<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 22, 1997
Providian Corporation
(Exact name of Registrant as Specified in its Charter)
Delaware 1-6701 51-0108922
(State or Other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
Providian Center, 400 West Market Street, Louisville, Kentucky 40202
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (502) 560-2000
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
1
<PAGE>
Item 5. Other Events.
On December 30, 1996, the Registrant announced its intent to spin off its
wholly owned subsidiary, Providian Bancorp, Inc. ("Providian Bancorp" or the
"Company"), to the shareholders of the Registrant (the "Distribution") in
connection with the merger of Registrant's insurance operations with AEGON
U.S.A., a wholly owned subsidiary of AEGON N.V. On February 4, 1997, a
subsidiary trust of Providian Bancorp issued $160 million of capital securities.
On February 12, 1997, the Registrant filed a Current Report on Form 8-K,
attaching as an exhibit certain historical financial information of Providian
Bancorp as well as certain pro forma financial information of Providian Bancorp,
giving effect to the proposed Distribution and the issuance of the capital
securities. On April 17, 1997, Providian Bancorp filed a Registration Statement
on Form 10, which contained revised pro forma financial information and audited
historical financial information of Providian Bancorp. The attached exhibit sets
forth the revised pro financial information and audited historical financial
information of Providian Bancorp as contained in Providian Bancorp's
Registration Statement on Form 10.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits. Exhibit 99.1.
Pro Forma Condensed Financial Statements of Providian Bancorp, Inc. and
Subsidiaries.
Consolidated Financial Statements of Providian Bancorp, Inc. and
Subsidiaries.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROVIDIAN CORPORATION
By: /s/ Robert L. Walker
_________________________________
Name: Robert L. Walker
Title: Senior Vice President - Finance
Date: April 22, 1997
3
<PAGE>
Index to Exhibits
Exhibit Number and Designation
- -------------------------------
99.1 Pro Forma Condensed Financial Statements of Providian Bancorp, Inc. and
Subsidiaries
Consolidated Financial Statements of Providian Bancorp, Inc. and
Subsidiaries
4
<PAGE>
EXHIBIT 99.1
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following tables present the unaudited pro forma condensed statement of
income for the year ended December 31, 1996 and the unaudited pro forma
condensed statement of financial condition as of December 31, 1996 for Providian
Bancorp, giving effect to the Distribution and to the issuance of $160 million
in liquidation amount of Capital Securities by Providian Capital I, a subsidiary
trust of Providian Bancorp that was formed in January 1997 for the sole purpose
of issuing the Capital Securities (and certain common securities of Providian
Capital I owned by Providian Bancorp) and investing the proceeds in the
Debentures. The Capital Securities are redeemable as described under "Capital
Securities" in Providian Bancorp's Registration Statement on Form 10. The pro
forma condensed statements of income were prepared assuming that the
Distribution and the sale of the Capital Securities had occurred on January 1,
1996, as noted in the Notes to the Pro Forma Condensed Statement of Income. The
pro forma statement of financial condition was prepared assuming that the
Distribution and the sale of the Capital Securities had occurred on December 31,
1996, as noted in the Notes to the Pro Forma Condensed Statement of Financial
Condition.
The unaudited pro forma condensed financial statements presented below do
not purport to represent what the results of operations or financial position
would actually have been if the pro forma adjustments had occurred on the
dates referred to above or to be indicative of the future results of
operations or financial position of Providian Bancorp. The pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The pro forma condensed financial
statements should be read in conjunction with the historical financial
statements of Providian Bancorp and the related notes thereto contained
elsewhere herein.
1
<PAGE>
PRO FORMA CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Consumer Loans............................ $574,335 $574,335
Other..................................... 21,658 21,658
-------- --------
Total interest income................... 595,993 595,993
Interest Expense:
Deposits.................................. 141,691 141,691
Borrowings................................ 48,676 (2,839)(1) 45,837
-------- ------- --------
Total Interest Expense.................. 190,367 (2,839) 187,528
-------- ------- --------
Net Interest Income......................... 405,626 408,465
Provision for loan losses................... 126,579 126,579
Other income................................ 412,008 412,008
Other expense(4)............................ (3,838)(2)
2,372 (3)
-------
433,804 (1,466) 432,338
-------- ------- --------
Income before income taxes.................. 257,251 4,305 261,556
-------- ------- --------
1,079 (1)
1,458 (2)
(901)(3)
-------
Income tax expense.......................... 97,485 1,636 99,121
-------- ------- --------
NET INCOME.................................. $159,766 $ 2,669 162,435
======== ======= --------
Dividends on Company Obligated Mandatorily
Redeemable Preferred Securities of the
Trust...................................... (9,921)
--------
Net Income Applicable to Common Stock....... $152,514
========
Weighted Average Number of Common Shares
Outstanding................................ 93,664
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE(5)................................... $ 1.63
</TABLE>
- --------
NOTES TO PRO FORMA CONDENSED STATEMENT OF INCOME:
(1) The pro forma condensed statement of income reflects, for the period
presented, the repayment of borrowings by Providian Bancorp from
affiliates that will no longer be affiliates after the Distribution,
totaling $50.8 million, and the redemption of preferred stock issued by
Providian Bancorp that was held by Providian, totaling $63.3 million. The
adjustment assumes that such repayment was funded from the proceeds of the
issuance of the Capital Securities as of January 1, 1996. The assumed
repayment of affiliate borrowings bearing interest at 5.59% results in a
reduction of interest expense of $2,839,000. For the period presented, the
Pro Forma Condensed Statement of Income reflects the net tax effect, at
Providian Bancorp's estimated combined United States federal and state
income tax rate of 38%, of replacing borrowings from affiliate entities
and reducing funding provided by CDs.
The proceeds from the issuance of Capital Securities remaining after the
redemption of preferred stock and repayment of borrowings described above
were $45.9 million. These proceeds are expected to be used to reduce
alternative funding currently provided by certificates of deposit ("CDs").
If the excess proceeds had been used for this purpose as of January 1, 1996,
the Company's interest expense would have been reduced by a total of
$2,724,000 based on the average CD interest rate paid by the Company during
1996 of 5.93%,
2
<PAGE>
with a corresponding increase in net income of $1,689,000, after giving
effect to a combined United States federal and state income tax rate of 38%.
(2) The Pro Forma Condensed Statement of Income reflects, for the period
presented, the reimbursement by Providian of $3.838 million of certain
previously recognized employee costs incurred by Providian Bancorp on behalf
of Providian. This reimbursement is required by the terms of the Employee
Benefits Agreement between Providian and Providian Bancorp in connection
with the Distribution. For the period presented, the Pro Forma Condensed
Statement of Income reflects the net tax effect, at Providian Bancorp's
estimated combined United States federal and state income tax rate of 38%,
of such reduction in compensation expense.
As part of the Distribution, Providian Bancorp intends to grant stock
options in lieu of vesting of equity units ("Equity Units") under the
Providian Bancorp Equity Unit Plan (the "Equity Unit Plan") which, in prior
periods, resulted in the recognition of compensation expense as the units
vested. See "Management--The Equity Unit Plan" in Providian Bancorp's
Registration Statement on Form 10. During 1996, Providian Bancorp recognized
$11.2 million in compensation expense, which, after giving effect to a
combined United States federal and state income tax rate of 38%, resulted in
a $7.0 million impact on net income. This expense would not have been
incurred had Providian Bancorp been a stand-alone company utilizing stock
options for incentive compensation purposes, as it plans to do in the
future. However, since this change is not directly attributable to the
Distribution, no adjustment has been made to the Pro Forma Condensed
Statement of Income.
(3) The Pro Forma Condensed Statement of Income reflects, for the period
presented, the additional administrative expenses (executive salaries,
professional services, business taxes and other expenses) which are
estimated to be incurred by Providian Bancorp as a publicly held, stand-
alone entity and the net tax effect, at the estimated combined United
States federal and state income tax rate of 38%, of such additional
administrative expenses. Actual future expenses may be higher or lower
than those reflected in the Pro Forma Condensed Statement of Income.
(4) Certain employees of Providian Bancorp have rights to restricted stock which
provides for vesting of the restricted shares over specified periods of
time. As part of the Distribution, the restricted shares will vest
immediately and such stock will be distributed to the holders. See
"Arrangements Between Providian and Providian Bancorp--Employee Benefits
Agreement" in Providian Bancorp's Registration Statement on Form 10. The
impact to pretax earnings of such distribution will increase salary and
benefit expenses $2.3 million, and, after giving effect to a combined United
States federal and state income tax rate of 38%, will result in a $1.4
million impact to net income.
(5) In the Distribution, each Providian shareholder will receive one share of
Providian Bancorp Common Stock for each share of Providian Common Stock held
on the record date for the Distribution. Pro forma per share information is
calculated using net income divided by the weighted average number of shares
of Providian Common Stock outstanding (93,664,000 shares) in 1996. Fully
diluted net income per common share is not presented, as it approximates net
income per common share.
3
<PAGE>
PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
UNAUDITED
AS OF DECEMBER 31, 1996
--------------------------------------
AS REPORTED, PRO FORMA
PROVIDIAN PRO FORMA PROVIDIAN
BANCORP ADJUSTMENTS BANCORP
------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents............. $ 82,946 $ 54,231 (1) $ 137,177
Federal Funds Sold.................... 172,350 172,350
Consumer Loans held for
securitization or sale............. 739,706 739,706
Consumer Loans........................ 2,939,436 2,939,436
Other Loans........................... 10,492 10,492
Less allowance for possible credit
losses............................... (114,540) (114,540)
---------- -------- ----------
NET LOANS......................... 3,575,094 3,575,094
Other assets.......................... 496,354 496,354
---------- -------- ----------
TOTAL ASSETS...................... $4,326,744 $ 54,231 $4,380,975
========== ======== ==========
LIABILITIES:
Deposits.............................. $3,390,112 $3,390,112
Federal Funds purchased............... 51,000 51,000
Notes Payable to Banks................ 165,000 165,000
Notes Payable to Affiliates........... 42,500 $(42,500)(1) --
Other Liabilities..................... 194,988 194,988
---------- -------- ----------
TOTAL LIABILITIES................. 3,843,600 (42,500) 3,801,100
Company Obligated Mandatorily
Redeemable Capital Securities of
Subsidiary Trust Holding Solely
Junior Subordinated Deferrable
Interest Debentures of Providian
Bancorp(2)........................... 160,000 (1) 160,000
Equity................................ 483,144 (63,269)(1) 419,875
---------- -------- ----------
TOTAL LIABILITIES AND EQUITY...... $4,326,744 $ 54,231 $4,380,975
========== ======== ==========
</TABLE>
- --------
NOTES TO PRO FORMA CONDENSED STATEMENT OF FINANCIAL CONDITION:
(1) The Pro Forma Condensed Statement of Financial Condition reflects the
repayment of borrowings from Providian Bancorp's affiliates and the
redemption of preferred stock held by Providian. The adjustment assumes
that such repayment was funded from the proceeds of the issuance of the
Capital Securities.
(2) The sole assets of Providian Capital I, the Trust that issued the Capital
Securities (the common securities of which are wholly owned by the Company),
are (a) $164,949,000 aggregate principal amount of the Company's 9.525%
Junior Subordinated Deferrable Interest Debentures due February 1, 2027 and
(b) the right to reimbursement of expenses under a related expense agreement
with the Company. The Company has guaranteed payments under the Capital
Securities, but only to the extent of funds held by Providian Capital I. See
"Capital Securities" in Providian Bancorp's Registration Statement on Form
10.
PRO FORMA REGULATORY CAPITAL
Each of Providian Bancorp's banking entities is subject to risk-based capital
adequacy guidelines as defined by its primary federal regulator. "Capital" is
defined as either Tier 1 (core) which consists principally of shareholder's
equity less goodwill or Tier 2 (supplementary) which is comprised of a portion
of the reserve for possible credit losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Adequacy" in
Providian Bancorp's Registration Statement on Form 10. On a pro forma,
regulatory accounting basis, as of December 31, 1996, after giving effect to the
consummation of the Distribution and the sale of the Capital Securities,
Providian Bancorp's banking entities' capital to risk-based assets ratios would
remain above "well capitalized" levels.
4
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 6
Consolidated Statements of Financial Condition.............................. 7
Consolidated Statements of Income........................................... 8
Consolidated Statements of Changes in Shareholder's Equity.................. 9
Consolidated Statements of Cash Flows....................................... 10
Notes to Consolidated Financial Statements.................................. 11
</TABLE>
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Providian Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Providian Bancorp, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Providian
Bancorp, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, CA
January 29, 1997,
except for Note P, as to which the date is
February 4, 1997
6
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 82,946 $ 104,083
Federal funds sold................................. 172,350 71,300
Investment securities at cost (which approximates
market value)...................................... 7,173 4,927
Reserve account receivable......................... 252,899 123,687
Loans held for securitization or sale.............. 739,706 123,330
Loans receivable, less allowance for possible
credit losses of $114,540 in 1996 and $93,429 in
1995.............................................. 2,841,779 3,003,115
Interest receivable................................ 56,864 44,734
Premises and equipment, less accumulated
depreciation and amortization...................... 49,870 28,032
Deferred income taxes.............................. 71,492 59,895
Other assets....................................... 51,665 47,963
---------- ----------
$4,326,744 $3,611,066
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Deposits:
Noninterest bearing.............................. $ 28,299 $ 38,639
Interest bearing, $100 thousand and over......... 2,065,930 1,113,188
Interest bearing, other.......................... 1,295,883 1,005,938
---------- ----------
3,390,112 2,157,765
Federal funds purchased............................ 51,000 336,000
Notes payable to banks............................. 115,000 321,000
Notes payable to affiliates........................ 42,500 95,800
Bank notes......................................... -- 189,880
Long term notes payable............................ 50,000 --
Accrued expenses and other liabilities............. 194,988 161,366
---------- ----------
$3,843,600 $3,261,811
========== ==========
SHAREHOLDER'S EQUITY
Special Preferred Stock, noncumulative, nonpartici-
pating, nonvoting, par value $1.00 per share--au-
thorized 5,000,000 shares, issued and outstanding
1,290,107 shares in 1995.......................... -- 1,290
7.25% Cumulative Preferred Stock, nonparticipating,
nonvoting, par value $1.00 per share--authorized
63,269 shares, issued and outstanding 63,269
shares............................................ 63 63
Common Stock, par value $1.00 per share--authorized
5,000 shares, issued and outstanding 5,000 shares
(following the Distribution, 93,768,000 shares is-
sued and outstanding)............................. 5 5
Additional paid-in capital......................... 63,706 63,706
Retained earnings.................................. 419,370 284,191
---------- ----------
483,144 349,255
---------- ----------
$4,326,744 $3,611,066
========== ==========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans............................................. $574,335 $457,818 $315,001
Investment securities............................. 21,658 21,736 28,709
-------- -------- --------
Total Interest Income........................... 595,993 479,554 343,710
Interest expense:
Deposits.......................................... 141,691 105,442 61,920
Borrowings........................................ 48,676 52,962 39,739
-------- -------- --------
Total Interest Expense.......................... 190,367 158,404 101,659
-------- -------- --------
Net Interest Income............................. 405,626 321,150 242,051
Provision for possible credit losses................ 126,579 79,917 50,313
-------- -------- --------
Net Interest Income After Provision for Possible
Credit Losses.................................... 279,047 241,233 191,738
Other income:
Loan servicing income............................. 280,887 251,855 208,954
Credit product fee income......................... 123,654 81,374 57,683
Other............................................. 7,467 2,535 2,652
-------- -------- --------
412,008 335,764 269,289
Other expenses:
Salaries and employee benefits.................... 153,849 113,412 89,470
Amortization of loan acquisition costs............ 41,342 14,561 54,178
General and administrative expenses............... 238,613 234,161 142,176
-------- -------- --------
433,804 362,134 285,824
-------- -------- --------
Income Before Income Taxes...................... 257,251 214,863 175,203
Income tax expense.................................. 97,485 79,411 65,084
-------- -------- --------
Net Income...................................... $159,766 $135,452 $110,119
======== ======== ========
Pro forma earnings per share........................ $ 1.71 1.41 1.11
======== ======== ========
Pro forma shares (in thousands)..................... 93,664 95,861 99,319
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
7.25%
SPECIAL CUMULATIVE ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK STOCK CAPITAL EARNINGS TOTAL
--------- ---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... $1,290 $63 $ 5 $63,706 $205,505 $270,569
Net income for the year
ended December 31,
1994................... 110,119 110,119
Dividends paid to
shareholder............ (54,588) (54,588)
------ --- --- ------- -------- --------
Balance at December 31,
1994................... 1,290 63 5 63,706 261,036 326,100
Net income for the year
ended December 31,
1995................... 135,452 135,452
Dividends paid to
shareholder............ (112,297) (112,297)
------ --- --- ------- -------- --------
Balance at December 31,
1995................... 1,290 63 5 63,706 284,191 349,255
Net income for the year
ended December 31,
1996................... 159,766 159,766
Dividends paid to
shareholder............ (24,587) (24,587)
Redemption of special
preferred stock........ (1,290) (1,290)
------ --- --- ------- -------- --------
Balance at December 31,
1996................... -- $63 $5 $63,706 $419,370 $483,144
====== === === ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income.............................. $ 159,766 $ 135,452 $ 110,119
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for possible credit losses.. 126,579 79,917 50,313
Depreciation and leasehold
amortization......................... 10,566 7,522 7,718
Amortization of net loan acquisition
costs................................ 13,380 3,002 46,422
Amortization of discount on sale of
credit card and line of credit
receivables.......................... 715 875 908
Deferred income tax benefit........... (11,597) (13,099) (2,313)
Increase in interest receivable....... (12,130) (13,690) (5,302)
(Increase) decrease in other assets... (3,702) (5,530) 11,248
Increase (decrease) in accrued
expenses and other liabilities....... 33,622 37,939 (23,758)
----------- ----------- ---------
Net Cash Provided by Operating
Activities......................... 317,199 232,388 195,355
----------- ----------- ---------
INVESTING ACTIVITIES
Net issuance and repayment of credit
card and line of credit receivables.... (2,847,643) (2,244,585) (834,995)
Net proceeds from the sales of credit
card and line of credit receivables.... 2,035,893 1,583,239 525,340
Net increase in other loans............. (224,452) (243,947) (145,415)
Net proceeds from sale of PHL loans..... 435,000 -- --
(Increase) decrease in reserve account
receivable............................. (129,212) (31,812) 75
Deferred net loan acquisition costs..... 5,488 (12,584) (33,898)
Purchases of investment securities...... (2,386) (1,530) (357)
Proceeds from sales/maturities of
investment securities.................. 140 294 54,879
Net increase in federal funds sold...... (101,050) (56,300) (6,200)
Purchase of premises and equipment...... (32,404) (12,343) (19,095)
----------- ----------- ---------
Net Cash Used in Investing
Activities......................... (860,626) (1,019,568) (459,666)
----------- ----------- ---------
FINANCING ACTIVITIES
Net increase in deposits................ 1,232,347 477,315 127,065
Net (decrease) increase in borrowings
under line of credit agreements........ (206,000) 86,000 60,000
Net (decrease) increase in note payable
to affiliates.......................... (53,300) (4,000) 45,000
Net (decrease) increase in other short-
term borrowings........................ (474,880) 327,880 145,174
Increase in long term notes payable..... 50,000 -- --
Redemption of special preferred stock... (1,290) -- --
Dividends paid to shareholder........... (24,587) (112,297) (54,588)
----------- ----------- ---------
Net Cash Provided by Financing
Activities......................... 522,290 774,898 322,651
----------- ----------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents................... (21,137) (12,282) 58,340
Cash and cash equivalents at beginning of
year..................................... 104,083 116,365 58,025
----------- ----------- ---------
Cash and Cash Equivalents at End of
Year............................... $ 82,946 $ 104,083 $ 116,365
=========== =========== =========
Income taxes paid......................... $ 91,516 $ 77,873 $ 80,415
=========== =========== =========
Interest paid on deposits and borrowings.. $ 187,284 $ 151,761 $ 93,760
=========== =========== =========
</TABLE>
See notes to consolidated financial statements
10
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Providian Bancorp, Inc. (the "Company" or "PBI"), a Delaware
corporation, is a wholly owned subsidiary of Providian Corporation
("Providian").
Principals of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries, First Deposit
National Bank (FDNB), Providian National Bank (PNB), Providian Credit
Services, Inc. (PCSI), First Deposit Service Corporation (FDSC), Providian
National Bancorp (PNBC), and Providian Credit Corporation (PCC). The activity
of one subsidiary (First Deposit Life Insurance Company) is recorded under the
equity method due to immateriality and is included in other assets. All
material intercompany transactions and accounts have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements: The preparation
of the Company's consolidated financial statements in accordance with
Generally Accepted Accounting Principles ("GAAP") requires management to make
estimates and assumptions that affect reported amounts. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could differ from those estimates.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and short-term investments convertible
into cash upon demand. The Company is required to maintain reserves with the
Federal Reserve Bank based on a percentage of deposit liabilities.
Investment Securities: The investment securities as of December 31, 1996 and
1995 consist primarily of Federal Reserve stock which is classified as an
investment because it will be held for the foreseeable future in accordance
with banking regulations.
Reserve Account Receivable: Amounts held in interest-bearing accounts with
other banks for the account of various trusts associated with the sale of
receivables (see Note E). Amount is not considered a cash or cash equivalent
in the consolidated statements of cash flows.
Asset Securitizations: FDNB and PNB (the Banks) securitize credit card loans
and record such securitizations as sales in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 77, "Reporting by Transferors for
Transfers of Receivables with Recourse." Due to the relatively short average
life of credit card loans securitized (approximately 10 to 12 months), no
gains are recorded at the time of sale. Rather, excess servicing fees related
to the securitizations are recorded over the life of each sale transaction.
The excess servicing fee is based upon the difference between finance charges
received from the cardholders less the yield paid to investors, credit losses
and a normal servicing fee, which is also retained by the Banks. Reserve
accounts receivable from securitization principally represents excess
servicing fees earned and due to the Banks. Transaction expenses are deferred
and amortized over the life of the transaction as a reduction of loan
servicing fees. The related deferred acquisition costs and allowance for
possible credit losses are removed from the Consolidated Statement of
Financial Condition. The monthly pattern of recording loan servicing fees is
similar to the revenue recognition that the Banks would experience if the
loans had not been securitized. These agreements require the Banks to maintain
2.0 to 5.5 percent minimum interests (Sellers Certificates) in the securitized
receivables.
Loans Held for Securitization or Sale: Loans held for securitization
represent the lesser of loans eligible for securitization or loans management
intends to securitize within six months which are currently on the balance
sheet. These assets are reported at the lower of cost or fair market value.
11
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Credit Card and Line of Credit Loans: Credit card loans include cash
advances, purchases, interest and fees charged to customer accounts. Interest
is recognized based on balances outstanding according to the terms of the
related customer agreements until the accounts are paid or recognized as a
credit loss after becoming 180 days past due. Customers are required to make
minimum monthly payments, and the total balance is governed by an established
credit limit.
Line of credit loans include cash advances, customer draws, interest and
fees charged to customer accounts. Minimum monthly payments are required, but
there are no prepayment penalties and the line is reusable.
The direct costs of acquiring consumer loans are netted against related
credit card and line of credit fees, if any, and deferred and amortized on a
straight line basis, generally over one year for credit card products and five
years for line of credit receivables. Amortization of loan acquisition costs
includes the accelerated amortization of loan acquisition cost resulting from
loan securitizations.
Home Equity Lines of Credit: Equity line loans include cash advances and
interest charged to customer accounts secured by second deeds of trust on
primarily single-family homes. Interest is recognized based on balances
outstanding according to the terms of the related customer agreement. Minimum
monthly payments are required, but there are no prepayment penalties and the
line is reusable. Loans are evaluated for impairment as they become overdue
and are placed in nonaccrual status upon foreclosure or charge-off. The
Company amortizes direct origination costs over the contractual life of the
related loans adjusted for prepayments.
Installment Loans: Installment loans consist primarily of loans which are
used to finance automobile insurance premiums and have an average life of
approximately 7 months.
Mortgage, Commercial and Other Loans and Loan Fees: The Company's real
estate loan portfolio consists primarily of long-term conventional loans
secured by first trust deeds on single-family residences, other residential
property and commercial property. In addition, the Company grants commercial
loans and other consumer loans.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related loan's
yield. The Company amortizes these amounts over the contractual life of the
related loans adjusted for prepayments.
Allowance for Possible Credit Losses: The allowance for possible credit
losses is maintained at a level that, in management's judgment, is adequate to
provide for estimated probable credit losses from known and inherent risks in
the loan portfolios.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight line method over the estimated useful life of the
related assets as follows: premises--30 years for building and term of the
lease or useful life of the assets, whichever is shorter for leasehold
improvements; furniture and equipment--three to ten years; automobiles--three
years.
Interest Rate Risk Management Instruments: The Company enters into interest
rate swap ("swaps") and cap ("caps") agreements for purposes of managing its
interest rate sensitivity. The Company designates swaps to on-balance sheet
instruments to alter the interest rate characteristics of such instruments and
to modify interest rate sensitivity. The Company also designates swaps to off-
balance sheet items to reduce the interest rate sensitivity associated with
off-balance sheet cash flows (i.e., securitizations). Interest rate caps are
used to minimize net interest margin compression in a rising interest rate
environment.
12
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Swaps involve the periodic exchange of payments over the life of the
agreements. Caps involve the payment of an up-front fee in which the
counterparty agrees to pay the difference between a negotiated rate and a
standard quoted index rate, if positive, for a fixed term. Amounts received or
paid on swaps and caps that are used to manage interest rate sensitivity and
alter the interest rate characteristics of on-balance sheet instruments or
reduce interest rate sensitivity associated with off-balance sheet items are
recorded on an accrual basis as a component of interest expense or loan
servicing income.
Repurchase Agreements: The Company entered into various agreements to
purchase and resell U.S. Treasury securities which were under the control of
the counterparty. There were no amounts outstanding at any month-end during
1996. The average daily balance of outstanding agreements during 1996 was
$53.2 million. The interest incurred on the repurchase agreements is recorded
as a component of interest expense.
Federal Funds Purchased: Federal funds purchased represent short-term
unsecured borrowings from various banks. The interest incurred on such
borrowings is recorded as a component of interest expense.
Bank Notes: Bank notes represent short-term unsecured borrowings which are
issued to various institutions. The interest incurred on such borrowings
during the three years ended.
Income Taxes: The Company is included in the consolidated tax return of
Providian. The Company's tax expense is calculated as if it files a separate
tax return and the appropriate payments, if any, are made to or received from
Providian. The current expense for income taxes is based on an estimate of
taxable income. Deferred income taxes are provided for the temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities.
Pro Forma Earnings per Share: Pro forma earnings per share is determined
based on the weighted average number of common shares of Providian Corporation
outstanding during the three years ended December 31, 1996 pursuant to the
Distribution Agreement as described in Note C--"Plan and Agreement of Merger
and Reorganization," in which one share of common stock of the Company will be
issued for each share of common stock of Providian Corporation. Fully diluted
net income per common share is not presented as it approximates net income per
share.
Reclassifications: Certain prior years' amounts have been reclassified to
conform with the 1996 presentation.
NOTE B--NATURE OF OPERATIONS
PBI, through its banking and other subsidiaries, provides banking and other
financial services to consumers throughout the United States. The Company
markets consumer loans, deposit products and other banking services using
mail, telephone and other direct response channels. Consumer loans include
unsecured credit cards, unsecured revolving lines, revolving home equity
loans, installment loans for insurance premium financing and credit cards
secured by interest-bearing savings accounts. The Company provides money
market deposit accounts to retail customers and certificates of deposit to
both retail and institutional customers.
NOTE C--PLAN AND AGREEMENT OF MERGER AND REORGANIZATION
On December 28, 1996, Providian executed a Plan and Agreement of Merger and
Reorganization with AEGON N.V. ("AEGON"), and LT Merger Corp., a wholly owned
subsidiary of AEGON ("Merger Sub"), pursuant to which, among other things, (a)
Merger Sub will merge with and into Providian, (b) Providian will be
13
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the surviving corporation in the merger and become a wholly owned subsidiary
of AEGON, and (c) each shareholder of Providian will be entitled to receive
shares of AEGON common stock in exchange for shares of Providian's common
stock. The number of AEGON shares received for each Providian share is subject
to an exchange ratio calculation which includes collars on the prices of AEGON
and Providian stock during the 20 trading days preceding the merger.
Immediately prior to the merger, Providian will spin-off the Company to the
shareholders of Providian (the "Distribution") which is currently expected to
occur soon after June 1, 1997. In the Distribution, Providian shareholders
will receive one share of Providian Bancorp Inc. Common Stock, together with
an associated Preferred Share Purchase Right for each share of common stock of
Providian held as of the date of the Distribution.
The Board of Directors of Providian has unanimously approved the merger and
Distribution. The merger is subject to approval by various regulatory
authorities, approval by Providian's shareholders and satisfaction of certain
other conditions. The Distribution will occur only if all the conditions
necessary for the merger are satisfied.
Because the consummation of the merger and Distribution is subject to the
above conditions, no representations can be made as to whether, or when, the
merger and Distribution will be complete or as to the possible impact of the
merger and Distribution on the financial condition and results of operations
of the Company should the merger and Distribution occur.
NOTE D--LOANS RECEIVABLE AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The following is a summary of loans receivable (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Credit card and line of credit loans.......... $2,493,827 $2,302,770
Home equity lines of credit................... 338,920 659,137
Net loan acquisition costs, net of accumulated
amortization of $48,860 in 1996 and $15,378
in 1995...................................... 6,391 25,260
---------- ----------
Total investment in credit card and line of
credit loans and home equity lines of
credit....................................... 2,839,138 2,987,167
Installment................................... 21,380 26,213
Mortgage...................................... 79,423 63,741
Commercial.................................... 15,749 18,959
Other......................................... 629 464
---------- ----------
2,956,319 3,096,544
Allowance for possible credit losses.......... (114,540) (93,429)
---------- ----------
$2,841,779 $3,003,115
========== ==========
</TABLE>
Certain qualified customers who accept credit card and line of credit loans
also accept an immediate cash advance. Included in loans receivable and non-
interest bearing deposits are $12.3 million and $22.3 million in cash advance
checks issued to customers which remain outstanding at December 31, 1996 and
1995, respectively.
14
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity in the allowance for possible credit losses for the years ended
December 31, 1996, 1995, and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year............... $ 93,429 $ 76,218 $ 75,061
Provision for possible credit losses....... 126,579 79,917 50,313
Credit losses.............................. (116,930) (73,004) (56,235)
Recoveries of loans previously recognized
as credit losses.......................... 11,462 10,298 7,079
--------- -------- --------
Balance at end of year..................... $ 114,540 $ 93,429 $ 76,218
========= ======== ========
</TABLE>
The following is a summary of loans held for securitization or sale (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1995
-------- --------
<S> <C> <C>
Credit card and line of credit loans.................... $641,666 $123,330
Home equity lines of credit............................. 51,667 --
First mortgage home loans............................... 46,373 --
-------- --------
$739,706 $123,330
======== ========
</TABLE>
NOTE E--SALE OF RECEIVABLES
During 1996, 1995 and 1994, the Banks sold $2.5 billion, $1.6 billion and
$526 million, respectively, of their credit card, revolving line of credit,
and home equity line of credit receivables through securitization
transactions. The total amount of securitized receivables serviced by the
Banks were $5.6 billion and $3.5 billion as of December 31, 1996 and 1995,
respectively.
During the initial period of a securitization transaction (reinvestment
period), all principal payments on the credit card and line of credit
receivables are retained by the Banks in exchange for additional receivable
balances added to the trust. In the final 6-to-12 month period of a
securitization transaction, principal payments are then allocated to pay off
the investor certificates. This period is referred to as the amortization or
accumulation period. FDNB currently has one transaction which is in the
accumulation period and the remaining transactions will begin their
amortization or accumulation periods at various times between 1997 and 2001.
PNB currently has one transaction which is in the accumulation period and the
remaining transactions will begin their amortization or accumulation periods
at various times between 1997 and 2001.
The reserve account receivable, which is funded solely by the net cash flows
of the related credit card and line of credit receivables, represents cash
held by a trustee used to absorb the receivables' losses should they exceed
the net cash flows of the receivables in the future. The cash reserve reverts
back to the Banks at the completion of the amortization or accumulation
period. None of the reserve was required to be used in the three year period
ended December 31, 1996.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125), which provides new accounting and reporting standards for sales,
securitization,
15
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and servicing of receivables and other financial assets and extinguishments of
liabilities for transactions occurring after December 31, 1996. SFAS No. 125
requires that a transfer of financial assets in which the transferor
surrenders certain conditions of control over those assets be accounted for as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. The statement also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interest, if any, based on their relative fair values at
the date of the transfer. Any gain on sale would be recognized at that date
and the offsetting asset will be classified as an interest only strip
receivable and held as available for sale under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115).
Although SFAS No. 125 is prospective in its application, it will have an
impact on securitization transactions entered into prior to January 1, 1997,
because it requires reclassification of certain related assets and because its
provisions apply to ongoing sales of receivables during the reinvestment
period for these securitization transactions. Accordingly, the related reserve
account receivable balances will be subsequently measured like investments in
debt securities classified as available-for-sale under SFAS No. 115 with the
fair value expected to approximate book value. Servicing assets have not been
recognized on these transactions and, therefore, will not be recorded in
future periods. The sellers' interest in the securitized receivables will
continue to be classified as loans receivable at par less associated allowance
for possible credit losses. Additional monthly sales of receivables during the
reinvestment period will be treated as new securitization transactions with
gains recognized each month during the reinvestment period and the offsetting
asset classified as an interest only strip receivable available for sale.
The application of SFAS No. 125 to monthly sales of receivables with respect
to securitization transactions originated prior to January 1, 1997 is
estimated to increase net income by approximately $24 million for the year
ended December 31, 1997, as a result of recognizing gains upon the dates of
transfer as opposed to recognizing excess servicing income as it is received
monthly. This impact is non-recurring because for the first six to eight
months of 1997, the Company will recognize both excess servicing income
generated by balances existing as of December 31, 1996, and gains on
additional monthly sales into these existing transactions during 1997. The
amount and timing of any increase in income resulting from the application of
SFAS No. 125 to transactions originated prior to January 1, 1997 are, however,
dependent on the performance of the underlying receivables. In addition, the
impact from the application of SFAS No. 125 to transactions originated
subsequent to January 1, 1997 is dependent on the amount and timing of future
securitizations.
Under SFAS No. 125, interest rate risk management instruments used to hedge
the excess servicing received from loan securitizations will be designated to
the interest only strips receivable and marked to market. Changes in the
market value of these instruments are expected to offset changes in the market
value of the designated interest only strips receivable.
NOTE F--DEPOSITS
The Company accepts time deposits with terms in excess of one year. The
aggregate amount of maturities for time deposits in each of the years
subsequent to December 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................... $ 171,616
1999........................... 136,290
2000........................... 58,770
2001........................... 131,361
---------
$ 498,037
=========
</TABLE>
16
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of average rate paid and average deposit amount by
deposit category as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 AVERAGE 1995 AVERAGE
-------------- --------------
BALANCE RATE BALANCE RATE
--------- ---- --------- ----
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits.......... 34,414 0.00% 38,057 0.00%
Interest bearing demand deposits............. 5,974 1.94 5,905 2.27
Savings deposits............................. 588,638 4.48 410,597 4.57
Time deposits................................ 1,961,012 5.87 1,394,669 6.21
</TABLE>
As discussed in Note K--Interest Rate Risk Management Instruments, the
Company enters into interest rate swap and cap transactions to manage interest
rate risk. As a result of interest rate risk management transactions, time
deposit interest expense decreased $1.3 million and $0.7 million in the years
ended December 31, 1996 and 1995, respectively. The effective interest rates
on the time deposits including the impact of the interest rate swap and cap
transactions in the years ended December 31, 1996 and 1995 was 5.81% and
6.16%, respectively.
NOTE G--NOTES PAYABLE
In May 1996, the Company amended the previous unsecured revolving credit
agreement with various banks and increased the line from $800 million to $1.2
billion. The Company pays facility fees based on the total commitment and
utilization fees based on the average outstanding loan balances which exceed
50% of the average total commitment. Interest on outstanding balances is based
upon the federal funds rate, prime rate, Eurodollar interest rate or
certificate of deposit rate of certain New York banks. The agreement expires
on May 14, 1999, with a one-year extension option. A total of $115 million and
$321 million was drawn on the line at December 31, 1996 and 1995,
respectively.
In March 1996, the Company entered into a $50 million Senior Subordinated
note agreement with various investors. Interest on outstanding balances is
fixed at 5.74% and the note is due March 15, 1999.
Throughout 1996, the Company maintained revolving credit agreements with
Providian. Total draws on the lines may not exceed $200 million. At December
31, 1996, there were no outstanding draws on the lines by the Company. The
Company paid facility fees of $0.3 million and interest of $2.8 million in
1996. Interest on the outstanding balance is based on the greater of
Providian's internal fund rate or the applicable Federal rate. Concurrently,
the Company entered into a three-year interest rate swap agreement wherein the
Company pays a variable rate based on one month LIBOR, and receives a fixed
rate on a notional amount of $40 million. The impact to interest expense on
this borrowing as a result of the interest rate swap was to increase interest
expense by $0.1 million in 1996. The following table summarizes all
outstanding short-term borrowings and the weighted average interest rate on
those borrowings as of December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
DECEMBER 31 BALANCE RATE BALANCE RATE
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal funds purchased..................... $ 51,000 5.55% $336,000 5.73%
Notes payable to banks...................... 115,000 5.78% 321,000 6.03%
Bank notes.................................. -- -- 189,880 5.82%
</TABLE>
17
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--INCOME TAXES
The components of the income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 95,512 $80,317 $59,329
State............................................. 13,570 12,193 8,068
-------- ------- -------
109,082 92,510 67,397
Deferred:
Federal........................................... (12,082) (9,580) (2,121)
State............................................. 485 (3,519) (192)
-------- ------- -------
(11,597) (13,099) (2,313)
-------- ------- -------
$ 97,485 $79,411 $65,084
======== ======= =======
</TABLE>
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
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory Federal Rate......................... 35% 35% 35%
State income taxes............................. 3 2 2
-------- -------- --------
Effective Tax Rate............................. 38% 37% 37%
======== ======== ========
</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 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1996 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs................................ $10,260 $12,169
Other..................................................... 1,566 1,327
------- -------
11,826 13,496
Deferred tax assets:
Provision for possible credit losses...................... 43,325 36,153
Deferred income........................................... 9,324 5,252
Long-term incentive accruals.............................. 16,192 13,945
Other..................................................... 14,477 18,041
------- -------
83,318 73,391
------- -------
Net deferred tax assets..................................... $71,492 $59,895
======= =======
</TABLE>
18
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--RELATED PARTY TRANSACTIONS
The Company had investments with Providian during 1996, 1995 and 1994. The
amount of interest earned on these investments was $1.1 million, $2.4 million
and $4.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance of such investments which are included
in cash equivalents was $14.3 million, $22.3 million and $66.6 million as of
December 31, 1996, 1995 and 1994, respectively.
Interest expense associated with notes to affiliates totaled $3.5 million,
$6.2 million and $4.7 million for the years ended December 31, 1996, 1995 and
1994, respectively. The Company maintains several long term notes with
Providian and, in prior years, with a number of Providian subsidiaries as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Providian:
Subordinated 5.10% note due 1996.................. -- $ 8,300 $ 8,300
Subordinated 5.51% note due 1997.................. $ 8,000 8,000 8,000
Subordinated 5.91% note due 1998.................. 7,500 7,500 7,500
Subordinated 6.19% note due 1999.................. 7,000 7,000 7,000
Subordinated 6.43% note due 2000.................. 20,000 20,000 20,000
------- ------- -------
Total Providian................................. 42,500 50,800 50,800
Providian Subsidiaries:
Subordinated 5.91% note due 1998.................. -- -- 4,000
Senior 6.75% notes due 1996....................... -- 45,000 45,000
------- ------- -------
$42,500 $95,800 $99,800
======= ======= =======
</TABLE>
On August 27, 1995, at the request of the Company's affiliate, Worldwide
Insurance Company, the Company paid the $4 million subordinated 5.91% note,
which was due in 1998. On March 15, 1996, the Company paid notes outstanding
with Commonwealth Life Insurance Company and Peoples Security Life Insurance
Company for $25 million and $20 million, respectively.
The Company maintains contractual agreements with Providian to provide
certain limited administrative services, which are consistent with similar
arrangements and transactions with unrelated parties.
NOTE J--PREMISES, EQUIPMENT AND LEASE COMMITMENTS
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Premises.................................................. $20,271 $ 8,922
Equipment and furniture................................... 49,403 30,354
Leasehold improvements.................................... 4,333 2,327
Land...................................................... 2,723 2,723
------- -------
Less accumulated depreciation and amortization............ 26,860 16,294
------- -------
$49,870 $28,032
======= =======
</TABLE>
The Company leases office space and equipment under long-term operating
leases. The office lease agreements have expiration dates ranging from
February 14, 1997, through February 28, 2002, with five-year
19
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
renewal options. Some of these lease agreements contain rent escalation
clauses. Rent includes the pass through of operating expenses and property
taxes and totaled $8.9 million, $6.9 million and $6.8 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company's approximate future minimum rental payments under noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
YEAR AMOUNT
---- -------
1997............................. $ 9,535
1998............................. 8,801
1999............................. 8,095
2000............................. 5,679
2001............................. 2,835
Thereafter....................... 7
-------
$34,952
=======
</TABLE>
NOTE K--INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company's principal objective in entering into off-balance sheet
interest rate risk management instruments is to manage interest rate risk
related to loans, deposits, and other borrowings. 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 swaps and caps which will mature from 1997 to 2003.
The Company's policy is to enter into hedging transactions and hold them to
maturity unless the underlying hedged item is sold, in which case, the
instrument is terminated and the related gain or loss recorded in conjunction
with the hedged item.
The Company also enters into off-balance-sheet interest rate risk management
instruments to manage interest rate risk related to excess servicing income.
The Company receives excess servicing income from securitized receivables
which represents the excess of (a) total interest and fees on the securitized
receivables, over (b) credit losses generated by the receivables, the stated
servicing fee, the coupon interest paid to the securitization investors and
credit enhancement and trust administration costs. Two components of the
excess servicing stream are tied to interest rates, the yield on the
receivables and the coupon payments to the investors, and each may be either a
fixed interest rate or be indexed to market interest rates. If the receivables
and the coupons do not have matching repricing terms, the excess servicing
income stream will be interest rate sensitive.
To the extent the excess servicing income stream is interest rate sensitive,
the Company enters into interest rate swap and cap agreements as a hedge
specifically against changes in interest rates. Notional amounts for the
instruments are determined based on the interest rate repricing exposure, if
any, between the securitized receivables and the investor interest rates.
Terms of the instruments are generally matched to the terms of the series
being hedged and vary from three to seven years.
As of December 31, 1996 and 1995 the Company had $1.3 billion and $1.4
billion notional amount of interest rate swaps outstanding, respectively. Of
these amounts, $305 million and $323 million were designated to hedge deposits
as of December 31, 1996 and 1995, respectively, $40 million and $0.0 million
were designated to hedge long-term notes payable as of December 31, 1996 and
1995, respectively, and $945 million and $1,100
20
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million were designated to hedge excess servicing from loan securitizations as
of December 31, 1996 and 1995, respectively.
When interest rate risk management instruments are used to hedge
liabilities, the net receipts or payments are recognized as an adjustment to
interest expense. The average effective interest rate on the Company's
interest bearing liabilities after giving effect to the swaps was 5.81% and
6.16% for the years ended December 31, 1996 and 1995, respectively. For the
years ended December 31, 1996 and 1995, the impact to interest expense as a
result of the interest rate swap agreements was a decrease of $1.2 million and
$0.7 million, respectively.
When interest rate risk management instruments are used to hedge the excess
servicing received from loan securitizations, the net receipts or
disbursements are recognized as an adjustment to loan servicing income. Net
amounts received in connection with these agreements during 1996 were $1.4
million and net amounts paid in connection with these agreements during 1995
were $0.5 million.
The following table summarizes the expected or contractual maturities and
weighted average interest rates associated with amounts to be received or paid
on interest rate swaps used to manage asset and liability interest rate
exposure (dollars in thousands):
<TABLE>
<CAPTION>
BALANCE AT BALANCES MATURING IN:
DECEMBER 31, ------------------------------------------
1996 1997 1998 1999 2000 2001
------------ -------- -------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Vari-
able:
Notional Value........ $ 120,000 -- $120,000 -- -- --
Weighted Average Pay
Rate................. 6.24% -- 6.24% -- -- --
Weighted Average Re-
ceive Rate*.......... 5.53% -- 6.19% -- -- --
Receive Fixed/Pay Vari-
able:
Notional Value........ $ 970,500 $125,000 $700,000 $125,500 -- $20,000
Weighted Average Pay
Rate*................ 5.57% 5.70% 6.14% 6.56% -- 6.82%
Weighted Average Re-
ceive Rate........... 6.31% 6.66% 6.15% 7.45% -- 6.62%
Receive Variable/Pay
Variable:
Notional Value........ $ 200,000 $200,000 -- -- -- --
Weighted Average Pay
Rate................. 6.27% 6.27% -- -- -- --
Weighted Average Re-
ceive Rate........... 5.54% 5.54% -- -- -- --
Total Notional Value:... $1,290,500 $325,000 $820,000 $125,500 -- $20,000
Weighted Average Pay
Rate*................ 5.74% 5.93% 6.15% 6.56% -- 6.82%
Weighted Average Re-
ceive Rate*.......... 6.12% 6.21% 6.16% 7.45% -- 6.62%
</TABLE>
- --------
* Variable rates for future periods are based on the implied forward rates on
the yield curve as of December 31, 1996.
In addition, the Company has entered into interest rate cap agreements, the
result of which establishes 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 via variable rate instruments, the interest rate caps are
designed to protect loan servicing income. As of December 31, 1996 and 1995,
the Company had $1.5 billion and $1.0 billion notional amount of interest rate
caps outstanding, respectively which was designated to excess servicing.
During 1996 and 1995, no cap interest payments were received and amortization
of cap fees totaled $0.9 million and $1.2 million, respectively.
21
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of interest rate cap agreement maturity distributions
as of December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED
AMOUNT AVERAGE
YEAR MATURING STRIKE RATE
---- -------- -----------
<S> <C> <C>
1997.................................. $208,000 9.00%
1998.................................. 533,700 10.26%
1999.................................. 775,000 12.00%
2000.................................. -- --
2001.................................. -- --
2002.................................. -- --
2003.................................. 5,750 8.75%
</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 contract. 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 $7.5 million and $17.4 million at December 31, 1996 and 1995,
respectively. The related net accrued interest receivable was $474,000 and
$1,637,000 at December 31, 1996 and 1995, respectively. The Company has
reduced credit risk in these instruments by entering into interest risk
management agreements with only nationally recognized financial institutions
and dealers which carry at least investment grade ratings. Also, the Company's
policy is to diversify its 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 L--LOAN COMMITMENTS
Credit card and line of credit loan commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. In addition, these commitments can be withdrawn by the Company at
any time after 30 days notice, or without notice if permitted by law. Credit
card and line of credit loan commitments reported below are the maximum
available line for all customers as of December 31, 1996. It is anticipated
that the commitment amounts will only be partially drawn upon based on overall
customer usage patterns and, therefore, do not necessarily represent future
cash requirements.
Other commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some commitments may expire or be
withdrawn by the Company without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Total unfunded commitments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
<S> <C> <C>
1996 1995
----------- ----------
Credit card and line of credit loans............... $11,928,517 $9,121,456
Home equity lines of credit........................ 137,692 111,603
Construction and commercial loans.................. 385 418
----------- ----------
$12,066,594 $9,233,477
=========== ==========
</TABLE>
22
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has credit risk on the credit card and line of credit loans to
the extent that borrowers default on funded portions and such amounts are not
recovered through collection procedures.
Home equity lines of credit may be originated up to 100% loan to value based
upon property and borrower characteristics.
The construction and commercial loans and commitments are secured by
residential and commercial real estate projects. Disbursements are made based
on the substantiated support of progress made on the underlying projects.
The Company has credit risk on commercial loans, construction loans and
equity lines to the extent that the borrower defaults and the current funded
amount as well as commitments outstanding exceed the collateral value. In
these events, losses would occur up to the amount that is funded that exceeds
the net realizable balance of the collateral held upon foreclosure sale.
The Company has no significant regional concentrations of credit risk.
NOTE M--SHAREHOLDER'S EQUITY AND CAPITAL REQUIREMENTS
During 1996, the Company redeemed all outstanding shares of special
preferred stock. Subsequently, the Company adopted a restated articles of
incorporation which effected certain changes in the capital structure
including the elimination of the special preferred stock and the Class B
common stock as well as a reduction in the authorized shares of common stock
and preferred stock to 5,000 and 63,269 shares, respectively.
The Company's banking subsidiaries are subject to various regulatory capital
requirements administered by the Federal banking agencies. Under these
guidelines, an institution is required to maintain a minimum total risk-based
ratio (total capital to risk-weighted assets) of 8%, of which 4% must be Tier
1 risk-based capital. In addition, the agencies 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. Capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors. Failure to meet minimum capital requirements can result in mandatory
and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Since December 31, 1996, there have been no conditions or events
that have changed the institutions' risk-based classifications.
23
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996 and 1995, all of the Company's depository
institution subsidiaries met the well capitalized requirements as set forth in
the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------- --------------------------------------------
TOTAL TIER 1 TIER 1 TOTAL TIER 1 TIER 1
RISK BASED RISK BASED LEVERAGE RISK BASED RISK-BASED LEVERAGE
CAPITAL CAPITAL RATIO* CAPITAL CAPITAL RATIO*
--------------- --------------- -------------- -------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST DEPOSIT NATIONAL
BANK:
Actual.................. 250,873 11.18% 222,281 9.91% 222,281 10.81% 231,795 10.89% 204,767 9.62% 204,767 9.56%
Minimum capital
adequacy............... 179,446 8.00% 89,723 4.00% 61,671 4.00% 170,294 8.00% 85,147 4.00% 64,248 4.00%
Minimum well-
capitalized............ 224,308 10.00% 134,585 6.00% 102,785 5.00% 212,868 10.00% 127,721 6.00% 107,080 5.00%
PROVIDIAN NATIONAL
BANK:
Actual.................. 210,055 13.44% 190,300 12.17% 190,300 10.78% 126,728 12.27% 113,622 11.00% 113,622 11.45%
Minimum capital
adequacy............... 125,046 8.00% 62,523 4.00% 70,624 4.00% 82,627 8.00% 41,313 4.00% 39,645 4.00%
Minimum well-
capitalized............ 156,307 10.00% 93,784 6.00% 88,280 5.00% 103,284 10.00% 61,970 6.00% 49,556 5.00%
PROVIDIAN CREDIT
SERVICES INC.
Actual.................. 16,343 218.43% 16,247 217.14% 16,247 80.68% N/A N/A N/A N/A N/A N/A
Minimum capital
adequacy............... 599 8.00% 299 4.00% 805 4.00% N/A N/A N/A N/A N/A N/A
Minimum well-
capitalized............ 748 10.00% 449 6.00% 1,007 5.00% N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
* Minimum capital adequacy ratio is 3.0% for the highest rated institutions
The Federal Deposit Insurance Corporation Improvement Act of 1991 requires
all federal banking agencies to incorporate interest rate risk into their
risk-based capital framework. During 1996, the agencies rejected a previously
proposed standardized model for measuring and monitoring the level of interest
rate risk. The Company does not believe that the consideration of interest
rate risk will have a material adverse effect on FDNB, PNB or PCSI's ability
to satisfy minimum risk-based capital requirements.
NOTE N--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 are disclosed
below. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. In addition, these values do not consider the potential income
taxes or other expenses that would 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.
24
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosure for financial instruments:
Cash and cash equivalents: Cash and cash equivalents are carried at an
amount that approximates fair value.
Federal funds sold: Federal funds sold are carried at an amount that
approximates fair value.
Investment securities: Fair value is based on quoted market prices, where
available or quoted market prices of comparable instruments. If not material,
the carrying value of investment securities approximates fair value.
Reserve accounts receivable and Interest receivable: The carrying amounts
reported in the Statements of Financial Condition approximate fair value.
Deposits: The fair values disclosed for demand deposits (money market
accounts, and certain savings accounts) are equal to the amount payable on
demand at the reporting date (carrying amount). The carrying amount for
variable-rate certificates of deposits approximates fair value. Fair value for
fixed-rate certificate of deposits and other fixed-rate deposits is estimated
using a discounted cash flow calculation that applies interest rates currently
offered on deposits of similar remaining maturities.
Borrowings: The carrying amounts of federal funds purchased, notes payable
to banks, and bank notes approximate fair value.
Notes payable to affiliates: The fair value of the Company's notes payable
to affiliates is estimated using discounted cash flow analysis, based on the
Company's current borrowing rates for similar types of borrowing arrangements.
Loans receivable and Loans held for securitization and sale: For variable
rate loans that reprice monthly with no applicable floor and no significant
change in credit risk, fair values are based on carrying value. Fair value of
credit card loans and lines of credit loans are estimated by discounting the
estimated future cash flows adjusted for differences in loan characteristics
at rates for securities backed by similar loans. Variable rate home equity
lines of credit with interest rate floors approximate carrying value plus a
floor premium calculated using external market valuations. For fixed-rate
mortgage loans, fair values were calculated using the discounted cash flow
method. Other mortgage and commercial loans are indexed to the prime rate and
their carrying value approximates fair value. Fair value for installment loans
approximates their carrying value.
Off-Balance-Sheet Instruments: Fair value for the Company's off-balance
sheet instruments (interest rate swaps, interest rate caps and lending
commitments) is based on valuation models, if material, using discounted cash
flows (swaps); an assessment of current replacement cost (caps); and valuation
models as previously described for loans receivable (lending commitments).
Credit card and line of credit lending commitments were determined to have no
fair value. If not material, no fair value is shown.
25
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 82,946 $ 82,946 $ 104,083 $ 104,083
Federal funds sold............... 172,350 172,350 71,300 71,300
Investment securities............ 7,173 7,173 4,927 4,927
Reserve account receivable....... 252,899 252,899 123,687 123,687
Loans held for securitization and
sale............................. 739,706 805,921 123,330 140,301
Loans receivable................. 2,841,779 3,209,290 3,003,115 3,406,331
Interest receivable.............. 56,864 56,864 44,734 44,734
LIABILITIES
Deposits......................... 3,390,112 3,396,377 2,157,765 2,171,801
Federal funds purchased.......... 51,000 51,000 336,000 336,000
Notes payable to banks........... 115,000 115,000 321,000 321,000
Notes payable to affiliates...... 42,500 42,530 95,800 95,993
Bank notes....................... 189,880 189,880
Long term notes payable.......... 50,000 49,985
OFF BALANCE-SHEET INSTRUMENTS
Interest rate swaps.............. 6,579 4,819
Interest rate caps............... 56 108
Lending commitments:
Home equity lines of credit...... 443 711
</TABLE>
NOTE O--DEFINED CONTRIBUTION 401(K) AND RETIREMENT PLAN
The Company sponsors a defined contribution 401(k) pension plan covering
substantially all of its employees. The Company has a policy of matching
contributions equal to 55% of the first 6% of compensation deferred by
employees. Total expenses for the years ended December 31, 1996, 1995 and 1994
amounted to $1.9 million, $1.3 million and $1.3 million, respectively. In
addition, the Company contributes additional amounts to the 401(k) pension
plan for those employees with at least one year of employment regardless of
any participation in the 401(k) plan. The Company recorded contributions of
$3.9 million, $3.0 million and $2.6 million as of December 31, 1996, 1995 and
1994, respectively. The retirement contributions vest at 20% upon completing
the third year of employment increasing 20% each completed year of employment
thereafter until fully vested.
NOTE P--SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Company, through its subsidiary
Providian Capital I, issued $160 million in mandatorily redeemable capital
securities which accrue dividends at 9.525% per year. The sole assets of
Providian Capital I, the trust that issued the capital securities (the common
securities of which are wholly owned by the Company), are $164,949,000
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.
The Company has the right to cause the redemption of the capital securities.
The redemption price is dependent 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
26
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
capital securities. The proceeds from the issuance of the securities will be
used for retirement of the outstanding long term notes payable ($42.5 million
as of December 31, 1996) and the redemption of outstanding preferred stock
($63.3 million as of December 31, 1996) held by Providian and for general
corporate purposes.
NOTE Q--STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 15,757 $ 23,749
Investment in securities................................... 2,175 --
Loans receivable........................................... 4,102 3,984
Investment in subsidiaries................................. 566,865 421,492
Deferred income taxes receivable........................... 71,492 59,895
Prepaid expenses and other assets.......................... 6,178 4,700
-------- --------
$666,569 $513,820
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY:
LIABILITIES
Due to affiliates.......................................... 24,713 22,931
Notes payable to affiliates................................ 42,500 50,800
Income taxes payable to shareholder........................ 39,491 21,925
Accrued expenses and other liabilities..................... 76,720 68,909
-------- --------
183,424 164,565
SHAREHOLDER'S EQUITY
Special Preferred Stock, noncumulative, nonparticipating,
nonvoting, par value $1.00 per share--authorized 5,000,000
shares, issued and outstanding
1,290,107 shares in 1995.................................. -- 1,290
7.25% Cumulative Preferred Stock, nonparticipating, nonvot-
ing, par value $1.00 per share--authorized 63,269 shares,
issued and outstanding 63,269 shares...................... 63 63
Common Stock, par value $1.00 per share--authorized 5,000
shares, issued and outstanding 5,000 shares............... 5 5
Additional paid-in capital................................. 63,706 63,706
Retained earnings.......................................... 419,371 284,191
-------- --------
483,145 349,255
-------- --------
$666,569 $513,820
======== ========
</TABLE>
27
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--STATEMENTS OF INCOME (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries.................... $ 70,000 $ 82,500 $110,000
Income on investments.......................... 1,071 2,234 4,115
Interest on loans.............................. 476 1,038 465
Other income................................... 6,249 4,350 5,839
-------- -------- --------
77,796 90,122 120,419
Expenses:
Salaries and employee benefits................. 9,728 9,827 11,702
Provision for possible credit losses........... (82) -- (8,800)
Interest expense............................... 2,839 3,185 3,289
General and administrative..................... (2,919) 6,011 (16,401)
-------- -------- --------
9,566 19,023 (10,210)
-------- -------- --------
Income Before Income Taxes and Equity in
Earnings of Subsidiaries.................... 68,230 71,099 130,629
Income tax (credit)/expense...................... (1,664) (6,928) 3,014
Equity in undistributed earnings of 89,872 57,425 (16,145)
subsidiaries:................................... -------- -------- --------
Net Income................................... $159,766 $135,452 $111,470
======== ======== ========
</TABLE>
28
<PAGE>
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE Q--STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income..................................... $159,766 $135,452 $111,470
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses......... (82) -- (8,800)
Equity in undistributed earnings of
subsidiary.................................. (89,872) (57,425) 16,145
Increase in other assets..................... (1,478) (878) (669)
Increase (decrease) in accrued expenses and
other liabilities........................... 7,811 12,587 (11,094)
Increase in deferred income taxes
receivable.................................. (11,597) (13,099) (13,003)
Increase (decrease) in taxes payable to
shareholder................................. 17,566 14,636 (2,313)
Due from (due to) affiliates................. 1,746 66,605 (16,941)
-------- -------- --------
Net Cash Provided by Operating Activities.. 83,860 157,878 74,795
-------- -------- --------
INVESTING ACTIVITIES
Purchases of investment securities............. (2,175) -- --
Proceeds from sales/maturities of investment
securities.................................... -- -- 8,463
Net increase in investment in subsidiaries..... (55,500) (65,995) (14,492)
-------- -------- --------
Net Cash Used in Investing Activities...... (57,675) (65,995) (6,029)
-------- -------- --------
FINANCING ACTIVITIES
Net (decrease) increase in note payable to
affiliates.................................... (8,300) (4,000) --
Net decrease in other short term borrowings.... -- -- (7,977)
Redemption of special preferred stock.......... (1,290) -- --
Dividends paid to shareholder.................. (24,587) (112,297) (54,588)
-------- -------- --------
Net Cash Used by Financing Activities...... (34,177) (116,297) (62,565)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash
Equivalents............................... (7,992) (24,414) 6,201
Cash and cash equivalents at beginning of year... 23,749 48,163 41,962
-------- -------- --------
Cash and Cash Equivalents at End of Year....... $ 15,757 $ 23,749 $ 48,163
======== ======== ========
</TABLE>
29
