================================================================================================================================
Earnings per share-assuming dilution/(2)/ $ 3.78 $ 2.04 $ 1.33 $ 1.08 $ 0.89
=================================================================================================================================
STATEMENT OF FINANCIAL CONDITION DATA
Loans held for securitization or sale $ - $ - $ 450,233 $ 739,706 $ 123,330
Loans receivable/(3)/ 11,609,954 5,741,106 2,960,676 2,949,928 3,020,174
Allowance for credit losses (1,028,377) (451,245) (145,312) (114,540) (93,429)
Total assets 14,340,877 7,231,215 4,449,413 4,351,742 3,620,893
Deposits 10,538,123 4,672,298 3,212,766 3,390,112 2,157,765
Borrowings 1,084,345 872,257 232,000 258,500 942,680
Equity 1,332,476 803,187 595,114 483,144 349,255
MANAGED FINANCIAL DATA
Credit cards $ 19,049,591 $ 12,138,380 $ 8,838,607 $ 8,348,252 $ 5,906,469
Home loans 1,976,862 1,106,568 1,063,446 951,382 722,878
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans $ 21,026,453 $ 13,244,948 $ 9,902,053 $ 9,299,634 $ 6,629,347
=================================================================================================================================
Securitized loans $ 9,416,499 $ 7,503,842 $ 6,491,144 $ 5,610,000 $ 3,485,843
Managed revenue 4,195,232 2,373,012 1,507,223 1,093,610 817,710
KEY STATISTICS
Total accounts (000s) at year-end 12,394 7,904 4,617 3,849 2,815
Managed net interest margin/(4)/ 12.33% 11.80% 11.23% 10.89% 11.80%
Managed delinquency ratio/(5)/ 5.66% 5.33% 4.22% 4.36% 3.34%
Managed loan net credit loss ratio/(6)/ 6.94% 7.58% 6.32% 4.82% 3.95%
Net income to average managed assets/(7)/ 3.02% 2.30% 1.81% 1.91% 2.24%
Net income to average equity 52.37% 42.76% 36.79% 38.43% 38.85%
Equity to managed assets 5.62% 5.50% 5.29% 4.85% 4.91%
</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) Represents all consumer credit products.
(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 that 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 include total managed assets of the Company,
including all consumer loan portfolios.
<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 in this Annual Report and the
data set forth under "Selected Financial Data." Prior to June 1997, the Company
operated as a separate business unit of the former Providian Corporation. 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"). The
discussion of comparative financial results that includes the year ended
December 31, 1997 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 do not 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. In addition, the historical financial statements of the Company may not
be indicative of the Company's future performance. Certain prior year amounts
included in the tables herein have been reclassified to conform to the 1999
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 that 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, operations, and litigation. These and other risks and
uncertainties are described in detail in the Company's 1999 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 and membership services products. In addition, the Company offers various
deposit products, including retail deposit products offered on the Internet. In
1999, the Company purchased GetSmart.com, Inc., an online marketplace that
provides consumer and business financial product information and lender
connections through proprietary search and application technology. 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
within the United States and in the United Kingdom. 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 margin 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 primarily through finance charges assessed on
outstanding loans receivable, through fees paid by customers related to loan
activity and performance (late, overlimit, cash advance, processing, and annual
membership fees), and from membership services revenue, which results from the
sale of various proprietary services that complement the Company's credit
products. 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.
The Company's primary expenses are the costs of funding assets, credit
losses, operating expenses, including salaries and employee benefits,
advertising and solicitation costs, data processing and communication costs, and
income taxes. Solicitation costs (such as printing, postage, and credit bureau
costs) are incurred and expensed prior to the acquisition of new accounts, while
the revenue associated with the accounts is earned over the life of the acquired
accounts. In accordance with generally accepted accounting principles (GAAP),
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).
The Company's return on average assets has steadily improved over the past
three years, increasing to 5.37% in 1999. The Company's market focus is to seek
out profitable consumer segments and apply its risk adjusted, return driven
approach to customer segmentation and pricing. The Company believes this
strategy is responsible for its continued overall superior financial
performance. The Company continued to strengthen its
27
<PAGE>
balance sheet in 1999 with improved profitability, combined with a high level of
capital retention, and was able to increase its return on equity to 52.37% in
1999 from 42.76% in 1998.
Beginning in May 1999, the Company was the subject of media coverage
concerning complaints made by some of its customers regarding certain sales and
collections practices. Following the initial media coverage, the San Francisco
District Attorney's Office began an investigation into the Company's sales and
collections practices, including the marketing of certain membership services
products and the posting of customer payments. In November 1999, the Company
received an inquiry from the Connecticut Attorney General's Office seeking
information in connection with a civil investigation into the Company's credit
card issuance and billing practices. A number of lawsuits including putative
class actions, some of which have been consolidated, have been filed against the
Company and, in some cases, against certain of the Company's subsidiaries by
current and former customers of the Company, alleging unfair and deceptive
business practices. Another putative class action (In re Providian Securities
Litigation) alleges, in general, that the Company and certain of its officers
made false and misleading statements concerning its future prospects and
financial results in violation of the federal securities laws. For more detailed
information on legal proceedings affecting the Company, see "Legal Proceedings"
in Item 3 of Part I of the Company's 1999 Annual Report on Form 10-K.
On February 29, 2000, the Company announced that it is realigning resources
previously dedicated to its home loan business. The Company expects to utilize
these resources, including employees and facilities, in its credit card and
e-commerce businesses, which are experiencing rapid growth and have greater
potential returns, and to continue to service its existing home loan portfolio.
The Company plans to provide access to home loan products online through its
GetSmart.com Web site to new and existing customers. As a result, the Company
will refer home loans to other lenders rather than originating them. The Company
does not expect the realignment of resources dedicated to its home loan business
to have a material impact on its financial condition or results of operations.
EARNINGS SUMMARY
The following discussion provides a summary of 1999 results compared to 1998
results and 1998 results compared to 1997 results. Each component of the results
is discussed in further detail in subsequent sections of this analysis.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net income
for the year ended December 31, 1999 was $550.3 million, representing an
increase of 86% over net income of $296.4 million for the year ended December
31, 1998. The underlying drivers of performance for the Company during 1999 were
account and managed loan growth, which, in turn, drove revenue growth. Managed
loans, which include reported and securitized loans, increased by $7.8 billion,
or 59%, during the year ended December 31, 1999. This growth was achieved
through increases in the Company's loan originations (particularly loans made
under lower line credit card products) and product upgrades for qualifying
customers in our lower line classic and secured card portfolios. Accounts grew
by 4.5 million as a result of our various marketing campaigns and improved
customer retention associated with the Company's customer satisfaction programs.
Managed revenue for 1999 was more equally distributed between net interest
income and non-interest income compared to 1998, during which managed revenue
was slightly weighted toward net interest income. Managed net interest income
was $2.11 billion in 1999 as compared to $1.36 billion in 1998, representing 55%
growth. The managed net interest margin on loans increased to 12.33% in 1999
from 11.80% in 1998. This increase reflects a 44% increase in average managed
loans, concentrated in the Company's higher yielding portfolios, and reduced
reliance on low introductory rate offers. Managed non-interest income grew 106%
to $2.09 billion in 1999 compared to $1.01 billion in 1998. The combination of
57% account growth and improvements in loan activity fees, membership services
revenue, and loan performance fees drove these positive results.
The managed net credit loss rate decreased to 6.94% in 1999 from 7.58% in
1998, reflecting strong asset growth and improved credit loss rates on acquired
portfolios. The 30+ day managed delinquency rate as of December 31, 1999
increased to 5.66% from 5.33% for the same date in 1998 and reflects the
seasoning of the Company's lower line asset classes. This seasoning is expected
to result in a reversal of the favorable loan loss trend the Company realized
during 1999, with the managed net credit loss rate expected to increase in 2000.
Non-interest expense increased $746.1 million during 1999 to $1.57 billion, due
to the expenses associated with servicing a greater number of customers and
increased marketing activity.
<TABLE>
<CAPTION>
RETURN ON ASSETS RETURN ON EQUITY
(percent) (percent)
<S> <C> <C> <C> <C> <C>
97 98 99 97 98 99
4.57 5.10 5.37 36.79 42.76 52.37
</TABLE>
28
<PAGE>
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 membership services
products to the Company's existing customers and 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 reported
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 credit card products) and activation of existing customer accounts
("core accounts").
Repricing programs implemented in 1997 to manage for risk adjusted return
contributed to an increase in the Company's managed net interest margin on loans
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 $1.01 billion, resulting from
increased sales of membership services products and increased revenue from loan
activity and performance 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 $825 million, due to the expenses associated with servicing a greater
number of customers and increased marketing activity.
<TABLE>
<CAPTION>
NET INCOME
($ in millions)
<S> <C> <C>
97 98 99
191.5 296.4 550.3
</TABLE>
MANAGED CONSUMER LOAN PORTFOLIO AND THE IMPACT OF SECURITIZATION
The Company securitizes credit card, home loan, and secured credit card
receivables. For additional discussion of the Company's securitization
activities, see "-Funding and Liquidity." Securitized assets sold to external
investors are not considered assets of the Company and therefore are not shown
on the Company's consolidated statements of financial condition. It is, however,
the Company's practice to analyze its financial performance on a managed loan
portfolio basis. To perform this analysis, the Company uses an adjusted income
statement and statement of financial condition, which add back the effect of
securitizations. The following table summarizes the Company's managed loan
portfolio:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR-END BALANCES
Reported consumer loans $ 11,609,954 $ 5,741,106 $ 3,410,909
Securitized consumer loans 9,416,499 7,503,842 6,491,144
- -----------------------------------------------------------------------------------------
Total managed consumer
loan portfolio $ 21,026,453 $ 13,244,948 $ 9,902,053
=========================================================================================
AVERAGE BALANCES
Reported consumer loans $ 8,399,577 $ 4,621,709 $ 3,173,231
Securitized consumer loans 8,082,412 6,821,800 6,192,243
- -----------------------------------------------------------------------------------------
Total average managed
consumer loan portfolio $ 16,481,989 $ 11,443,509 $ 9,365,474
=========================================================================================
OPERATING DATA AND RATIOS
Reported:
Average earning assets $ 9,600,878 $ 5,237,785 $ 3,632,200
Return on average assets 5.37% 5.10% 4.57%
Net interest margin/(1)/ 12.24% 11.37% 11.00%
Managed:
Average earning assets $ 17,683,290 $ 12,059,585 $ 9,824,443
Return on average assets 3.02% 2.30% 1.81%
Net interest margin/(1)/ 11.92% 11.29% 10.66%
</TABLE>
(1) Net interest margin is equal to net interest income divided by average
earning assets.
29
<PAGE>
Financial Statement Impact Securitizations are treated as sales under GAAP. The
Company receives the proceeds of the sale, and the securitized loans are removed
from the Company's consolidated statements of financial condition. In certain
cases, the Company has retained a subordinated interest in the pool of assets
included in a securitization, with a right to receive collections allocated to
such subordinated interest after payment to investors. Such retained interests
are recorded at fair value and are included in "Due from securitizations" on the
Company's consolidated statements of financial condition. At the time it enters
into a securitization, the Company recognizes an "interest-only strip
receivable" asset, which is the present value of the projected excess servicing
income during the period the securitized loans are projected to be outstanding.
"Excess servicing income" refers to the excess of the finance charge and fee
revenue generated by the securitized loans over the sum of the interest paid to
investors, related credit losses, servicing fees, and other transaction
expenses. During the revolving period of a securitization, an additional
interest-only strip receivable is recognized each month, as additional
receivables are transferred to investors to replenish the investors' share of
principal collections on the securitized loans. Revenue resulting from excess
servicing income is recognized each month first as a reduction of the
interest-only strips receivable and then, to the extent the amount received
exceeds the related component of the interest-only strips receivable, as
servicing and securitization income.
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 consolidated statements of
financial condition as loans receivable at par less the associated allowance for
credit losses. Periodically, the Company transfers new loans receivable into a
securitized pool in order to maintain the seller's interest above an agreed-upon
minimum balance.
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 effect of securitization accounting 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. For the years ended December
31, 1999, 1998, and 1997, securitization accounting had the effect of: reducing
net interest income by $933 million, $767 million, and $648 million; reducing
the provision for credit losses by $607 million, $512 million, and $473 million;
and increasing non-interest income by $326 million, $255 million, and $175
million. Because credit losses on the securitized loans are reflected as a
reduction in servicing and securitization income rather than a reduction of the
allowance for credit losses, the Company's provision for credit losses is lower
than would be the case had such loans not been securitized.
Cash Flow Impact When loans are securitized, the Company receives cash proceeds
from investors, net of underwriting or placement fees. The Company uses these
proceeds to reduce other funding liabilities, invest in short-term liquid
investments, fund new loans, and for other general corporate purposes. 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 the investors' share of principal collections in
exchange for the transfer of additional loans receivable 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.
RISK ADJUSTED REVENUE AND RETURN
The Company has developed segmentation 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. Various
30
<PAGE>
credit products are offered to customer segments under separate underwriting
criteria. Interest rates are sometimes adjusted after the account is opened to
reflect changes in the credit environment. Many accounts include performance-
based pricing terms pursuant to which interest rates may increase if the
customer fails to comply with the terms of the account agreement.
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 on loans plus non-interest 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,
1999 were $2.97 billion and 18.05%, compared to $1.49 billion and 13.06% for the
year ended December 31, 1998. The increase during 1999 was a result of growth in
portfolios with higher yields priced according to customer risk, declining use
of low introductory rates on new accounts, and strong growth in fee revenue per
customer. The increase in managed risk adjusted revenue and return also reflects
the decrease in managed net credit loss rates, which were 6.94% for the year
ended December 31, 1999, compared to 7.58% for the previous year, reflecting
strong asset growth and declining credit loss rates on acquired portfolios.
Managed risk adjusted revenue and return for the year ended December 31,
1998 were $1,493.8 million and 13.06%, compared to $919.7 million and 9.82% for
the year ended December 31, 1997. The increase during 1998 was a result of
increased yields on portfolios priced to address customer risk, declining use of
introductory rates on new accounts, and higher fee revenue per customer. The
increase was partially offset by an increase in managed net credit losses, which
were 7.58% for the year ended December 31, 1998, compared to 6.32% for the
previous year, reflecting higher credit loss rates on acquired portfolios.
<TABLE>
<CAPTION>
RISK ADJUSTED REVENUE/(1)/ RISK ADJUSTED RETURN/(1)/
($ in millions) (percent)
<S> <C> <C> <C> <C> <C>
97 98 99 97 98 99
919.7 1,493.8 2,974.4 9.82 13.06 18.05
</TABLE>
/(1)/ Presented on a managed /(1)/ Presented as a percentage
loan basis. of managed loans.
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 and investment portfolios less
interest expense on deposits and borrowings. Managed net interest income
includes net interest income and interest earned from securitized loans
receivable and spread accounts less interest paid to securitization investors.
Managed net interest income for the year ended December 31, 1999 was $2.11
billion, compared to $1.36 billion for 1998, representing an increase of $746
million, or 55%. Managed net interest margin on average managed loans increased
to 12.33% for the year ended December 31, 1999, from 11.80% for the year ended
December 31, 1998. The increase in managed net interest income and margin
resulted from an increase of approximately $5.0 billion in average managed loans
combined with higher finance charge yields. The higher finance charge yields
resulted from an increase in the number of lower line credit card accounts,
which generate higher overall finance charge rates and fee income, consistent
with the Company's risk adjusted approach to pricing.
Managed net interest income for the year ended December 31, 1998 was $1.36
billion, compared to $1.05 billion for 1997, representing an increase of $314
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 of approximately $2.1 billion in average managed loans,
combined with higher finance charge yields related to an increase in the number
of accounts for lower line credit card products.
The Company offers both variable rate and fixed rate consumer loan products
and maintains both fixed rate and variable rate funding sources. See "-
Asset/Liability Risk Management" for a discussion of the Company's interest rate
risk management strategy.
<TABLE>
<CAPTION>
NET INTEREST INCOME/(1)/ NET INTEREST MARGIN/(1)/
($ in millions) (percent)
<S> <C> <C> <C> <C> <C>
97 98 99 97 98 99
1,047.5 1,361.9 2,108.3 11.23 11.80 12.33
</TABLE>
/(1)/ Presented on a managed /(1)/ Presented as a percentage
loan basis. of managed loans.
31
<PAGE>
STATEMENT OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
The following table provides an analysis of reported interest income, interest
expense, net interest spread, and average balances for the years ended December
31, 1999, 1998, and 1997. Interest income and interest expense margins are
presented as a percentage of average earning assets, which include
interest-earning consumer loan portfolios and investments held for liquidity
purposes.
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 8,399,577 $ 1,559,285 18.56% $ 4,621,709 $ 807,824 17.48% $ 3,173,231 $ 556,918 17.55%
Interest-earning cash 127,455 6,222 4.88% 43,493 2,262 5.20% 88,048 4,812 5.47%
Federal funds sold 663,884 34,334 5.17% 264,669 14,071 5.32% 239,267 13,170 5.50%
Investment securities 409,962 24,435 5.96% 307,914 18,422 5.98% 131,654 7,593 5.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 9,600,878 $ 1,624,276 16.92% 5,237,785 $ 842,579 16.09% 3,632,200 $ 582,493 16.04%
Allowance for loan losses (700,908) (327,689) (131,602)
Other assets 1,344,302 897,403 685,370
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $10,244,272 $ 5,807,499 $ 4,185,968
===================================================================================================================================
LIABILITIES AND EQUITY
Interest-bearing liabilities
Deposits $ 6,495,080 $ 356,736 5.49% $ 3,736,523 $ 204,335 5.47% $ 3,014,087 $ 164,252 5.45%
Borrowings 1,543,719 92,334 5.98% 712,478 42,931 6.03% 310,017 18,858 6.08%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 8,038,799 $ 449,070 5.59% 4,449,001 $ 247,266 5.56% 3,324,104 $ 183,110 5.51%
Other liabilities 994,783 505,167 196,182
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,033,582 4,954,168 3,520,286
Capital securities 160,000 160,000 145,096
Equity 1,050,690 693,331 520,586
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $10,244,272 $ 5,807,499 $ 4,185,968
===================================================================================================================================
NET INTEREST SPREAD 11.33% 10.53% 10.53%
===================================================================================================================================
Interest income to
average interest-
earning assets 16.92% 16.09% 16.04%
Interest expense to
average interest-
earning assets 4.68% 4.72% 5.04%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 12.24% 11.37% 11.00%
===================================================================================================================================
</TABLE>
32
<PAGE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 vs. 1998 1998 vs. 1997
- -------------------------------------------------------------------------------------------------------
Increase Change due to/(1)/ Increase Change due to/(1)/
--------------------- --------------------
(Decrease) Volume Rate (Decrease) Volume Rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Consumer loans $ 751,461 $ 698,653 $ 52,808 $ 250,906 $ 253,136 $ (2,230)
Federal funds sold 20,263 20,671 (408) 901 1,347 (446)
Other securities 9,973 10,182 (209) 8,279 8,220 59
- -------------------------------------------------------------------------------------------------------
Total interest income 781,697 729,506 52,191 260,086 262,703 (2,617)
INTEREST EXPENSE
Deposits 152,401 151,650 751 40,083 39,478 605
Borrowings 49,403 49,762 (359) 24,073 24,230 (157)
- -------------------------------------------------------------------------------------------------------
Total interest expense 201,804 201,412 392 64,156 63,708 448
- -------------------------------------------------------------------------------------------------------
Net interest income $ 579,893 $ 528,094 $ 51,799 $ 195,930 $ 198,995 $ (3,065)
=======================================================================================================
</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 table.
NON-INTEREST INCOME
Non-interest income, which consists primarily of servicing and securitization
income and credit product fee income, represented approximately 60% of gross
reported revenues for each of the years ended December 31, 1999 and 1998. Total
non-interest income increased 90.5%, or $1.15 billion, to $2.41 billion in 1999
over 1998. This increase is attributable to increased credit product fee income
realized from membership services revenue and loan activity and loan performance
fees resulting from an increased customer base.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
($ in millions)
<S> <C>
1997 634.6
1998 1,266.2
1999 2,412.5
</TABLE>
Total non-interest income increased 99.5%, or $631.5 million, to $1.27
billion in 1998 over 1997. This increase was attributable to increased credit
product fee income realized from membership services revenue, loan activity and
performance fees, and higher average securitized loan balances.
Servicing and Securitization Income Servicing and securitization income relates
directly to securitized loans. It includes a servicing fee, which generally
offsets the Company's cost of servicing the securitized loans, excess servicing
income, and gains or losses from the transfer of financial assets (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, the Company will recognize additional
servicing and securitization income during the period in which the servicing is
provided.
The Company has issued $15.7 billion in public and private asset-backed
securities since 1989 and has increased the amount of receivables securitized as
the amount of total managed loans has increased. As of
33
<PAGE>
December 31, 1999, securitizations outstanding provided $9.3 billion in funding,
representing 42% of total managed funding, compared with $7.4 billion, or 53%,
as of December 31, 1998 and $6.8 billion, or 62%, as of December 31, 1997.
Securitizations outstanding decreased as a percentage of total managed funding
as of December 31, 1999, due to the Company's efforts to diversify its funding
sources and increase deposit funding. A more detailed discussion of the
Company's funding sources and the role of securitization activities is set forth
under "--Funding and Liquidity."
Because excess servicing income on securitized loans essentially represents
a recharacterization of net interest income and credit product fee income less
the provision for loan losses and servicing expense, it will vary based upon
those 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, 1999, servicing and securitization income
increased $60.9 million from the prior year, to $620.2 million. Excess servicing
yields on securitized loans remained stable, with increasing finance charge and
fee revenue being offset by increases in net credit losses related to the
securitization of acquired portfolios. The increase in excess servicing revenue
was partially offset by a reduction in the interest earned on principal funding
accounts compared to the prior year due to the repayment of securitizations that
matured in September 1998. For the year ended December 31, 1998, servicing and
securitization 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 loans receivable, partially
offset by increased net credit losses and a year-over-year reduction of the gain
on sale upon transfer of assets. See "--Managed Consumer Loan Portfolio and the
Impact of Securitization."
Credit Product Fee Income Credit product fee income includes loan activity fees,
loan performance fees, and membership services revenue. For the years ended
December 31, 1999, 1998, and 1997, credit product fee income was $1,754.1
million, $703.5 million, and $230.8 million. The Company expects credit product
fee income growth to moderate in 2000. Certain fee revenue realized from
securitized loans is not included in credit product fee income but instead is
recorded as part of servicing and securitization income.
Strong growth in new customers, customers that purchased membership
services products, and rising loan activity fee volume contributed to an
increase in credit product fee income during the year ended December 31, 1999
over 1998. For the years ended December 31, 1999, 1998, and 1997, loan activity
fees, which include interchange income and cash advance, annual membership, and
processing fees, totaled $803.5 million, $349.9 million, and $103.2 million.
Loan activity fee income increased as account growth resulted in increased
annual membership fees, cash advance fees, and interchange income. Loan
performance fees include late, returned check, and overlimit charges. For the
years ended December 31, 1999, 1998, and 1997, loan performance fees totaled
$386.4 million, $197.4 million, and $84.6 million, reflecting account growth and
increases in late fee rates. Membership services revenue results primarily from
the sale of Credit Protection, Home Protection, Providian Health Advantage,
Destination Unlimited, and various other proprietary services that complement
the Company's credit products.(1) The Company recognizes membership services
revenue ratably over the term of the product, net of an allowance for estimated
refunds, beginning after the end of the free or money-back guarantee period, if
any. For the years ended December 31, 1999, 1998, and 1997, membership services
revenue totaled $564.1 million, $156.1 million, and $43.0 million. The increases
reflect increased penetration rates for sales of membership services products
and increases in the customer base of the Company's lower line credit card
product offerings, which generate higher levels of membership services revenue.
During 1999, loan performance fees as a percentage of reported average loans
decreased as a result of the Company's customer satisfaction initiatives.
NON-INTEREST EXPENSE
Non-interest expense includes employee salaries and benefits; loan solicitation
and advertising costs; occupancy, furniture, and equipment costs; data
processing and communication costs; and other non-interest expense. Loan
solicitation and advertising costs include printing, postage, telemarketing,
list processing, and credit bureau costs paid to third parties in connection
with account solicitation efforts. The Company also incurs advertising costs to
promote its credit card and Internet product offerings. In accordance with GAAP,
the Company has capitalized only the direct nonsolicitation costs (loan
origination 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 home loans, 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, 1999, 1998, and 1997, the Company amortized loan
origination costs of $63.0 million, $44.9 million, and $37.7 million. For the
years ended December 31, 1999, 1998, and 1997, total loan solicitation costs
including amortized loan origination costs, were $428.6 million, $196.5 million,
and $143.0 million. The increase in loan solicitation costs reflects increased
direct mail volumes and new marketing initiatives, including television and
Internet advertising campaigns.
(1) Home Protection, Providian Health Advantage, and Destination Unlimited are
service marks of Providian Financial.
34
<PAGE>
Non-interest expense also includes salary and benefit expenses, such as
staffing costs associated with marketing, customer service, collections, and
administration. Other non-interest expense includes third-party data processing
and communication costs, occupancy expenses, and other operational expenses,
such as collection costs, fraud losses, and bankcard association assessments.
The following table presents non-interest expense for the years ended December
31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NON-INTEREST EXPENSE
Salaries and employee
benefits $ 494,089 $ 265,411 $ 196,761
Solicitation and advertising 428,617 196,528 142,956
Occupancy, furniture,
and equipment 84,157 49,908 37,610
Data processing and
communication 125,219 74,603 50,108
Other 439,044 238,550 146,012
- ----------------------------------------------------------------------------
Total $ 1,571,126 $ 825,000 $ 573,447
============================================================================
</TABLE>
Impact of Year 2000 In accordance with Year 2000 readiness guidelines
established by the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, which regulate the Company's banking
subsidiaries, the Company initiated a Year 2000 project in November 1996. The
Company's Year 2000 project consisted of five phases: (1) planning, in which the
Year 2000 project team defined 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 were inventoried and critical systems
and critical vendors identified; (3) assessment, in which Year 2000 readiness of
the Company's systems was assessed; (4) modification, in which affected systems
were replaced, repaired, upgraded, or retired; and (5) testing for Year 2000
compliance.
All five phases of the Company's Year 2000 project were completed
substantially as scheduled. The Company's testing of all systems was completed
in July 1999, with testing of internally developed critical systems and
third-party-provided critical systems continuing as enhancements were made to
the compliant code. During the last three months of 1999, the Company's Year
2000 project focused on reviewing controls in place to ensure that systems that
were Year 2000 ready remained so, and on liquidity and cash management planning,
as well as validating contingency plans and business resumption and disaster
recovery plans. The Company has not experienced any material disruption in its
operations as a result of the Year 2000 date rollover. Monitoring and validation
are scheduled to continue through the end of 2000 to verify that all systems and
applications continue to function properly.
The Company incurred $13.2 million in Year 2000 project expenses through
December 31, 1999, and the Company's total Year 2000 project costs are expected
to be approximately $13.5 million. The Company has funded all Year 2000-related
costs through operating cash flows. Year 2000 costs have been expensed as
incurred, and such costs have not had a material impact on the Company's
financial results or condition.
INCOME TAXES
The Company recognized income tax expense of $367.2 million, $194.1 million, and
$119.8 million for the years ended December 31, 1999, 1998, and 1997. The
Company's effective tax rate increased to 40.02% for the year ended December 31,
1999 from 39.57% for the year ended December 31, 1998. See Notes to Consolidated
Financial Statements, included elsewhere herein, for further explanation 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 loans receivable
(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
segmentation and underwriting criteria used, account management, seasoning, and
demographic and other factors.
The level of net credit losses directly affects earnings when reserves are
established through recognition of provisions for credit losses. Provisions for
credit losses generally depend on historical levels of net credit losses and
current trends. As new portfolios of consumer loans are originated or acquired,
management uses historical credit loss and delinquency analyses of similar, more
seasoned loan portfolios and other qualitative factors to establish an allowance
for credit losses inherent in the existing portfolio (see "-Allowance and
Provision for Credit Losses"). As net credit losses are experienced, the
previously established reserve is used to absorb the credit losses.
Additionally, the Company adjusts the allowance for credit losses to reflect the
sale of securitized loans and the removal of the related net book value from the
consolidated statements of financial condition.
The Company's policy is to recognize principal credit losses on all
delinquent unsecured loans (including the unsecured portion of any partially
secured credit card loans) 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 but
in no case later than 180 days after notification. Home loans are reviewed when
a loss of all or part of the principal balance of the loan is anticipated, and
an allowance for credit losses is established in the amount by which the book
value of the loan
35
<PAGE>
exceeds the estimated net realizable value of the underlying collateral.
Anticipated losses on home loans are charged off no later than 180 days after
payments on such loans become delinquent. At the time a loan is charged off,
accrued but unpaid finance charge and fee income is reversed against current
earnings but is maintained on the customer's record in the event of a future
recovery. After a loan is charged off, the Company continues collection
activity, to the extent legally permissible. Any collections on previously
charged off loans are recognized as recoveries when realized.
Delinquencies The following table presents the delinquency trends of the
Company's reported and managed consumer loan portfolios as of December 31, 1999,
1998, and 1997. An account is contractually delinquent if the minimum payment is
not received by the next billing date. Total 30+ day delinquencies on managed
loans increased to 5.66% as of December 31, 1999 from 5.33% as of December 31,
1998. This increase reflects the overall change in the loan portfolio
composition and account seasoning in lower line credit card asset classes.
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of
Loans Total Loans Loans Total Loans Loans Total Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REPORTED/(1)/
Loans outstanding $ 11,609,954 100.00% $ 5,741,106 100.00% $ 3,410,909 100.00%
Loans delinquent:
30-59 days $ 245,690 2.11% $ 116,827 2.03% $ 40,483 1.19%
60-89 days 176,367 1.52% 73,784 1.29% 35,310 1.03%
90 or more days 370,262 3.19% 135,980 2.37% 66,421 1.95%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 792,319 6.82% $ 326,591 5.69% $ 142,214 4.17%
===================================================================================================================================
MANAGED
Loans outstanding $ 21,026,453 100.00% $ 13,244,948 100.00% $ 9,902,053 100.00%
Loans delinquent:
30-59 days $ 388,240 1.84% $ 254,329 1.92% $ 139,245 1.41%
60-89 days 266,234 1.27% 156,276 1.18% 96,462 0.97%
90 or more days 535,361 2.55% 295,967 2.23% 182,146 1.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,189,835 5.66% $ 706,572 5.33% $ 417,853 4.22%
===================================================================================================================================
</TABLE>
(1) Includes consumer loans held for securitization.
30+ DAY DELINQUENCY & CREDIT LOAN RATIOS (percent)
<TABLE>
<CAPTION>
Managed Loan Net Credit Loss Ratio
<S> <C>
1997 6.32
1998 7.58
1999 6.94
Managed Loan Delinquency Ratio
<S> <C>
1997 4.22
1998 5.33
1999 5.66
</TABLE>
Net Credit Losses Net credit losses for consumer loans represent the principal
amount of losses from customers who have not paid their existing loan balances
(including charged-off bankrupt and deceased customer accounts) less current
period recoveries. The principal amounts of such losses include cash advances,
purchases, and certain financed membership services sales. The principal amounts
of such losses 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 expense.
The annualized managed net credit loss rate decreased to 6.94% as of
December 31, 1999, compared to 7.58% as of December 31, 1998, reflecting strong
asset growth and improved credit loss rates on acquired portfolios combined with
stable credit loss rates on credit card portfolios originated by the Company.
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 portfolios acquired
36
<PAGE>
in 1998. The seasoning of the Company's lower line asset classes is expected to
result in a reversal of the favorable loan loss trend the Company realized in
1999, with the managed net credit loss rate expected to increase during 2000.
The Company's pricing for finance charge and fee income incorporates an expected
higher credit loss rate when appropriate, consistent with the Company's risk
adjusted return approach.
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) 1999 1998 1997
- ----------------------------------------------------------------------
REPORTED/(1)/
<S> <C> <C> <C>
Average loans outstanding $ 8,399,577 $ 4,621,709 $ 3,173,231
Net credit losses $ 536,299 $ 356,140 $ 118,496
Net credit losses as a
percentage of average
loans outstanding 6.38% 7.71% 3.73%
MANAGED
Average loans outstanding $ 16,481,989 $ 11,443,509 $ 9,365,474
Net credit losses $ 1,143,849 $ 867,611 $ 591,676
Net credit losses as a
percentage of average
loans outstanding 6.94% 7.58% 6.32%
</TABLE>
(1) Includes consumer loans held for securitization.
NET CREDIT LOSSES & PROVISION
($ in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net Credit Losses 118.5 356.1 536.3
Provision 149.3 545.9 1,099.1
</TABLE>
Allowance and Provision for Credit Losses The Company maintains the allowance
for credit losses at a level estimated to be adequate to absorb credit losses,
net of recoveries, inherent in the existing reported loan portfolio. The
allowance for credit losses is maintained for reported loans only (see "-Managed
Consumer Loan Portfolio and the Impact of Securitization"). Accordingly, the
entire allowance is allocated to designated portfolios or pools of the Company's
reported loans.
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 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. In evaluating the need to establish additional allowances
on a pool or portfolio, the Company takes into consideration qualitative
factors, including general economic conditions, trends in loan portfolio volume
and seasoning, geographic concentrations, and recent modifications to loan
review and underwriting procedures. The Company compares actual credit loss
performance against estimated credit losses, and may modify its loan loss
allowance evaluation model accordingly.
REPORTED LOANS & ALLOWANCE FOR CREDIT LOSSES
($ in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Reported Loans 3,411 5,741 11,610
Allowance for Credit Losses 145.3 451.2 1,028.4
</TABLE>
37
<PAGE>
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) 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 451,245 $ 145,312 $ 114,540
Provision for credit losses 1,099,131 545,929 149,268
Allowance acquired (net of securitization) 14,303 116,144 --
Foreign currency translation (3) -- --
Credit losses (609,947) (389,587) (132,521)
Recoveries 73,648 33,447 14,025
- --------------------------------------------------------------------------------------
Net credit losses (536,299) (356,140) (118,496)
- --------------------------------------------------------------------------------------
Balance at end of year $ 1,028,377 $ 451,245 $ 145,312
======================================================================================
Allowance for credit losses to loans
at end of year/(1)/ 8.86% 7.86% 4.91%
Reported consumer loans $11,609,954 $5,741,106 $3,410,909
Loans held for securitization or sale -- -- 450,233
- --------------------------------------------------------------------------------------
Loan balance $11,609,954 $5,741,106 $2,960,676
======================================================================================
</TABLE>
(1) Excludes consumer loans held for securitization.
The allowance for credit losses increased to $1,028.4 million, or 8.86% of
reported loans, as of December 31, 1999, from $451.2 million, or 7.86% of
reported loans, as of December 31, 1998. The increase in the allowance for
credit losses as a percentage of reported loans reflects an increase in lower
line credit card loans, which are generally expected to experience higher credit
loss rates (see "--Risk Adjusted Revenue and Return").
FUNDING AND LIQUIDITY
The Company funds its assets through a diversified mix of funding products
designed to appeal to a broad range of investors, with the goal of generating
funding at the lowest cost possible while maintaining liquidity at prudent
levels and managing interest rate risk.
The primary goal of the Company's liquidity management is to ensure that
funding will be available to support Company operations in varying business
environments. The Company employs multiple strategies to maintain a strong
liquidity position: diversification of funding sources; dispersion of
maturities; maintenance of a prudent investment portfolio and cash balances; and
maintenance of committed credit facilities.
Funding Sources and Maturities The Company seeks to fund its assets by
diversifying its distribution channels and offering a variety of products. Among
the products offered are retail and institutional deposits, money market
accounts, term federal funds, public and private asset securitizations, and bank
notes. Distribution channels include direct phone and mail, brokerage and
investment banking relationships, and the Internet.
The Company offers maturity terms for its funding products that range from
one week to 30 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 utilized and by the rates
offered on different products. The Company seeks to maintain 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 liquidity levels are adequate to support maturities.
[PIE CHART APPEARS HERE]
FUNDING SOURCES (REPORTED)
($ in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
<S> <C>
Deposits less than or equal to one year 5,111,626
Deposits greater than one year 4,365,588
Deposits w/o maturity 1,060,909
Borrowed Funds 1,084,345
Total capital (includes capital securities) 1,492,476
<CAPTION>
DECEMBER 31, 1998
<S> <C>
Deposits less than or equal to one year 1,907,028
Deposits greater than one year 1,707,202
Deposits w/o maturity 1,058,068
Borrowed Funds 872,257
Total capital (includes capital securities) 963,187
</TABLE>
38
<PAGE>
The following table summarizes the contractual maturities of deposits at the
Company as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Direct Other Total Direct Other Total
Deposits Deposits Deposits Deposits Deposits Deposits
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 675,158 $ 271,852 $ 947,010 $ 317,219 $ 165,290 $ 482,509
Over three months through 12 months 2,080,048 2,084,568 4,164,616 995,587 428,932 1,424,519
Over one year through five years 1,426,006 2,609,582 4,035,588 856,924 850,278 1,707,202
Over five years -- 330,000 330,000 -- -- --
Deposits without contractual maturity 999,753 61,156 1,060,909 969,205 88,863 1,058,068
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $5,180,965 $5,357,158 $10,538,123 $3,138,935 $1,533,363 $4,672,298
=========================================================================================================================
</TABLE>
Deposits increased to $10.5 billion as of December 31, 1999 from $4.7 billion as
of December 31, 1998. This increase is attributable to the Company's continuing
strategy to maintain a large deposit funding base and strong demand for FDIC-
insured deposits.
The Company securitizes loans in order to diversify funding sources and to
obtain efficient all-in cost of funds, including the cost of capital. The
securitizations are diversified across the public and private securitization
markets and across maturity terms. Pools of securitized loans provide cash flow
for securities sold to investors under legal structures that generally provide
for an interest-only (revolving) period and a principal repayment (amortization
or accumulation) period. During an amortization or accumulation period, payments
on the securitized loans are distributed or accumulated for payment to the
securitization investors, and the portion of the securitized pool of assets
reported on the Company's statement of financial condition will increase.
Private securitizations generally utilize commercial paper-based conduit
facilities and other variable funding programs to securitize loans receivable.
The conduit facilities and variable funding programs are generally renewable
annually. Balances securitized under conduit and variable funding facilities
totaled approximately $3.1 billion as of December 31, 1999.
During 1999, the Company completed four term securitizations totaling
approximately $1.9 billion and two variable funding programs in the amount of
approximately $1.2 billion.
The Company's term securitizations are expected to amortize over the
periods indicated below, based on currently outstanding securitized loans as of
December 31, 1999:
<TABLE>
<CAPTION>
Amount Amortizing
Year (dollars in millions)
- -------------------------------------------------------------
<S> <C>
2000 $ 937
2001 1,139
2002 2,003
2003 1,376
2004 536
</TABLE>
The Company believes that it can attract deposits, borrow funds from other
sources, and issue additional asset-backed securities to replace the funding
reflected in the amortization schedule summarized above, although no assurances
can be given to that effect.
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
$4.0 billion, with maturities ranging from seven days to 15 years.
39
<PAGE>
The following table shows the Company's unsecured funding availability and
outstandings as of December 31, 1999:
<TABLE>
<CAPTION>
December 31, 1999
(dollars or dollar Effective/ Outstanding, Final
equivalents in thousands) Issue Date Availability/(1)/ Net Maturity
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior and
subordinated bank note
program/(2)(4)/ 2/98 $ 4,000,000 $957,875 2/13
Short-term credit
facilities (three
364-day facilities) Various 250,000 -- Various
Short-term U.K. credit
facility (364-day
facility)/(3)/ 4/99 40,550 25,952 4/00
Revolving credit facility 1/99 1,000,000 -- 1/03
Providian Financial
shelf registration 6/98 2,000,000 -- --
Capital securities/(5)/ 2/97 160,000 160,000 2/27
</TABLE>
(1) Short-term bank notes issued under the bank note program and short-term and
long-term credit facilities are revolving funding sources. Funding
availability is subject to market conditions and contractual provisions.
(2) Includes availability to issue up to $500 million of subordinated bank
notes; none outstanding as of December 31, 1999.
(3) (Pounds)25 million sterling facility in dollars using exchange rate as of
December 31, 1999.
(4) Bank notes currently outstanding under the bank note program are medium-
term senior bank notes.
(5) See Note 11: Long-Term Borrowings and Capital Securities in Notes to
Consolidated Financial Statements.
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 $2.0 billion. However, there can be no
assurance that additional debt or equity financing will be available on terms
attractive to the Company.
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; sale of investment
securities; repurchase agreements; 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.
The primary source of funds for payment of dividends on the Company's
common stock is dividends received from its banking subsidiaries. The amount of
dividends that a banking subsidiary may declare is generally limited to the sum
of its net income for the current year and its retained net income for the
previous two years, less any dividends declared during the related three-year
measurement period. In addition, a bank may not declare dividends if such
declaration would leave the bank inadequately capitalized. Therefore, the
Company's ability to pay dividends on its common stock depends on the future net
income and capital requirements of its banking subsidiaries.
Investments The Company maintains cash reserves to provide 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 increased
to $581.5 million as of December 31, 1999 from $433.7 million as of December 31,
1998. Federal funds sold and securities purchased under resale agreements
increased to $1,298.0 million as of December 31, 1999 from $297.9 million as of
December 31, 1998, due to steps taken to enhance the Company's short-term
liquidity position and in anticipation of the Year 2000 date change.
Investment securities can provide liquidity either through sale or in
repurchase agreements. Under a repurchase agreement, the Company pledges 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 demand for the investment securities and interest rate
trends.
Credit Facilities The Company has additional backup liquidity in the form of a
$1.0 billion unsecured committed revolving credit facility from a group of
financial institutions, which is scheduled to expire in January 2003. Pursuant
to this credit facility, the Company's two banking subsidiaries, Providian
National Bank and Providian Bank, as 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 1999,
there were no borrowings under the credit facility. The Company is also a party
to three separate 364-day lines of credit totaling $250 million, under which
short-term borrowings are available for general corporate purposes. The Company
did not borrow funds under these 364-day lines of credit during 1999. The United
Kingdom branch of Providian National Bank is a party to a sterling denominated
364-day line of credit in the amount of (Pounds)25 million ($40.6 million
equivalent based on the exchange rate at December 31, 1999), under which short-
term borrowings are available for general corporate purposes. The Company
40
<PAGE>
guarantees the prompt and complete payment, when due, of the borrower's
obligations under the sterling facility.
The Company has developed a contingency funding plan that defines tests for
management to monitor the Company's liquidity position and prescribes
management's 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
capital adequacy regulations establish three capital adequacy ratios that 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 greater than or greater than or equal
equal to 10% to 8% less than 10%
Tier 1 Tier 1/Total risk-based assets greater than or greater than or equal
equal to 6% to 4% less than 6%
Leverage Tier 1/Adjusted average assets greater than or greater than or equal
equal to 5% to 4% less than 5%
</TABLE>
At December 31, 1999, each of the Company's banking subsidiaries was "well
capitalized" in all regulatory capital ratio categories, as set forth below:
<TABLE>
<CAPTION>
Providian
National Providian
Capital Ratio Bank Bank
- ---------------------------------------------------------------------
<S> <C> <C>
Total risk-based 11.17% 15.08%
Tier 1 9.79% 13.78%
Leverage 10.88% 10.54%
</TABLE>
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.
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 GAAP 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 strips receivable 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 composition of the Company's consolidated statements of financial condition
consist primarily of investments in interest-earning assets (loans receivable
and investment securities) that 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 have a fixed yield or float at a
spread above the prime rate. While the Company's fixed rate credit card
receivables have no stated maturity or repricing period, the Company may adjust
the rate charged after providing notice to the customer. Interest rates on the
Company's liabilities are generally indexed to LIBOR or bear a fixed rate until
maturity. This asset/liability structure exposes 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; and (b) basis risk,
which arises from changing spread relationships between yield curves and
indexes.
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 reported and managed assets and liabilities
in its measurement and management. To measure exposure to interest rate changes,
the Company uses net interest income (NII) and market value of portfolio equity
(MVPE) simulation analysis.
41
<PAGE>
The following table presents the estimated effects of positive and negative
parallel shifts in interest rates as calculated at December 31, 1999 and takes
into consideration the Company's current hedging activity:
<TABLE>
<CAPTION>
Change in Interest Rates/(1)/ Percentage Change in
-----------------------------
(in basis points) NII/(2)/ MVPE/(3)/
<S> <C> <C>
+200 (1.9)% (7.3)%
Flat 0% 0%
- -200 1.8% 8.0%
</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.
As part of its interest rate risk measurement process, the Company must make
reasonable estimates about how its customers and competitors will respond to
changes in market interest rates. In addition, 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.
Therefore, the table above should be viewed as the Company's best estimate as to
the general effect of broad and sustained interest rate movements on the
Company's net income and portfolio value.
The Company seeks to mitigate earnings volatility associated with interest
rate movement by generally matching the repricing characteristics of reported
and managed 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 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.
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 swap and cap agreements purchased for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Swap agreements:
Beginning balance $ 635,500 $955,000 $1,290,000
Additions 500,476 667,000 263,000
Maturities 85,500 987,000 598,000
- -----------------------------------------------------------------------
Ending balance $1,050,476 $635,000 $ 955,000
=======================================================================
Interest rate caps:
Beginning balance $ 670,960 $922,000 $1,522,000
Additions 255,750 659,000 --
Maturities 281,832 910,000 600,000
- -----------------------------------------------------------------------
Ending balance $ 644,878 $671,000 $ 922,000
=======================================================================
</TABLE>
Notional amounts of swaps outstanding have increased to offset, in part, the
growth of fixed rate deposits. As market conditions or the Company's
asset/liability mix change, the Company may increase or decrease the notional
amount of swaps and caps outstanding in order to manage the Company's interest
rate risk profile.
The Company manages credit risk arising from derivative transactions
through an ongoing credit review, approval, and monitoring process. "Credit
risk" for these derivative transactions is defined as the risk that a loss will
occur as the result of a derivative counterparty defaulting on a contract when
the contract is in a favorable economic position to the Company. The Company may
enter into master netting, market settlement, or collateralization agreements
with swap counterparties to reduce the credit exposure arising from its hedging
transactions.
42
<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 the scope and
results of the audit effort with the independent auditors. 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 this page.
/s/ Shailesh J. Mehta
Shailesh J. Mehta
Chairman, President and
Chief Executive Officer
/s/ David J. Petrini
David J. Petrini
Executive Vice President
and Chief Financial Officer
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, 1999 and
1998, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, CA
January 20, 2000, except as to Note 24
as to which the date is February 29, 2000
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 182,915 $ 176,348
Federal funds sold and securities purchased under resale agreements 1,298,000 297,869
Investment securities:
Available-for-sale (at market value, amortized cost of $458,916 and $115,396
at December 31, 1999 and 1998) 455,238 114,858
Held-to-maturity (market value of $125,697 and $323,273 at December 31, 126,258 318,817
1999 and 1998)
Loans receivable, less allowance for credit losses of $1,028,377 and $451,245
December 31, 1999 and 1998 10,545,173 5,282,014
Premises and equipment, net 149,194 82,858
Interest receivable 108,087 51,801
Due from securitizations 614,217 454,374
Deferred taxes 571,040 306,234
Other assets 290,755 146,042
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $14,340,877 $ 7,231,215
============================================================================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 63,890 $ 48,220
Interest bearing 10,474,233 4,624,078
- ----------------------------------------------------------------------------------------------------------------------------
10,538,123 4,672,298
Short-term borrowings 126,289 472,500
Long-term borrowings 958,056 399,757
Deferred fee revenue 578,607 315,708
Accrued expenses and other liabilities 647,326 407,765
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,848,401 6,268,028
Company obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated deferrable interest debentures of
the Company (capital securities) 160,000 160,000
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share (authorized: 800,000,000 shares; issued and outstanding:
December 31, 1999-142,066,407 shares; December 31, 1998-141,732,008 shares) 954 954
Retained earnings 1,394,293 866,005
Cumulative other comprehensive income (2,161) (320)
Common stock held in treasury-at cost: (December 31, 1999-1,053,573 shares;
December 31, 1998-1,405,972 shares) (60,610) (63,452)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,332,476 803,187
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $14,340,877 $ 7,231,215
============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 1,559,285 $ 807,825 $ 556,918
Federal funds sold and securities purchased under resale agreements 34,334 14,072 13,170
Other 30,657 20,682 12,405
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,624,276 842,579 582,493
INTEREST EXPENSE
Deposits 356,736 204,335 164,252
Borrowings 92,334 42,931 18,858
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 449,070 247,266 183,110
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,175,206 595,313 399,383
Provision for credit losses 1,099,131 545,929 149,268
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 76,075 49,384 250,115
NON-INTEREST INCOME
Servicing and securitizations 620,223 559,305 402,446
Credit product fee income 1,754,068 703,498 230,786
Other 38,185 3,376 1,400
- ---------------------------------------------------------------------------------------------------------------------------------
2,412,476 1,266,179 634,632
NON-INTEREST EXPENSE
Salaries and employee benefits 494,089 265,411 196,761
Solicitation and advertising 428,617 196,528 142,956
Occupancy, furniture, and equipment 84,157 49,908 37,610
Data processing and communication 125,219 74,603 50,108
Other 439,044 238,550 146,012
- ----------------------------------------------------------------------------------------------------------------------------------
1,571,126 825,000 573,447
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 917,425 490,563 311,300
Income tax expense 367,153 194,117 119,839
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 550,272 $ 296,446 $ 191,461
=================================================================================================================================
Earnings per common share-basic $ 3.89 $ 2.09 N/A
=================================================================================================================================
Earnings per common share-assuming dilution $ 3.78 $ 2.04 N/A
=================================================================================================================================
Cash dividends paid per common share $ 0.20 $ 0.15 $ 0.07
=================================================================================================================================
Weighted average common shares outstanding-basic (000) 141,371 141,872 N/A
=================================================================================================================================
Weighted average common shares outstanding-assuming dilution (000) 145,547 145,184 N/A
=================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
7.25% Cumulative Common
Cumulative Additional Other Stock
Preferred Common Paid-in Retained Comprehensive Held in
(dollars in thousands, except per share data) Stock Stock Capital Earnings Income Treasury Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 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
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)
Net tax effect from employee stock plans 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 $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 employee stock plans 9,071 9,071
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ - $ 954 $ - $ 866,005 $ (320) $ (63,452) $ 803,187
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7.25% Cumulative Common
Cumulative Additional Other Stock
Preferred Common Paid-in Retained Comprehensive Held in
(dollars in thousands, except per share data) Stock Stock Capital Earnings Income Treasury Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ - $ 954 $ - $ 866,005 $ (320) $ (63,452) $ 803,187
Comprehensive income:
Net Income 550,272 550,272
Other comprehensive income, net of income tax:
Unrealized loss on securities net of
income taxes of ($1,256) (1,887) (1,887)
Foreign currency translation adjustments
net of income taxes of $30 46 46
----------
Other comprehensive income (1,841)
----------
Comprehensive income 548,431
Cash dividend: Common-$0.20 per share (28,374) (28,374)
Purchase of 957,923 common shares for treasury 25,723 (99,727) (74,004)
Exercise of stock options and other awards (72,785) 6,390 93,826 27,431
Issuance of restricted and unrestricted stock less
forfeited shares (434) 8,743 8,309
Deferred compensation related to grant of
restricted and unrestricted stock less
amortization of $7,738 (571) (571)
Net tax effect from employee stock plans 48,067 48,067
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ - $ 954 $ - $ 1,394,293 $(2,161) $ (60,610) $1,332,476
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 550,272 $ 296,446 $ 191,461
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 1,099,131 545,929 149,268
Depreciation and amortization of premises and equipment 34,659 19,435 14,984
Amortization of net loan acquisition costs 63,016 44,852 37,728
Amortization of deferred compensation related to
restricted and unrestricted stock 7,738 4,415 1,280
Amortization of deferred fee revenue (598,978) (212,915) (55,399)
(Increase) decrease in deferred income tax benefit (263,584) (239,507) 4,981
Increase in deferred fee revenue 861,877 467,583 92,789
Increase in interest receivable (56,286) (21,609) (23,570)
Net increase in other assets (207,512) (87,700) (56,948)
Net increase (decrease) in accrued expenses and other liabilities 287,628 230,518 (5,669)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,777,961 1,047,447 350,905
INVESTING ACTIVITIES
Net decrease (increase) in money market instrument investments 99,882 (129,862) -
Net cash used for loan originations and principal collections on
loans receivable (8,071,051) (1,962,496) (1,496,371)
Net increase in securitized loans 1,835,739 1,633,766 1,591,250
Net proceeds from sale of home loans - - 64,894
Portfolio acquisitions (127,119) (2,233,944) -
(Increase) decrease in due from securitizations (159,843) 68,013 (219,246)
Purchases of investment securities (376,790) (148,907) (473,052)
Proceeds from maturities of investment securities 125,948 15,137 307,469
(Increase) decrease in federal funds sold (1,000,131) (182,909) 57,390
Net purchases of premises and equipment (100,995) (40,668) (26,875)
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (7,774,360) (2,981,870) (194,541)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 5,865,825 1,459,532 (177,344)
Proceeds from issuance of term federal funds 1,873,000 1,122,500 414,000
Repayment of term federal funds (2,245,000) (800,000) (315,000)
Increase (decrease) in short-term borrowings 25,789 (82,000) (33,000)
Decrease in note payable to affiliates - - (42,500)
Increase (decrease) in long-term borrowings 558,299 399,757 (50,000)
Proceeds from the issuance of capital securities - - 160,000
Redemption of preferred stock - - (63,269)
Reimbursement relating to conversion of stock options - - 6,846
Purchase of treasury stock (74,004) (97,971) (18,345)
Put warrant premium - 1,325 -
Dividends paid (28,374) (21,358) (10,526)
Proceeds from exercise of stock options 27,431 16,464 2,350
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 6,002,966 1,998,249 (126,788)
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,567 63,826 29,576
Cash and cash equivalents at beginning of year 176,348 112,522 82,946
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 182,915 $ 176,348 $ 112,522
====================================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest expense paid $ 390,534 $ 228,945 $ 182,209
====================================================================================================================
Income taxes paid $ 617,929 $ 310,677 $ 112,426
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1999 AND 1998
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
Providian Financial Corporation is a Delaware corporation, with executive
offices located in San Francisco, California (Providian Financial Corporation,
together with its subsidiaries, the "Company"). Through its subsidiaries, the
Company provides banking and other financial services to consumers throughout
the United States and offers credit cards in the United Kingdom. The Company's
principal wholly owned subsidiaries are Providian National Bank ("PNB") and
Providian Bank ("PB"). The Company markets consumer loans, deposits, and
membership services products using distribution channels such as mail,
telephone, television, and the Internet. Consumer loans include credit cards,
secured credit cards, and home loans. The Company 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 accompanying consolidated financial statements as of December 31, 1999
and 1998 and for the years ended December 31, 1999, 1998, and 1997 have been
prepared in accordance with generally accepted accounting principles (GAAP) that
require 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. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain prior years' amounts have been
reclassified to conform to the 1999 presentation. The consolidated financial
statements for the year ended December 31, 1997 reflect the results of
operations, changes in shareholders' equity, and cash flows 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 year ended December 31, 1997 include
certain expenses related to administrative services provided to the Company by
Providian Corporation. The consolidated financial statements for the period
prior to the spin-off may not necessarily reflect what the consolidated results
of the Company's operations, changes in shareholders' equity, or cash flows
would have been had the Company been a separate stand-alone company during such
period.
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's banking
subsidiaries are required to maintain reserves with the Federal Reserve Bank
based on a percentage of their 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, reported as a component of "comprehensive income" in the
Company's consolidated statements of changes in shareholders' equity. Investment
securities that 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. The Company does not have a trading securities portfolio.
Realized gains and losses and other than temporary impairments related to
investment securities are determined by using specific identification and are
reported in "other non-interest income" in the Company's consolidated statements
of income.
Securitizations The Company securitizes loans and records such securitizations
as sales. The Company accounts for securitization transactions in accordance
with Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 125"). 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 are initially
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 at the
time it enters into a securitization and at the time of each subsequent transfer
of loans. The gains or losses represent 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 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" in the Company's consolidated statements of income, and the
related asset is included as a component of "due from securitizations" in the
consolidated statements of financial condition.
49
<PAGE>
Interest 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. The
accrued interest portion of charged-off loan balances is deducted from current
period interest income and the principal amount is charged off against the
allowance for credit losses.
Origination fees are offset against loan origination costs and any
remaining income is deferred and amortized on a straight-line basis over the
estimated loan life (generally four years for home loans).
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.
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 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.
In evaluating the need to establish additional allowances on a pool or
portfolio, the Company takes into consideration qualitative factors, including
general economic conditions, trends in loan portfolio volume and seasoning,
geographic concentrations, and recent modifications to loan review and
underwriting procedures. The Company compares actual credit loss performance
against estimated credit losses, and may modify its loan loss allowance
evaluation model accordingly. The Company's policy is generally to charge off
loan balances no later than 180 days after they become contractually past due.
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 membership services
revenue, loan performance fees (late, returned check, and overlimit charges),
and loan activity fees (cash advance, annual membership, and processing fees,
and interchange income). 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. Loan performance fees previously recognized as fee or servicing and
securitization income are charged to the related income account at the time of
credit loss recognition for charged-off customer accounts.
Cash advance fees and interchange income are recognized monthly. Annual
membership fees and deferred membership services revenue are recorded, net of
estimated cancellations, in the month subsequent to customer billing and
amortized into revenue on a straight-line basis over the membership period,
generally twelve months. The allowance for cancellations is established based on
the Company's most recent actual cancellation experience and is updated
regularly. A customer may cancel his or her membership for a complete refund
during an initial 30-day money-back guarantee period. After such initial period,
customers who cancel their memberships may be eligible to receive a full or
partial refund under the Company's customer satisfaction program.
Derivative Financial Instruments The Company uses a combination of swap and cap
agreements to manage interest rate risk related to loans, deposits, and loan
servicing income relating to securitized loans. When swap and cap agreements are
used to hedge reported 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. 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 a 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 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 servicing income.
Cap premiums paid are amortized to loan servicing income ratably during the life
of the 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 swap or cap agreements is deferred and amortized
to loan servicing income over the remaining term of the related securitization.
For derivative financial instruments to qualify for hedge accounting
treatment, the following conditions must be met: the underlying asset/liability
being hedged by the instrument exposes the Company to interest rate risk; the
instrument reduces the Company's sensitivity to interest rate risk; and the
instrument is designated and deemed effective in hedging the Company's exposure
to interest rate risk. All of the Company's derivative financial instruments
designated as hedging instruments qualify for hedge accounting treatment. The
Company does not hold or issue derivative financial instruments for trading
purposes.
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
50
<PAGE>
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 The Company accounts for comprehensive income in accordance
with 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 Company presents
comprehensive income in its consolidated statements of changes in shareholders'
equity, net of related income taxes.
NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 137, "Deferral of Effective Date
of FASB Statement 133" ("SFAS No. 137"), which amends the effective date for the
implementation of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
As amended, SFAS No. 133 is effective for financial statements for fiscal years
beginning after June 15, 2000. 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 have a material effect on its
financial condition or operations.
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) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
United States Treasury and
federal agencies $ 137,384 $ - $ 1,171 $ 136,213 $ - $ - $ - $ -
Mortgage-backed securities 314,225 549 3,056 311,718 108,089 21 559 107,551
Equity securities 7,307 - - 7,307 7,307 - - 7,307
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 458,916 $ 549 $ 4,227 $ 455,238 $ 115,396 $ 21 $ 559 $ 114,858
====================================================================================================================================
Securities held-to-maturity:
United States Treasury and
federal agencies $ 125,728 $ 160 $ 721 $ 125,167 $ 188,485 $ 4,458 $ 2 $ 192,941
Commercial paper - - - - 129,862 - - 129,862
Tax exempt and other 530 - - 530 470 - - 470
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $ 126,258 $ 160 $ 721 $ 125,697 $ 318,817 $ 4,458 $ 2 $ 323,273
====================================================================================================================================
</TABLE>
51
<PAGE>
The Company did not sell any investment securities during the years ended
December 31, 1999, 1998, and 1997. No investment securities were pledged by the
Company at December 31, 1999 and 1998. The amortized cost and estimated fair
value as of December 31, 1999 of the Company's available-for-sale and
held-to-maturity investment securities by estimated maturity dates are presented
in the following table:
<TABLE>
<CAPTION>
December 31, 1999
(dollars in thousands) Available-for-Sale Held-to-Maturity
- ------------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year
or less $ 10,000 $ 9,997 $ 26,960 $ 26,954
Due after one year
through five years 75,637 75,031 99,298 98,743
Due after five years
through ten years - - - -
Due after ten years 51,747 51,185 - -
- ------------------------------------------------------------------------------------
Subtotal 137,384 136,213 126,258 125,697
Mortgage-backed
securities 314,225 311,718 - -
Equity securities 7,307 7,307 - -
- ------------------------------------------------------------------------------------
Total securities $458,916 $455,238 $126,258 $125,697
====================================================================================
</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) 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Credit cards $ 10,075,185 $ 5,129,835
Home loans 1,520,795 606,657
Other 13,974 4,614
- ---------------------------------------------------------------------
11,609,954 5,741,106
Allowance for credit losses (1,028,377) (451,245)
Net deferred origination fees (36,404) (7,847)
- ---------------------------------------------------------------------
$ 10,545,173 $ 5,282,014
=====================================================================
</TABLE>
The Company originates consumer loans in the United States and in 1999 began
offering credit cards in the United Kingdom. Credit card origination costs net
of processing fees, if any, are deferred and amortized on a straight-line basis
over an estimated loan life (generally one year). Amortization of deferred loan
origination costs is accelerated when the associated assets are securitized or
sold. Deferred loan origination costs, which are included in "Other assets" on
the Company's consolidated statements of financial condition, were $27.4 million
and $30.5 million at December 31, 1999 and 1998.
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 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 domestic or foreign
concentrations of credit risk.
The activity in the allowance for credit losses for the years ended
December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 451,245 $ 145,312 $ 114,540
Provision for credit losses 1,099,131 545,929 149,268
Reserves acquired (net of
securitization) 14,303 116,144 -
Foreign currency translation (3) - -
Credit losses (609,947) (389,587) (132,521)
Recoveries 73,648 33,447 14,025
- ---------------------------------------------------------------------------------------
Balance at end of year $ 1,028,377 $ 451,245 $ 145,312
=======================================================================================
</TABLE>
NOTE 6: SECURITIZATION OR SALE OF RECEIVABLES
The Company periodically securitizes certain of its loans receivable in both
public and private market transactions. During 1999, 1998, and 1997, the Company
securitized $2.5 billion, $1.6 billion, and $1.7 billion of loans. The total
amount of securitized loans as of December 31, 1999 and 1998 was $9.4 billion
and $7.5 billion.
During the initial period of a securitization (revolving period), the
Company generally retains principal collections in exchange for the transfer of
additional loans receivable 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.
52
<PAGE>
"Due from securitizations" consists primarily of interest-only strips
receivable, retained subordinated interests, and principal advanced to trust as
shown in the table below:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Spread accounts receivable $ 38,844 $ 181,021
Interest-only strips receivable 101,903 68,930
Retained subordinated interests 178,350 122,210
Interest receivable on securitized loans 72,067 63,191
Principal advanced to trust 173,980 -
Other 49,073 19,022
- --------------------------------------------------------------------------------
$ 614,217 $ 454,374
================================================================================
</TABLE>
Spread accounts receivable represent 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 net cash flows from the securitized loans available
to cover such losses. The spread account deposit is generally released as
investors are repaid, although some spread account deposits are not released
until 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, 1999.
Interest-only strips receivable 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 revolving
periods, additional interest-only strip receivable assets are recognized each
month as additional receivables are transferred to investors.
The Company has entered into certain securitization transactions in which
it retains an interest in the securitized pool subordinate to the investors. The
retained subordinated interests are recorded at fair value at the time of
securitization and represent loans receivable with respect to which the related
cash flow is subordinate to the investors' interest and may be used to absorb
the investors' portion of loan losses should they exceed the net cash flows from
the securitized loans available to cover such losses.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Loan commitments are agreements to lend to customers subject to the customers'
compliance with the Company's account agreements. The Company can reduce or
terminate credit card commitments by providing the required prior notice to the
customers, which is generally no more than 30 days, or without notice if
permitted by law. Home loan commitments generally have fixed expiration dates or
other termination clauses and generally may not be reduced or terminated unless
the customer 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) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Credit card loans $ 19,161,840 $ 16,260,479
Home loans 203,662 154,611
Other 467 575
- --------------------------------------------------------------------------------
$ 19,365,969 $ 16,415,665
================================================================================
</TABLE>
Beginning in May 1999, the Company was the subject of media coverage concerning
complaints made by some of its customers regarding certain sales and collections
practices. Following the initial media coverage, the San Francisco District
Attorney's Office began an investigation into the Company's sales and
collections practices, including the marketing of certain membership services
products and the posting of customer payments. In November 1999, the Company
received an inquiry from the Connecticut Attorney General's Office seeking
information in connection with a civil investigation into the Company's credit
card issuance and billing practices. A number of lawsuits including putative
class actions, some of which have been consolidated, have been filed against the
Company and, in some cases, against certain of the Company's subsidiaries by
current and former customers of the Company, alleging unfair and deceptive
business practices. Another consolidated putative class action (In re Providian
Securities Litigation) alleges, in general, that the Company and certain of its
officers made false and misleading statements concerning its future prospects
and financial results in violation of the federal securities laws. These
lawsuits filed against the Company are at an early stage. An informed assessment
of the ultimate outcome or potential liability associated with these matters is
not feasible at this time. Due to the uncertainties of litigation, there can be
no assurance that the Company will prevail on all claims made against it.
However, management believes that the Company has substantive defenses and
intends to defend the actions vigorously. For more detailed information on legal
proceedings affecting the Company, see "Legal Proceedings" in Item 3 of Part I
in the Company's 1999 Annual Report on Form 10-K.
53
<PAGE>
In response to customer concerns, in 1999 the Company introduced an
enhanced customer satisfaction program. In the course of implementing the
enhanced customer satisfaction program, the Company discovered a programming
error that had resulted, over a period of months, in the billing of erroneous
late fees related to specific weekend days. These errors have been corrected,
and refunds of approximately $20 million were provided to affected customers.
NOTE 8: PREMISES, EQUIPMENT, AND LEASE COMMITMENTS
The following is a summary of the Company's premises and equipment:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises $ 35,751 $ 34,209
Equipment and furniture 178,815 95,405
Leasehold improvements 25,623 9,524
Land 2,723 2,723
- --------------------------------------------------------------------------------
242,912 141,861
Less accumulated depreciation
and amortization 93,718 59,003
- --------------------------------------------------------------------------------
$ 149,194 $ 82,858
================================================================================
</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, 2000 through June 30, 2007, 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
$34.6 million, $20.2 million, and $14.2 million for the years ended December 31,
1999, 1998, and 1997.
The Company's approximate future minimum rental payments under
noncancelable operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Amount
Year (dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 55,541
2001 35,016
2002 26,645
2003 19,567
2004 11,617
Thereafter 7,746
- --------------------------------------------------------------------------------
$ 156,132
================================================================================
</TABLE>
NOTE 9: DEPOSITS
The Company accepts time deposits with terms in excess of one year. Time
deposits in amounts of $100,000 or more totaled $6.5 billion and $2.1 billion at
December 31, 1999 and 1998. The aggregate amount of time deposits by maturity as
of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Amount
Year (dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 5,111,627
2001 1,928,168
2002 882,177
2003 546,707
2004 and thereafter 1,008,536
- --------------------------------------------------------------------------------
$ 9,477,215
================================================================================
</TABLE>
NOTE 10: SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of federal funds purchased that mature
in more than one business day and borrowings under a revolving line of credit
used by the United Kingdom branch of PNB.
The following table summarizes all outstanding short-term borrowings and
the weighted average interest rate on those borrowings as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Interest Interest
Balance Rate Balance Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal funds purchased $ 100,000 6.11% $ 472,500 5.27%
Other $ 26,289 6.24% - -
</TABLE>
The Company has various short-term unsecured revolving credit agreements with a
borrowing capacity totaling $250 million. The Company pays facility fees based
on the total credit line. Interest on outstanding balances is based upon the
London Interbank Offered Rate (LIBOR). The agreements expire 364 days from their
respective effective dates. The Company did not borrow against these commitments
during 1999 or 1998. In 1999, the United Kingdom branch of PNB entered into a
sterling denominated 364-day line of credit in the amount of (pound)25 million
($40.6 million equivalent based on the exchange rate at December 31, 1999).
54
<PAGE>
NOTE 11: LONG-TERM BORROWINGS AND CAPITAL SECURITIES
Long-term borrowings and capital securities consist of borrowings having an
original maturity of one year or more. The following table summarizes all
outstanding long-term borrowings and capital securities as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM BORROWINGS
6.25% senior bank notes maturing in 2001 $ 186,687 $ 199,883
6.75% senior bank notes maturing in 2002 $ 257,555 -
6.70% senior bank notes maturing in 2003 $ 199,905 $ 199,874
6.65% senior bank notes maturing in 2004 $ 243,733 -
Senior bank notes with variable interest rates
having a weighted average interest rate of
6.79% maturing in 2001 $ 69,995 -
CAPITAL SECURITIES
Company obligated mandatorily redeemable
capital securities of subsidiary trust
holding solely junior subordinated
deferrable interest debentures of
the Company with an interest rate of
9.525% maturing in 2027 $ 160,000 $ 160,000
Other $ 181 -
</TABLE>
Senior Bank Notes The senior bank notes are direct unconditional, unsecured
general obligations of PNB and are not subordinated to any other indebtedness of
PNB. The senior bank notes consist of fixed rate three-year and five-year senior
obligations and variable rate two-year senior obligations. Interest is payable
semiannually on the fixed rate senior bank notes and quarterly on the variable
rate senior bank notes. During 1999 and 1998, PNB made interest payments of
$47.9 million and $13.3 million on its outstanding senior bank notes.
Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust
Holding Solely Junior Subordinated Deferrable Interest Debentures of the Company
The Company, through a wholly owned subsidiary statutory business trust,
Providian Capital I, issued mandatorily redeemable preferred securities, which
accumulate accrued distributions that are payable semiannually. The Company has
the right to defer payment of interest on the capital securities 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. During any such extension period, 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 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 and the right to reimbursement of expenses under a related expense
agreement with the Company. During 1999, 1998, and 1997, distributions totaling
$15.2 million, $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 capital securities
constitute a full and unconditional guarantee.
Revolving Credit Facility 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 from the lenders and utilization fees based on outstanding borrowings
when borrowings 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 commitment from the lenders
under the revolving credit agreement was $1.0 billion at December 31, 1999 and
$1.2 billion at December 31, 1998 and 1997. There were no outstanding balances
drawn on this line as of December 31, 1999 and 1998. During 1999, no borrowings
were made and no interest expense was incurred on the revolving credit
agreement. Interest expense on the revolving credit agreement totaled $5.1
million and $7.3 million for the years ended December 31, 1998 and 1997. The
revolving credit agreement expires in January 2003.
55
<PAGE>
NOTE 12: DEFERRED FEE REVENUE
The activity for deferred fee revenue and the related cancellation allowance for
the years ended December 31, 1999, 1998, and 1997 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED FEES
Balance at beginning
of year $ 315,708 $ 61,040 $ 23,650
Additions 861,877 467,583 92,789
Amortization (598,978) (212,915) (55,399)
- --------------------------------------------------------------------------------
Balance at end of year $ 578,607 $ 315,708 $ 61,040
================================================================================
CANCELLATION ALLOWANCE
Balance at beginning
of year $ 18,909 $ 3,656 $ 1,417
Additions 231,802 125,757 24,956
Reversals (217,392) (110,504) (22,717)
- --------------------------------------------------------------------------------
Balance at end of year $ 33,319 $ 18,909 $ 3,656
================================================================================
</TABLE>
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) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 537,173 $ 369,087 $ 93,509
State 102,864 64,538 21,349
- -------------------------------------------------------------------------------
640,037 433,625 114,858
Deferred:
Federal (241,597) (212,048) 7,124
State (31,287) (27,460) (2,143)
- -------------------------------------------------------------------------------
(272,884) (239,508) 4,981
- -------------------------------------------------------------------------------
$ 367,153 $ 194,117 $ 119,839
===============================================================================
</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) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Gain on sale of loans $ 25,608 $ 24,471
Deferred loan acquisition costs 10,781 11,995
Purchase accounting adjustment 8,890 -
Other 7,484 2,316
- -------------------------------------------------------------------------------
52,763 38,782
Deferred tax assets:
Allowance for credit losses 404,523 172,982
Deferred fee revenue 174,690 115,891
Discount on securitized loans - 29,024
Long-term incentive accruals 27,676 17,465
Other 15,888 9,439
- -------------------------------------------------------------------------------
622,777 344,801
- -------------------------------------------------------------------------------
Net deferred tax assets before unrealized
losses on securities available-for-sale 570,014 306,019
Unrealized losses on securities
available-for-sale 993 215
Foreign currency 33 -
- -------------------------------------------------------------------------------
Net deferred tax assets $ 571,040 $ 306,234
===============================================================================
</TABLE>
The Company believes that it will fully realize its total deferred income tax
assets as of December 31, 1999 based upon the Company's recoverable taxes from
prior carryback years, its total deferred income tax liabilities, and its
current level of operating income.
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 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
Effect of state income taxes 5.2 5.0 4.0
Other (0.2) (0.4) (0.5)
- -------------------------------------------------------------------------------
Effective tax rate 40.0% 39.6% 38.5%
===============================================================================
</TABLE>
56
<PAGE>
NOTE 14: DERIVATIVE FINANCIAL 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 2000 to 2003.
When interest rate risk management instruments are used to hedge reported
assets and liabilities, the net receipts or payments are recognized as an
adjustment to interest expense. As of December 31, 1999 and 1998, the Company
had $1,050 million and $635 million in notional amount of swaps outstanding.
The average effective interest rate on the Company's interest-bearing
liabilities after giving effect to the swaps was 5.59%, 5.56%, and 5.51% for the
years ended December 31, 1999, 1998, and 1997. For the years ended December 31,
1999, 1998, and 1997, the impact to interest expense as a result of the interest
rate swap agreements was a decrease of $3.5 million, $2.1 million, and $1.3
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. In
connection with these agreements, $0.1 million was paid during 1999 and $1.2
million and $2.1 million were received during 1998 and 1997.
The following table summarizes the expected or contractual maturities and
weighted average interest rates associated with amounts to be received or paid
by the Company:
<TABLE>
<CAPTION>
Balance at
December 31, Balances Maturing in
------------------------------------------------------
(dollars in thousands) 1999 2000 2001 2002 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)/ 6.46% - - - 6.46%
RECEIVE FIXED/PAY VARIABLE
Notional value $ 380,000 $ 10,000 $ 20,000 $ 20,000 $ 330,000
Weighted average pay rate/(1)/ 6.07% 6.22% 6.18% 6.19% 6.05%
Weighted average receive rate 7.37% 6.94% 6.62% 6.99% 7.49%
RECEIVE VARIABLE/PAY VARIABLE
Notional value $ 170,476 $ 170,476 - - -
Weighted average pay rate/(1)/ 7.32% 7.32% - - -
Weighted average receive rate 12.48% 12.48% - - -
TOTAL
Notional value $1,050,476 $ 180,476 $ 20,000 $ 20,000 $ 830,000
Weighted average pay rate/(1)/ 5.99% 7.26% 6.18% 6.19% 5.77%
Weighted average receive rate/(1)/ 7.77% 12.17% 6.62% 6.99% 6.99%
</TABLE>
(1) Variable rates are held constant for future periods at their effective rates
as of their most recent reset prior to December 31, 1999.
57
<PAGE>
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, 1999
and 1998, the Company had $645 million and $671 million in notional amount of
interest rate caps outstanding. During 1999, the Company recorded no
amortization related to interest rate cap fees. For the years ended December 31,
1998 and 1997, the Company amortized $0.1 million and $0.6 million related to
interest rate cap fees paid. The Company received no interest rate cap agreement
interest payments in 1999, 1998, or 1997.
The following is a summary of the Company's interest rate cap agreement maturity
distributions as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Notional Amount Average
Maturing Strike
Year (dollars in thousands) Rate
- --------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 461,836 11.94%
2001 $ 155,563 11.80%
2002 $ 23,741 11.27%
Thereafter $ 3,738 6.99%
</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 $20.9 million and
$4.0 million at December 31, 1999 and 1998. The Company has reduced credit risk
in these instruments by entering into interest 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, 1999 and 1998. At December 31, 1999 and 1998, the
Company's banking subsidiaries met
58
<PAGE>
the "well-capitalized" requirements under the applicable regulatory guidelines.
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) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 Tier 1 Total
Risk-Based Risk-Based Leverage Risk-Based
Capital Capital Ratio/(1)/ Capital
- --------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROVIDIAN NATIONAL BANK
Actual $1,396,127 11.17% $1,224,177 9.79% $1,224,177 10.88% $741,222 10.08%
Minimum
capital
adequacy 1,000,246 8.00% 500,123 4.00% 450,076 4.00% 588,541 8.00%
Minimum
well-
capitalized 1,250,308 10.00% 750,185 6.00% 562,596 5.00% 735,676 10.00%
PROVIDIAN BANK
Actual 157,423 15.08% 143,884 13.78% 143,884 10.54% 27,508 10.58%
Minimum
capital
adequacy 83,511 8.00% 41,755 4.00% 54,595 4.00% 20,805 8.00%
Minimum
well-
capitalized 104,389 10.00% 62,633 6.00% 68,243 5.00% 26,006 10.00%
<CAPTION>
- -----------------------------------------------------------------------------------
Total Tier 1
Risk-Based Risk-Based
Capital Capital
- -----------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PROVIDIAN NATIONAL BANK
Actual $666,424 9.06% $666,424 11.06%
Minimum
capital
adequacy 294,270 4.00% 240,919 4.00%
Minimum
well-
capitalized 441,405 6.00% 301,148 5.00%
PROVIDIAN BANK
Actual 23,968 9.22% 23,968 6.85%
Minimum
capital
adequacy 10,403 4.00% 14,001 4.00%
Minimum
well-
capitalized 15,604 6.00% 17,501 5.00%
</TABLE>
(1) Minimum capital adequacy ratio is 3.0% for the highest rated institutions.
NOTE 16: SHAREHOLDERS' EQUITY
The Company is party to several agreements in which it has contracted to
purchase shares of its common stock on a forward basis. At the Company's
election, the agreements allow 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 is greater than the forward purchase price, the Company will
receive the net differential. To the extent that the market price of the
Company's common stock on a settlement date is lower than the forward purchase
price, the Company will settle the agreed-upon premium amount. At December 31,
1999 and 1998, the agreements covered 1,153,013 and 567,232 shares of the
Company's common stock at an average forward price of $96.03 and $72.56 per
share. The agreements have terms of one year but may be settled earlier at the
Company's option. If the agreements had been settled on a net share basis at the
December 31, 1999 market price of the Company's common stock ($91.0625 per
share), the Company would have issued approximately 62,907 shares of its common
stock to the counterparties. During the years ended December 31, 1999 and 1998
settlements from the forward purchase agreements resulted in the Company
receiving 248,319 and 182,768 shares of its common stock and paying premium
amounts of $1.3 million and $1.0 million, which were recorded as adjustments to
additional paid-in capital. In addition, during 1998, the Company completed a
final settlement of an earlier agreement which, 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 April 1998, the Company entered an agreement to sell equity put
warrants for 375,000 shares of the Company's common stock. The put warrants
entitled the holder to sell to the Company, by physical delivery, a specified
number of shares of the Company's common stock at a price of $43.07 per share.
These put warrants expired unexercised on February 26, 1999.
<PAGE>
Note 17: CUMULATIVE OTHER COMPREHENSIVE INCOME
The components of cumulative other comprehensive income, net of related tax, for
the years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Cumulative
Unrealized Foreign Other
Gain (Loss) Currency Comprehensive
(dollars in thousands) on Securities Translation Income
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1998 $ - $ - $ -
Other comprehensive
income (535) - (535)
Tax benefit (expense) 215 - 215
- ---------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (320) $ - $ (320)
Other comprehensive
income (3,143) 76 (3,067)
Tax benefit (expense) 1,256 (30) 1,226
- ---------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (2,207) $ 46 $ (2,161)
=======================================================================================
</TABLE>
Note 18: EARNINGS PER COMMON SHARE
Earnings per share-basic is computed by dividing net income by the weighted
average number of common shares outstanding for the applicable period. Earnings
per share-assuming dilution is computed by dividing net income by the weighted
average number of common shares outstanding after consideration of the potential
dilutive effect of common share equivalents, based on the treasury stock method
using the average market price of the Company's common shares for the applicable
period. Common share equivalents for the Company are related to employee stock
option programs and forward purchase agreements entered into by the Company. For
the years ended December 31, 1999, 1998, and 1997, no shares related to forward
purchase agreements were included in the computation because their inclusion
would have been antidilutive.
Historical earnings per share are not presented for the year ended December
31, 1997 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 year
ended December 31, 1997 have been computed by dividing net income as reported
for the period 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 that were
exercised between January 1, 1997 and June 10, 1997. These options 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.
<TABLE>
<CAPTION>
Year ended December 31, Pro Forma
(dollars in thousands, (Unaudited)
except per share data) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Income/(1)/ $ 550,272 $296,446 $ 191,461
===================================================================
Weighted average shares
outstanding-basic 141,371 141,872 142,144
Effect of dilutive securities:
Restricted stock
issued-non vested 528 540 219
Employee stock
options/(2)/ 3,648 2,772 1,229
- -------------------------------------------------------------------
Dilutive potential
common shares 4,176 3,312 1,448
- -------------------------------------------------------------------
Adjusted weighted
average shares and
assumed conversions 145,547 145,184 143,592
===================================================================
Earnings per share-basic $ 3.89 $ 2.09 $ 1.35
===================================================================
Earnings per share-
assuming dilution $ 3.78 $ 2.04 $ 1.33
===================================================================
</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) During 1999, options to purchase 1,771,500 shares of the Company's common
stock were not included in the computation of diluted earnings per share,
because the exercise price of the options was greater than the average
market price of the common shares and, therefore, the inclusion of such
options would be antidilutive.
Note 19: 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
60
<PAGE>
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized by the Company at the time of the grant. 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, 1999, the Company had four stock-based compensation plans:
the Company's 1999 Non-Officer Equity Incentive Plan, 1997 Stock Option Plan,
Stock Ownership Plan, and 1997 Employee Stock Purchase Plan.
During 1999, the Company introduced the Non-Officer Equity Incentive Plan
authorizing a maximum of 2,500,000 shares of common stock to be granted under
the Plan. This Plan provides stock-based grants to employees other than
officers. During 1999, the Company granted 1,031,050 options to purchase shares
of the Company's common stock under this Plan. On January 4, 2000, in connection
with the introduction of this Plan, the Company granted 150,000 options to
purchase shares of the Company's common stock and is scheduled to issue
additional grants on July 3, 2000. Stock options granted under this Plan have a
maximum term of ten years.
The Company's 1997 Stock Option Plan provides for grants of incentive and
nonqualified stock options to employees and non-employee directors. Stock
options granted under this Plan have a maximum term of ten years. During 1999,
the Company granted nonqualified options to purchase 1,883,300 shares of the
Company's common stock to employees and non-employee directors under this Plan.
The 1997 Stock 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, 1999, the number of
common shares available for future grants under this Plan was 6,730,910 shares.
The Company's 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 granted under
this Plan. Restricted stock is subject to forfeiture during the vesting period.
During 1999, the Company granted 93,950 shares of restricted stock and 2,769
shares of nonrestricted stock to employees and non-employee directors under this
Plan. The Company records the market value of restricted stock grants as
deferred compensation at the time of grant and amortizes such amounts over the
applicable vesting period.
The Company's 1997 Employee Stock Purchase Plan authorizes a maximum of
1,500,000 shares of common stock to be issued to eligible employees. Under this
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 under this Plan. The offering periods begin
every six months, on each January 1 and July 1, and each have a duration of one
year, except that the first offering period began on October 1, 1997 and ended
on June 30, 1998. During 1999, the Company sold 70,475 shares of the Company's
common stock at an average price of $51.28 per share under this Plan. As of
December 31, 1999, the number of shares available for future purchases by
employees under this Plan was 1,325,944 shares.
The following is a summary of stock options outstanding and exercisable
under the Company's Plans at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- -------------------------------------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Exercise Prices Shares Contractual Life Price Shares Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00- 20.00 1,207,813 5.66 $ 14.23 1,207,813 $ 14.23
20.01- 30.00 3,406,514 5.11 21.52 2,776,224 21.49
30.01- 45.00 2,283,417 8.34 39.07 729,917 39.03
45.01- 70.00 52,500 8.78 50.74 17,500 50.74
70.01-100.00 1,066,450 9.52 91.84 - -
100.01-130.00 1,717,000 9.42 125.55 - -
- -------------------------------------------------------------------------------------------------------
9,733,694 7.19 $ 50.94 4,731,454 $ 22.45
=======================================================================================================
</TABLE>
61
<PAGE>
Presented below are the changes to the stock options under the Company's Plans
for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 8,481,764 $ 25.25 7,266,762 $18.59
Granted 2,914,350 111.92 2,543,157 39.35
Exercised (1,159,521) 20.54 (1,031,297) 13.63
Forfeited/(1)/ (502,899) 41.09 (296,858) 23.66
- ------------------------------------------------------------------------------------------
Outstanding at
end of year 9,733,694 $ 50.94 8,481,764 $25.25
==========================================================================================
</TABLE>
(1) 1999 forfeitures include option to purchase 183,577 shares that were
surrendered and cancelled in exchange for participation in a deferred
compensation program. For the year ended December 31, 1999, the Company
recognized an expense of $18.8 million in connection with this exchange.
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 Company's Plans, consistent with the provisions 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) 1999 1998 1997/(1)/
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 550,272 $ 296,446 $ 191,461
Pro forma $ 515,254 $ 280,938 $ 186,084
Net income per common share:
As reported
Basic $ 3.89 $ 2.09 $ 1.35
==================================================================================================
Assuming dilution $ 3.78 $ 2.04 $ 1.33
==================================================================================================
Pro forma
Basic $ 3.64 $ 1.98 $ 1.31
==================================================================================================
Assuming dilution $ 3.55 $ 1.94 $ 1.30
==================================================================================================
</TABLE>
(1) See Note 18: Earnings Per Common Share for additional information about
1997 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, 1999, risk-free weighted
average interest rate of 5.55%; weighted average dividend yield of 0.29%;
weighted average expected volatility of 62%; expected stock option life of five
years; and expected life for an offering under the 1997 Employee Stock Purchase
Plan of one year. 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 stock option life of five
years; and expected life for an offering under the 1997 Employee Stock Purchase
Plan of one year.
The weighted average grant date fair values of the stock options granted by
the Company during 1999 and 1998 were $60.79 and $19.61 per share. The exercise
price of each stock 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 per share. Expiration dates
range from August 7, 2001 to December 8, 2009 for options outstanding at
December 31, 1999.
Note 20: DEFINED CONTRIBUTION 401(K) PLAN
The Company sponsors a defined contribution 401(k) Plan offering tax-deferred
investment opportunities to substantially all of its employees who have
completed at least 1,000 hours of service. Employees may elect to make both pre-
tax and after-tax contributions subject to certain limits set by the Internal
Revenue Service. The Company makes matching contributions in an amount
determined at the discretion of the Company. The Company uses its common stock
for these matching contributions. As of December 31, 1999, the 401(k) Plan held
538,806 shares of the Company's common stock with a market value of $49.1
million. For the year ended December 31, 1999, the 401(k) Plan received $0.1
million in common stock dividends from the Company. Employee contributions are
invested at the direction of the employee participant. Total 401(k) Plan
expenses for the years ended December 31, 1999, 1998, and 1997 were $4.1
million, $3.2 million, and $2.3 million.
In addition, the Company makes retirement contributions to the 401(k) Plan
for employees with at least one year of employment regardless of whether such
employees make contributions to the 401(k) Plan. The Company made retirement
contributions to the 401(k) Plan of $8.3 million, $6.2 million, and $5.4 million
during 1999, 1998, and 1997. The retirement contributions vest 20% on completion
of the third year of employment and an additional 20% for each completed year of
employment thereafter until fully vested.
62
<PAGE>
NOTE 21: SEGMENT INFORMATION
The operations of the Company consist of two primary segments: Credit Card and
Emerging Businesses. The Credit Card segment includes credit cards and secured
credit cards. Credit Card customer relationships are initiated primarily through
direct marketing and other distribution channels or credit card portfolio
acquisitions from other financial institutions. The Emerging Businesses segment
represents home loans and First Select Corporation, specializing in the purchase
of delinquent loans for collections and other new business development
initiatives. The Company reorganized its reporting segments in 1999 to combine
First Select Corporation with the Home Loan segment to form its Emerging
Businesses segment. First Select Corporation had been reported prior to 1999
under the caption "Other." Prior periods have been restated to reflect the
change in segment reporting. Membership services revenue, which is derived from
both Credit Card and Emerging Businesses 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 2: Summary of Significant Accounting
Policies, the Company securitizes certain loans and records such securitizations
as sales, which has the effect of removing such loans from the Company's
consolidated statements of financial condition.
The following is a summary of the Company's managed segment activity for
the years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Emerging
(dollars in thousands) Credit Card Businesses Other Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenue/(1)/ $ 3,934,355 141,324 21,734 $ 4,097,413
Net interest income $ 1,918,708 86,549 (1,150) $ 2,004,107
Provision for credit losses $ 1,678,584 28,094 - $ 1,706,678
Segment income before income taxes $ 1,169,650 (24,056) (64,775) $ 1,080,819
Assets $18,848,542 2,025,948 201,049 $21,075,539
YEAR ENDED DECEMBER 31, 1998
Revenue/(1)/ $ 2,265,286 84,111 - $ 2,349,397
Net interest income $ 1,263,940 71,901 - $ 1,335,841
Provision for credit losses $ 1,058,165 13,496 - $ 1,071,661
Segment income before income taxes $ 568,851 7,120 - $ 575,971
Assets $12,138,380 1,122,640 - $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 for credit losses $ 840,822 10,214 - $ 851,036
Segment income before income taxes $ 343,071 27,837 - $ 370,908
Assets $ 8,838,607 1,063,446 - $ 9,902,053
</TABLE>
(1) Segment revenue consists of interest income less interest expense, less an
allocated portion of the distributions on the Company's mandatorily
redeemable capital securities, plus non-interest income realized on all
operating segments.
63
<PAGE>
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 ended December 31, 1999, 1998,
and 1997:
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Total segment revenue/(1)/ $ 4,097,413 $ 2,349,397 $ 1,494,315
Revenue from
securitized loans (607,550) (511,520) (473,208)
Other 97,819 23,615 12,908
- ------------------------------------------------------------------------------------------
Total consolidated
revenues $ 3,587,682 $ 1,861,492 $ 1,034,015
==========================================================================================
NET INTEREST INCOME
Total segment net
interest income $ 2,004,107 $ 1,335,841 $ 1,036,883
Net interest income from
securitized loans (933,129) (766,592) (648,153)
Other 104,228 26,064 10,653
- ------------------------------------------------------------------------------------------
Total consolidated net
interest income $ 1,175,206 $ 595,313 $ 399,383
==========================================================================================
PROVISION FOR CREDIT LOSSES
Total segment provision $ 1,706,678 $ 1,071,661 851,036
Net credit losses from
securitized loans (607,547) (525,732) (701,815)
Other - - 47
- ------------------------------------------------------------------------------------------
Total consolidated
provision $ 1,099,131 $ 545,929 $ 149,268
==========================================================================================
PROFIT OR LOSS
Total segment profits $ 1,080,819 $ 575,971 $ 370,908
Corporate and other (163,394) (85,408) (59,608)
- ------------------------------------------------------------------------------------------
Income before
income taxes $ $ 917,425 $ 490,563 $ 311,300
==========================================================================================
ASSETS
Total assets for $
reportable segments $ 21,075,539 $ 13,261,020 9,902,053
Securitized loans (9,416,499) (7,503,842) (6,491,144)
Allowance for credit losses (1,028,377) (451,245) (145,312)
Other assets 3,710,214 1,925,282 1,183,816
- ------------------------------------------------------------------------------------------
Total consolidated assets $ 14,340,877 $ 7,231,215 $ 4,449,413
==========================================================================================
</TABLE>
(1) Total segment revenue consists of interest income less interest expense,
less an allocated portion of the distributions on the Company's mandatorily
redeemable capital securities, plus non-interest income realized on all
operating segments.
NOTE 22: 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 value of the Company's financial instruments is disclosed below.
In cases where quoted market prices are not available, fair values are basis 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 and Securities Purchased Under Resale Agreements Federal
funds sold and securities purchased under resale agreements 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 The carrying amount of loans approximates fair value.
Interest Receivable and Due from Securitizations 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 and lines
of credit approximate fair value.
64
<PAGE>
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 mandatorily redeemable
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 (swaps, caps, and lending commitments) is based on valuation models,
if material, using discounted cash flows (swaps) and assessment of current
replacement cost (caps). Credit card and home loan lending commitments were
determined to have no fair value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 182,915 $ 182,915 $ 176,348 $ 176,348
Federal funds sold and securities purchased under resale agreements 1,298,000 1,298,000 297,869 297,869
Investment securities:
Available-for-sale 455,238 455,238 114,858 114,858
Held-to-maturity 126,258 125,697 318,817 323,273
Loans receivable 10,545,173 10,545,173 5,282,014 5,282,014
Interest receivable 108,087 108,087 51,801 51,801
Due from securitizations 614,217 614,217 454,374 454,374
LIABILITIES
Deposits 10,538,123 10,237,144 4,672,298 4,664,957
Short-term borrowings 126,289 126,289 472,500 472,500
Long-term borrowings 958,056 942,050 399,757 412,832
Capital securities 160,000 194,477 160,000 231,149
OFF-BALANCE SHEET INSTRUMENTS
Swaps - 12,251 - (3,287)
Caps - 62 - 23
</TABLE>
NOTE 23: BUSINESS COMBINATION
On February 18, 1999, the Company announced the acquisition of GetSmart.com,
Inc. GetSmart.com is an online referral service for consumer financial products
that provides product information and lender connections through proprietary
search and application technology. The purchase price consisted of $32.1
million, paid in cash to the former shareholders of GetSmart.com, $1.5 million
in transaction costs, and liabilities of $4.4 million assumed by the Company.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of GetSmart.com have been included in the Company's
consolidated financial statements from the date of acquisition. Intangible
assets, including goodwill created as a result of the acquisition, have been
included in "other assets" on the Company's consolidated statements of financial
condition
Note 24: SUBSEQUENT EVENT
On February 29, 2000, the Company announced that it is realigning resources
previously dedicated to its home loan business. The Company expects to utilize
these resources, including employees and facilities, in its credit card and
e-commerce businesses and to continue to service its existing home loan
portfolio. The Company plans to provide access to home loan products online
through its GetSmart.com Web site to new and existing customers. As a result,
the Company will refer home loans to other lenders rather than originating them.
The Company does not expect the realignment of resources dedicated to its home
loan business to have a material impact on its financial condition or results of
operations.
65
<PAGE>
Note 25: Parent Company Financial Information
Providian Financial Corporation (Parent Company Only)
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 67,328 $ 100,090
Investment securities:
Held-to-maturity - 148,283
Loans receivable 264 272
Investment in subsidiaries 1,459,871 744,998
Deferred taxes 579,930 306,234
Prepaid expenses and other assets 12,434 10,635
- -------------------------------------------------------------------------
Total assets $ 2,119,827 $ 1,310,512
=========================================================================
LIABILITIES
Due to subsidiaries $ 371,968 $ 120,091
Junior subordinated debentures 164,949 164,949
Income taxes payable 127,667 153,626
Accrued expenses and other liabilities 122,767 68,659
- -------------------------------------------------------------------------
Total liabilities 787,351 507,325
SHAREHOLDERS' EQUITY
Common stock 954 954
Retained earnings 1,394,293 866,005
Cumulative other comprehensive
income (2,161) (320)
Common stock held in treasury (60,610) (63,452)
- -------------------------------------------------------------------------
Total shareholders' equity 1,332,476 803,187
- -------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 2,119,827 $ 1,310,512
=========================================================================
</TABLE>
Providian Financial Corporation (Parent Company Only)
Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries $ 170,271 $ 320,000 $ -
Interest income:
Investments 5,039 1,609 3,296
Loans 23 27 31
Loans to subsidiaries 5,304 4,530 928
Other income 2,945 (103) 9,551
- ------------------------------------------------------------------------------------------
183,582 326,063 13,806
EXPENSES
Salaries and employee
benefits 31,671 10,832 15,973
Interest expense:
Borrowings - - 392
Borrowings from
subsidiaries 221 - -
General and administrative 54,636 37,424 13,319
- ------------------------------------------------------------------------------------------
86,528 48,256 29,684
- ------------------------------------------------------------------------------------------
Income (loss) before
income taxes and
equity in undistributed
earnings of subsidiaries 97,054 277,807 (15,878)
Income tax benefit (29,068) (16,819) (6,022)
Equity in undistributed
earnings of subsidiaries 424,150 1,820 201,317
- ------------------------------------------------------------------------------------------
Net Income $ 550,272 $ 296,446 $ 191,461
==========================================================================================
</TABLE>
66
<PAGE>
Providian Financial Corporation (Parent Company Only)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 550,272 $ 296,446 $ 191,461
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (424,150) (1,820) (201,317)
Amortization of deferred compensation 7,738 4,415 1,280
(Increase) decrease in other assets (1,791) 1,676 (2,299)
Increase (decrease) in accrued expenses and other liabilities 54,108 (5,610) (276)
(Increase) decrease in deferred income taxes receivable (273,696) (239,507) 4,981
Increase in taxes payable 22,108 122,951 2,428
Due to (due from) subsidiaries 251,877 96,116 (738)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 186,466 274,667 (4,480)
INVESTING ACTIVITIES
Net decrease (increase) in investment securities 146,442 (98,496) (58,000)
Proceeds from sales/maturities of investment securities - - 8,000
Net (increase) decrease in investment in subsidiaries (290,723) - 24,678
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (144,281) (98,496) (25,322)
FINANCING ACTIVITIES
Net decrease in note payable to affiliates - - (42,500)
Redemption of preferred stock - - (63,270)
Reimbursement relating to conversion of stock options - - 6,846
Proceeds from exercise of stock options 27,431 16,464 2,350
Purchase of common stock for treasury (74,004) (97,971) (18,345)
Put warrant premium - 1,325 -
Proceeds from the issuance of junior subordinated debentures - - 164,949
Dividends paid to shareholders (28,374) (21,358) (10,526)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (74,947) (101,540) 39,504
- -----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32,762) 74,631 9,702
Cash and cash equivalents at beginning of year 100,090 25,459 15,757
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 67,328 $ 100,090 $ 25,459
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<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>
1999
Interest income $ 291,616 $ 372,929 $ 439,248 $ 520,483
Interest expense 80,501 100,270 117,619 150,680
Net interest income 211,115 272,659 321,629 369,803
Provision for credit losses 182,073 255,222 288,279 373,557
Non-interest income 477,256 571,458 651,118 712,644
Non-interest expense 317,106 377,840 433,188 442,992
Income before income taxes 189,192 211,055 251,280 265,898
Net Income $ 113,546 $ 126,486 $ 150,872 $ 159,368
Earnings per share-basic $ 0.80 $ 0.89 $ 1.07 $ 1.13
Earnings per share-assuming dilution $ 0.78 $ 0.87 $ 1.04 $ 1.10
Weighted average common shares outstanding-basic (000) 141,247 141,483 141,296 141,451
Weighted average common shares outstanding-assuming dilution (000) 145,502 145,546 145,070 145,164
1998
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 common shares outstanding-assuming dilution (000) 144,771 145,169 145,500 144,811
</TABLE>
COMMON STOCK PRICE RANGES AND DIVIDENDS (UNAUDITED)
<TABLE>
<CAPTION>
Dividends
Declared per
Common
High Low Share
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1999
First quarter $ 117 $ 70 13/16 $ 0.05
Second quarter 131 5/8 78 7/16 0.05
Third quarter 103 1/4 77 5/8 0.05
Fourth quarter 115 1/2 77 5/8 0.05
<CAPTION>
Dividends
Declared per
Common
High Low Share
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1998
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
</TABLE>
The Company's common stock is traded on the New York Stock Exchange under the
symbol "PVN." There were 9,358 common stockholders of record as of February 15,
2000.
68
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
(415) 543-0404
www.providian.com
CORPORATE CONTACTS
Corporate Giving:
Jim Wunderman
Vice President, Community Relations
(415) 278-4651
Media Relations:
Laurie Cole
Vice President, Corporate Communications
(415) 278-4844
Alan Elias
Vice President, Corporate Communications
(415) 278-4189
INVESTOR INQUIRIES
Investor information is available on our Web site at www.providian.com under the
Investor Information section. Providian's annual reports, quarterly earnings
releases, press releases, and SEC filings are available on the site, as well as
current stock price data, earnings estimates, and a calendar of upcoming events.
If you prefer, you may write or call us at:
Investor Relations
Providian Financial Corporation
201 Mission Street
San Francisco, CA 94105
(415) 278-6170
Institutional investors or analysts seeking information about Providian should
contact:
Nancy Murphy
Senior Vice President, Investor Relations
(415) 278-4483
STOCK EXCHANGE LISTINGS
New York Stock Exchange and Pacific Exchange
Ticker Symbol: PVN
TRANSFER AGENT / REGISTRAR FOR COMMON STOCK
First Chicago Trust Company of New York
a Division of Equiserve
P.O. Box 2500
Jersey City, NJ 07303-2500
(800) 317-4445
www.equiserve.com
INDEPENDENT AUDITORS
Ernst & Young LLP
DIRECT INVESTMENT PROGRAM
Providian Financial's transfer agent, First Chicago Trust Company of
New York, a Division of Equiserve, offers a direct investment program for
investors interested in purchasing or selling Providian Financial common stock.
Additional information is available through a link from Providian's Web site to
the DirectSERVICE(TM) Investment Program's Web site, or you may call or write:
The DirectSERVICE(TM) Investment Program
First Chicago Trust Company of New York
a Division of Equiserve
P.O. Box 2598
Jersey City, NJ 07303-2598
(800) 482-8690
www.equiserve.com
69
<PAGE>
Corporate Officers
Board of Directors
Shailesh J. Mehta
Chairman, President and Chief Executive Officer, Providian Financial Corporation
Christina L. Darwall
Executive Director, Harvard Business School California Research Center
James V. Elliott
Executive Vice President, U.K. Business, Providian Financial Corporation
Lyle Everingham
Retired Chairman and Chief Executive Officer, The Kroger Co.
J. David Grissom
Chairman, Mayfair Capital
F. Warren McFarlan, D.B.A.
Senior Associate Dean and Professor of Business Administration, Harvard Business
School
Ruth M. Owades
President and Chief Executive Officer, Calyx & Corolla
Larry D. Thompson
Partner, King & Spalding
John L. Weinberg
Senior Chairman, Goldman, Sachs & Co.
Senior Management
Shailesh J. Mehta
Chairman, President and Chief Executive Officer
Ellen Richey
Vice Chairman, General Counsel and Secretary
David R. Alvarez
President, Credit Cards
Seth A. Barad
President, Emerging Businesses
James V. Elliott
Executive Vice President, U.K. Business
David J. Petrini
Executive Vice President and Chief Financial Officer
James P. Redmond
Executive Vice President and Chief Risk Management Officer
John H. Rogers
Executive Vice President and Chief Human Resources Officer
James H. Rowe
Executive Vice President, E-Commerce
<PAGE>
Exhibit 21
PROVIDIAN FINANCIAL CORPORATION
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
Name Incorporated
- ---- ------------
Providian National Bank United States
Providian Bank Utah
<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 the Providian Financial Corporation 1997 Stock
Option Plan and the Providian Financial Corporation Stock Ownership Plan, the
Registration Statement (Form S-8 No. 333-57409) pertaining to Providian
Financial Corporation 1997 Employee Stock Purchase Plan, the Registration
Statement (Form S-8 No. 333-81893) pertaining to the Providian Financial
Corporation 1999 Non-Officer Equity Incentive Plan and the Providian Financial
Corporation Registration Statement (Form S-3 No. 333-55937) of our report dated
January 20, 2000, except as to Note 24, as to which the date is February
29, 2000, 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, 1999.
/s/ Ernst & Young LLP
March 30, 2000
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 182,915
<SECURITIES> 581,496
<RECEIVABLES> 11,573,550
<ALLOWANCES> 1,028,377
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 149,194
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 14,340,877
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 1,331,522
<TOTAL-LIABILITY-AND-EQUITY> 14,340,877
<SALES> 0
<TOTAL-REVENUES> 4,036,752
<CGS> 0
<TOTAL-COSTS> 1,571,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,099,131
<INTEREST-EXPENSE> 449,070
<INCOME-PRETAX> 917,425
<INCOME-TAX> 367,153
<INCOME-CONTINUING> 550,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550,272
<EPS-BASIC> 3.89
<EPS-DILUTED> 3.78
<FN>
<F1>Non-classified balance sheet
<F2>PP&E shown net
</FN>
</TABLE>
