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: February 12, 1997
Providian Corporation
(Exact name of Registrant as Specified in its Charter)
Delaware 1-6701 51-0108922
(State or Other jurisdiction (Commmission 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)
<PAGE>
Item 5. Other Events.
On December 30, 1996, the Registrant announced its intent to spin-off
its wholly owned subsidiary Providian Bancorp, Inc. 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, Inc. issued $160
million of capital securities. The attached exhibit provides certain historical
financial information of Providian Bancorp, Inc. as well as certain pro forma
financial information of Providian Bancorp, Inc., giving effect to the proposed
Distribution and the issuance of the capital securities.
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
<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:_________________________________
Name: Robert L. Walker
Title: Senior Vice President - Finance
Date: February 12, 1997
<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
PRO FORMA CONDENSED FINANCIAL STATEMENTS
PROVIDIAN BANCORP, INC. AND SUBSIDIARIES
The following tables present unaudited pro forma condensed statements
of income for the years ended December 31, 1996 and 1995 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 mandatorily redeemable preferred securities
(the "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 thereof owned by
Providian Bancorp) and investing the proceeds in 9.525% Junior Subordinated
Deferrable Interest Debentures issued by Providian Bancorp. 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, 1995, 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 Registrant 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.
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Statement of Income
------------------------------------------------------------------------------------------
Unaudited
Year Ended December 31, 1996 Year Ended December 31, 1995
--------------------------------------------- -------------------------------------------
As Pro Forma As Pro Forma
reported, ----------- Providian reported, - Pro Forma Providian
Providian Pro Forma ----------- Providian Adjustments -----------
Bancorp Adjustments Bancorp ----------- Bancorp
Bancorp
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Consumer Loans $574,335 $574,335 $457,818 $457,818
Other 21,658 21,658 21,736 21,736
Total interest income 595,993 595,993 479,554 479,554
Interest Expense:
Deposits 141,691 (7,511) (1) 134,180 105,442 (4,896) (1) 100,546
Borrowings (2,839) (1) (3,176) (1)
------------ ----------- ---- 45,250 ----------- ----------- ---- 49,460
48,676 (587) (2) 52,962 (326) (2)
Total Interest Expense 190,367 (10,937) 179,430 158,404 (8,398) 150,006
Net interest income 405,626 416,563 321,150 329,548
Provision for loan losses 126,579 126,579 79,917 79,917
- ------------------------------
Other income 412,008 412,008 335,764 335,764
Other expense (11,284) (3) (4,893) (3)
433,804 ----------- ---- 424,892 ----------- ----------- ---- 359,907
2,372 (4) 362,134 2,666 (4)
Income before income taxes 257,251 19,849 277,100 214,863 10,625 225,488
Income tax expense 3,933 (1) 3,067 (1)
----------- ---- 124 ----
223 (2) 1,859 (2)
4,288 (3) (1,013) (3)
(901) (4) (4)
97,485 7,543 105,028 79,411 4,037 -----------
83,448
- ----------------------------- $159,766 =========== =========== ----------- =========== ===========
Net Income $12,306 $172,072 $135,452 $6,588 $142,040
Divdends on Company
Obligated Manditorily ----------- -----------
Redeemable Preferred
Securities of the Trust
(9,449) (9,449)
Net Income Applicable to 162,623 132,591
Common Stock
Weighted Average Number of
============================= 93,700 95,900
Common Shares Outstanding
Net Income per common and
common equivalent share (5) $1.74 $1.38
</TABLE>
<PAGE>
Notes to Pro Forma Statement of Income:
(1) The pro forma condensed statement of income reflects, for the periods
presented, the repayment of borrowings by Providian Bancorp from affiliates who
will no longer be affiliates after the Distribution, and the redemption of
preferred stock issued by Providian Bancorp that is currently held by Providian
Corporation. The adjustment assumes that such repayment was funded from the
proceeds of the issuance of the Capital Securities as of January 1, 1995, with
the remaining proceeds, totaling $42 million, used to reduce funding provided by
certificates of deposit. Additionally, the pro forma adjustments assume the
payment of dividends on Providian Bancorp Common Stock in amounts equal to
approximately 12% (representing Providian Bancorp's estimate of the median rates
paid by peer group companies) of Providian Bancorp's net income (before payments
in respect of the Capital Securities), rather than payment of dividends in the
amounts historically paid to Providian Corporation (12% and 80% of net income
before payments in respect of preferred stock, in 1996 and 1995, respectively).
The additional amount assumed for pro forma purposes to be retained by Providian
Bancorp, rather than paid as dividends, is assumed to further reduce funding
provided by certificates of deposit. For all periods presented, the Pro Forma
Condensed Statement of Income reflects the net tax effect, at Providian
Bancorp's estimated combined Federal and state income tax rate of 38%, of
replacing borrowings from affiliate entities and reducing funding provided by
certificates of deposit.
(2) The Pro Forma Condensed Statement of Income reflects, for the periods
presented, the short-term borrowing of funds from Providian Bancorp's committed
revolving credit facility rather than from the corporate line of credit facility
provided by Providian Corporation and the net tax effect, at Providian Bancorp's
estimated effective tax rate of 38%, of such decrease in interest expense.
(3) The Pro Forma Condensed Statement of Income reflects, for the periods
presented, the granting of stock options (which does not result in compensation
expense) rather than the vesting of Equity Units under the Providian Bancorp
Equity Unit Plan (the "Equity Unit Plan")which results in compensation expense
as the units vest, and the net tax effect, at Providian Bancorp's estimated
combined Federal and state income tax rate of 38%, of such reduction in
compensation expense.
(4) The Pro Forma Condensed Statement of Income reflects, for the periods
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 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.
(5) Pro forma per share information is calculated using net income divided by
the weighted average number of common and common equivalent shares outstanding.
<PAGE>
Pro Forma Condensed Statement of Financial Condition
-----------------------------------------------
Unaudited
As of December 31, 1996
-----------------------------------------------
As Pro Forma
reported, Pro Forma Providian
Providian Adjustments Bancorp
Bancorp
(Dollars in thousands)
Assets:
Cash and Cash Equivalents $82,946 54,231 (1) $137,177
Federal Funds Sold 172,350 172,350
Consumer Loans held for
securitization 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
(63,269) (1)
Equity 483,144 160,000 (1) 579,875
------- ------- -------
Total Liabilities and Equity $4,326,744 54,231 $4,380,975
========== ====== ==========
Note 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 currently held by Providian Corporation. The adjustment
assumes that such repayment was funded from the issuance of Capital Securities.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PROVIDIAN BANCORP, INC.
AND SUBSIDIARIES
The attached consolidated financial statements present historical
financial and operating data for Providian Bancorp and its subsidiaries.
Providian Bancorp periodically securitizes certain credit card, revolving line
and home loan receivables to provide funds for operations, improve liquidity and
effectively manage capital. The effect of these transactions is to remove the
transferred loans from the statement of financial condition and to convert net
interest income on the securitized receivables to loan servicing fees.
Providian Bancorp's historical financial information may not be
indicative of Providian Bancorp's future performance nor does it necessarily
reflect what the financial position and results of operations of Providian
Bancorp would have been had Providian Bancorp operated as a separate,
stand-alone entity during the periods covered. The information set forth below
should be read in conjunction with the "Pro Forma Condensed Financial
Statements" included herein.
Unaudited Consolidated Financial Statements
of
Providian Bancorp Inc. and Subsidiaries
December 31, 1996
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands) (Unaudited)
<CAPTION>
December 31,
1996
--------------
<S> <C>
ASSETS
Cash and cash equivalents $ 82,946
Federal funds sold 172,350
Investment securities at cost (which approximates market value) 7,173
Reserve account receivable 252,899
Loans held for securitization or sale 739,706
Loans receivable, less allowance for possible credit losses of $114,540 2,841,779
Interest receivable 56,864
Premises and equipment, less accumulated depreciation and amortization 49,870
Deferred income taxes 71,492
Other assets 51,665
---------------
$ 4,326,744
===============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 28,299
Interest bearing, $100,000 and over 2,065,930
Interest bearing, other 1,295,883
---------------
3,390,112
Federal funds purchased 51,000
Notes payable to banks 115,000
Notes payable to affiliates 42,500
Long term notes payable 50,000
Accrued expenses and other liabilities 194,988
---------------
3,843,600
SHAREHOLDER'S EQUITY
7.25% Cumulative Preferred stock, Class A, nonparticipating, nonvoting, par value
$1.00 per share -- authorized 200,000 shares, issued and outstanding
63,269 shares 63 Common Stock, Class A and B, par value $1.00 per share --
authorized 1,001,000
shares, issued and outstanding 5,000 shares 5
Additional paid-in capital 63,706
Retained earnings 419,370
---------------
483,144
---------------
$ 4,326,744
===============
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands) (Unaudited)
Year Ended December 31,
1996
------------
Interest income:
Loans $ 574,335
Investment securities 21,658
-------------
Total Interest Income 595,993
Interest expense:
Deposits 141,691
Borrowings 48,676
-------------
Total Interest Expense 190,367
-------------
Net Interest Income 405,626
Provision for possible credit losses 126,579
-------
Net Interest Income After Provision
for Possible Credit Losses 279,047
Other income:
Loan servicing income 280,887
Credit product fee income 123,654
Other 7,467
-------------
412,008
Other expenses:
Salaries and employee benefits 153,849
Amortization of loan acquisition costs 41,342
General and administrative expenses 238,613
-------------
433,804
-------------
Income Before Income Taxes 257,251
Income tax expense 97,485
-------------
Net Income $ 159,766
=============
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, 1995 and 1994,
and the related consolidated statements of income, shareholder's equity and cash
flows for the years then ended. 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, 1995 and 1994, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Ernst and Young LLP
February 1, 1996
San Francisco, California
<PAGE>
<TABLE>
================================================================================
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
================================================================================
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands)
December 31
<CAPTION>
1995 1994
-------------- --- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 104,083 $ 116,365
Federal funds sold 71,300 15,000
Investment securities at cost (which approximates market value) 4,927 3,691
Reserve account receivable 123,687 91,875
Loans held for securitization 123,330
Loans receivable, less allowance for possible credit losses of $93,429 in 1995 and
$76,218 in 1994 3,003,115 2,292,362
Interest receivable 44,734 31,044
Premises and equipment, less accumulated depreciation and amortization 28,032 23,211
Deferred income taxes 59,895 46,796
Other assets 47,963 42,433
--------------- ---------------
$3,611,066 $2,662,777
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 38,639 $ 40,973
Interest bearing, $100,000 and over 1,113,188 767,516
Interest bearing, other 1,005,938 871,961
--------------- ---------------
2,157,765 1,680,450
Term federal funds purchased 336,000 198,000
Notes payable to banks 321,000 235,000
Notes payable to affiliates 95,800 99,800
Bank notes 189,880
Accrued expenses and other liabilities 161,366 123,427
--------------- ---------------
3,261,811 2,336,677
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 1,290 1,290
7.25% Cumulative Preferred stock, Class A, nonparticipating, nonvoting, par value
$1.00 per share -- authorized 200,000 shares, issued and outstanding 63,269 63 63
shares
Common Stock, Class A and B, par value $1.00 per share -- authorized 1,001,000
shares, issued and outstanding 5,000 shares 5 5
Additional paid-in capital 63,706 63,706
Retained earnings 284,191 261,036
--------------- ---------------
349,255 326,100
--------------- ---------------
$3,611,066 $2,662,777
=============== ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands)
Year Ended December 31
1995 1994
------------ ---- ------------
<S> <C> <C>
Interest income:
Loans $457,818 $315,001
Investment securities 21,736 28,709
------------- -------------
Total Interest Income 479,554 343,710
Interest expense:
Deposits 105,442 61,920
Borrowings 52,962 39,739
------------- -------------
Total Interest Expense 158,404 101,659
------------- -------------
Net Interest Income 321,150 242,051
Provision for possible credit losses 79,917 50,313
------------ -------------
Net Interest Income After Provision
for Possible Credit Losses 241,233 191,738
Other income:
Loan servicing income 251,855 208,954
Credit product fee income 81,374 57,683
Other 2,535 2,652
------------- -------------
335,764 269,289
Other expenses:
Salaries and employee benefits 113,412 89,470
Amortization of loan acquisition costs 14,561 54,178
General and administrative expenses 234,161 142,176
------------- -------------
362,134 285,824
------------- -------------
Income Before Income Taxes 214,863 175,203
Income tax expense 79,411 65,084
------------- -------------
Net Income $ 135,452 $ 110,119
============= =============
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
====================================================================================================================================
====================================================================================================================================
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands)
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
============ ============== ============ ============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
====================================================================================================================================
====================================================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Providian Bancorp, Inc. and Subsidiaries
(Dollars in Thousands)
Year Ended December 31
1995 1994
<CAPTION>
------------- ---- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 135,452 $ 110,119
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible credit losses 79,917 50,313
Depreciation and leasehold amortization 7,522 7,718
Amortization of net loan acquisition costs 3,002 46,422
Amortization of discount on sale of credit card and line of credit receivables 875 908
Deferred income tax benefit (13,099) (2,313)
Increase in interest receivable (13,690) (5,302)
(Increase) decrease in other assets (5,530) 11,248
Increase (decrease) in accrued expenses and other liabilities 37,939 (23,758)
------------- -------------
Net Cash Provided by Operating Activities 232,388 195,355
------------- -------------
INVESTING ACTIVITIES
Net issuance and repayment of credit card and line of credit receivables (2,244,585) (834,995)
Net proceeds from the sales of credit card and line of credit receivables 1,583,239 525,340
Net issuance and repayment of insurance premium financing loans 7,456 7,181
Net increase in other loans (251,403) (152,596)
(Increase) decrease in reserve account receivable (31,812) 75
Deferred net loan acquisition costs (12,584) (33,898)
Purchases of investment securities (1,530) (357)
Proceeds from sales/maturities of investment securities 294 54,879
Net increase in federal funds sold (56,300) (6,200)
Purchase of premises and equipment (12,343) (19,095)
-------------- -------------
Net Cash Used in Investing Activities (1,019,568) (459,666)
-------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 477,315 127,065
Net borrowings under line of credit agreements 86,000 60,000
Net (decrease) increase in note payable to affiliates (4,000) 45,000
Net increase in other short term borrowings 327,880 145,174
Dividends paid to shareholder (112,297) (54,588)
-------------- ------------
Net Cash Provided by Financing Activities 774,898 322,651
------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents (12,282) 58,340
Cash and cash equivalents at beginning of year 116,365 58,025
------------- ------------
Cash and Cash Equivalents at End of Year $ 104,083 $ 116,365
============= ============
Income taxes paid $ 77,873 $ 80,415
============= ============
Interest paid on borrowings $ 148,747 $ 93,760
============= =============
See notes to consolidated financial statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
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), formerly First Deposit
National Credit Card Bank; First Deposit Service Corporation (FDSC); Providian
National Bancorp (PNBC); and Providian Credit Corporation (PCC), formerly
Providian National Credit Corporation. The activity of two subsidiaries (First
Deposit Life Insurance Company and Providian Credit Services, Inc.) are recorded
under the equity method due to immateriality and are 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 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.
Investment Securities: The investment securities as of December 31, 1995
and 1994 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 D). Amount is not considered a cash or cash equivalent in the
consolidated statements of cash flows.
Asset Securitizations: FDNB and PNB (the Banks) actively engage in non-recourse
sales of certain credit card and revolving line receivables through
securitization. Since the receivables are sold at par value, no gains or losses
are recorded at the time of sale. Upon the sale, the underlying credit card and
revolving line receivables, the related deferred acquisition costs and allowance
for possible credit losses are removed from the Consolidated Statement of
Financial Condition. These agreements require the Banks to maintain 5 to 7
percent minimum interests (Sellers Certificates) in the securitized receivables.
The Banks continue to service the related credit card accounts after the
receivables are securitized. The amount of credit card and revolving line
interest income and fee revenue in excess of interest paid to the owners of the
securitized assets, credit losses and other trust expenses are recognized
monthly over the life of the transaction when earned and are included in loan
servicing income in the Consolidated Statement of Income. Other transaction
costs are deferred and amortized as a reduction of servicing fees over the
expected life of the securitization.
Loans Held for Securitization: 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
During 1994, the Company terminated a contract with an independent third party
which originated the majority of its credit card and line of credit
outstandings. Subsequently, all origination costs related to lending efforts are
incurred and expensed by the Company except for costs related to successful
lending efforts, which are eligible for deferral in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91 "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." Deferred loan acquisition costs are amortized over one year
for credit card loans and five years for line of credit originations.
Equity Lines Secured by Second Deeds of Trust: 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 considered impaired when they are placed on
nonaccrual status, which generally occurs when they are in-substance foreclosed.
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 is party to a variety of
interest rate swap and cap agreements used in the management of its interest
rate exposure. Net amounts received or paid on contracts is recognized over the
life of the contract as a component of interest expense or excess servicing
income.
<PAGE>
================================================================================
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Repurchase Agreements: The Company entered into various agreements to sell
and repurchase U.S. Treasury securities held as investments. The interest
incurred on the repurchase agreements is recorded as a component of interest
expense.
Term Federal Funds Purchased: Term 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
is recorded as a component of interest expense.
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.
Reclassifications: Certain 1994 amounts have been reclassified to conform with
the 1995 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 -- LOANS RECEIVABLE AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
<TABLE>
The following is a summary of loans receivable (in thousands): December 31
1995 1994
<CAPTION>
------------ ---- ------------
<S> <C> <C>
Credit card and line of credit loans $2,302,770 $1,825,642
Equity lines secured by second deeds of trust 659,137 446,923
Net loan acquisition costs, net of accumulated amortization of $15,378 in 1995
and $7,987 in 1994 25,260 15,678
------------- ------------
Total investment in credit card and line of credit
loans and equity lines secured by second deeds of trust 2,987,167 2,288,243
Installment 26,213 48,880
Mortgage 63,741 25,935
Commercial 18,959 4,997
Other 464 525
------------- ------------
3,096,544 2,368,580
Allowance for possible credit losses (93,429) (76,218)
-------------- -------------
$3,003,115 $2,292,362
============= =============
</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 $22.3 million and $27.5 million in cash advance checks
issued to customers which remain outstanding at December 31, 1995 and 1994,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE C -- LOANS RECEIVABLE AND ALLOWANCE FOR
POSSIBLE CREDIT LOSSES (continued)
The activity in the allowance for possible credit losses for the years ended
December 31, 1995 and 1994 is as follows
(in thousands):
<TABLE>
<CAPTION>
December 31
1995 1994
------------ --- ------------
<S> <C> <C>
Balance at beginning of year $ 76,218 $ 75,061
Provision for possible credit losses 79,917 50,313
Credit losses (73,004) (56,235)
Recoveries of loans previously recognized as credit losses 10,298 7,079
---------- -----------
Balance at end of year $93,429 $ 76,218
=========== ===========
</TABLE>
NOTE D -- SALE OF RECEIVABLES
During 1995 and 1994, the Banks sold $1,583.8 million and $525.7 million,
respectively, of their credit card and line of credit receivables through
securitization transactions. The total amount of securitized receivables
serviced by the Banks were $3.5 billion and $2.4 billion as of December 31, 1995
and 1994, respectively.
During the first 24 to 32 months 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 placed into the trust. In the subsequent 18 to 24 month period,
principal payments are then allocated to pay off the Investor Certificates. This
period is referred to as the amortization period. FDNB currently has two
transactions which are in the amortization period and the remaining transactions
will begin their amortization periods at various times between 1996 and 1998.
PNB currently has one transaction which is in the amortization period and the
remaining transactions will begin their amortization periods at various times
between 1996 and 1998.
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 period. None of the reserve was
required to be used in 1995 or 1994.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE E -- NOTES PAYABLE
In October 1995, the Company amended the previous unsecured revolving credit
agreement with various banks and increased the line to $800 million. 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 October 10, 1998, with a
one-year extension option. At December 31, 1995, a total of $321 million was
drawn on the line.
Throughout 1995, the Company maintained revolving credit agreements with
Providian. Total draws on the lines may not exceed $200 million. At December 31,
1995, there were no outstanding draws on the lines by the Company. The Company
paid facility fees of $0.3 million and interest of $0.2 million in 1995.
Interest on the outstanding balance is based on the greater of Providian's
internal lending fund rate or the applicable federal rate.
NOTE F -- INCOME TAXES
The components of the income tax expense are as follows (in thousands):
Year Ended December 31
1995 1994
------------- ---- ------------
Current:
Federal $80,317 $59,329
State 12,193 8,068
-------------- -------------
92,510 67,397
Deferred:
Federal (9,580) (2,121)
State (3,519) (192)
-------------- -------------
(13,099) (2,313)
-------------- -------------
$79,411 $65,084
============== =============
The effective tax rate differs from the statutory rate primarily as a result of
state taxes.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE F -- INCOME TAXES (continued)
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
December 31
1995 1994
------------------------------
Deferred tax liabilities:
Deferred acquisition costs $12,169 $8,830
Prepaid capitalized costs 2,581
Other 1,327 932
-------------- -------------
13,496 12,343
Deferred tax assets:
Provision for possible credit losses 36,153 28,092
Deferred income 5,252 7,955
State franchise tax 10,941 8,290
Long-term incentive accruals 13,945 8,425
Other 7,100 6,377
-------------- -------------
73,391 59,139
-------------- -------------
Net deferred tax assets $59,895 $46,796
============== =============
NOTE G-- RELATED PARTY TRANSACTIONS
The Company maintains several long term notes with Providian and a number of
Providian subsidiaries as follows (in thousands):
December 31,
1995 1994
-------------------------------
Providian:
Subordinated 5.1% note due 1996 $8,300 $8,300
Subordinated 5.51% note due 1997 8,000 8,000
Subordinated 5.91% note due 1998 7,500 7,500
Subordinated 6.19% note due 1999 7,000 7,000
Subordinated 6.43% note due 2000 20,000 20,000
-------------- -------------
Total Providian 50,800 50,800
Providian Subsidiaries:
Senior 6.75% notes due 1996 45,000 45,000
Subordinated 5.91% note due 1998 4,000
-------------- -------------
Total Subsidiaries 45,000 49,000
-------------- -------------
$95,800 $99,800
============== =============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE G-- RELATED PARTY TRANSACTIONS (continued)
Interest expense associated with notes to affiliates totaled $6.2 million and
$4.7 million for the years ended December 31, 1995 and 1994, respectively.
On August 27, 1995, at the request of our affiliate, Worldwide Insurance
Company, the Company paid the $4 million subordinated 5.91% note, which was
previously due in 1998.
At December 31, 1995, the Company has a $20 million 6.43% subordinated note to
Providian, which matures in 2000 and $45 million in senior notes due to
affiliates, Commonwealth Life Insurance Company and Peoples Security Life
Insurance Company. The notes mature on March 15, 1996. Interest is paid
semi-annually and is based upon pre-determined rates as set forth in the note
purchase agreement.
The Company had investments with Providian during 1995 and 1994. The amount of
interest earned on these investments was $2.4 million and $4.0 million for the
years ended December 31, 1995 and 1994, respectively. The outstanding balance of
such investments which are included in cash equivalents was $22.3 million and
$66.6 million as of December 31, 1995 and 1994, respectively.
NOTE H -- LEASE COMMITMENTS
The Company leases office space and equipment under long-term operating leases.
The office lease agreements have expiration dates ranging from July 31, 1996,
through July 31, 2001, 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 $6.9 million and $6.8 million
for the years ended December 31, 1995 and 1994, respectively. The Company's
approximate future minimum rental payments under noncancelable operating leases
are as follows (in thousands):
Year Amount
-------------- ------------------
1996 $6,230
1997 5,267
1998 4,741
1999 4,269
2000 2,238
Thereafter 961
==================
$23,706
==================
NOTE I -- INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company's principal objective in entering into off-balance sheet interest
rate risk management instruments is asset/liability management. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE I -- INTEREST RATE RISK MANAGEMENT INSTRUMENTS (continued)
Interest rate swap transactions involve the exchange of interest payment amounts
calculated on an agreed-upon notional principal amount with at least one amount
based on a floating rate index. Interest rate caps are agreements in which the
seller agrees to make payments, if positive, on an index interest rate less an
agreed upon fixed rate, computed on notional amounts.
When interest rate risk management instruments are used to hedge liabilities,
the net receipts or payments under these agreements are deferred and are
amortized as an adjustment to interest expense over the original term of the
interest rate exchange agreement. When interest rate risk management instruments
are used to hedge the excess servicing received from loan securitizations, the
net receipts or disbursements are deferred and amortized as an adjustment to
excess servicing income over the average life of the underlying securitization.
Net amounts paid in connection with these agreements during 1995 and 1994 were
$1.4 million and $12.0 million, respectively.
The following table summarizes the notional amounts of financial instruments
outstanding (amounts in thousands):
December 31
1995 1994
----------------- ----- ----------------
Interest rate swap agreements: $1,437,890 $632,954
Interest rate caps purchased: 106,000 306,000
Interest rate risk management instruments subject the Company to the risk of
default by a counterparty to the agreement. The Company maintains a policy of
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 does not anticipate default by any
counterparties.
NOTE J-- 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, 1995. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE J-- COMMITMENTS (continued)
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):
December 31
1995 1994
------------------------------
Credit card and line of credit loans $9,121,456 $6,744,601
Equity lines secured by second deeds of trust 111,603 78,408
Construction and commercial loans 418 730
------------------------------
$9,233,477 $6,823,739
==============================
The Company has credit risk on the credit card and line of credit loans to the
extent that borrower's default on funded portions and amounts are not recovered
through collection procedures.
Equity lines secured by second deeds of trust 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 K-- SHAREHOLDER'S EQUITY
FDNB and PNB are regulated by the Office of Comptroller of the Currency and
maintain deposit insurance with the Federal Deposit Insurance Corporation. They
are subject to the capital adequacy guidelines of these organizations and
maintain capital in excess of well-capitalized minimums. Under the current
guidelines, FDNB and PNB shareholder's equity available for dividends to
maintain well-capitalized status was $18.9 million and $23.4 million,
respectively, at December 31, 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Providian Bancorp, Inc. and Subsidiaries
December 31, 1995 and 1994
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", 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. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
necessarily represent or affect the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosure for financial instruments:
Cash and cash equivalents: Cash and cash equivalents
are carried at an amount that approximates fair value.
Federal funds sold: Federal funds sold are carried at
an amount that approximates fair value.
Investment securities: Fair value is based on quoted certificate of deposits and
other fixed-rate deposits market prices, where available or quoted market prices
are estimated using a discounted cash flow calculation of comparable
instruments. If not material, the that applies interest rates currently offered
on carrying value of investment securities approximates deposits of similar
remaining maturities.
fair value.
Reserve accounts receivable and Interest receivable: The carrying amounts
reported in the Statements of Financial Condition approximate fair value.
Loans receivable and loans held for securitization: For variable rate loans that
reprice monthly with no applicable floor and no significant change in credit of
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 equity lines secured by second deeds of
trust 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.
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
Borrowings: The carrying amount of term federal funds purchased, notes payable
to banks, and bank notes approximates 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.
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. The
excess servicing fee is estimated by discounting the estimated future cash flows
generated from securitized receivables. If not material, no fair value is shown.
1
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
Providian Bancorp, Inc. and Subsidiaries
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------------------------- ---------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 104,083 $ 104,083 $ 116,365 $ 116,365
Federal funds sold 71,300 71,300 15,000 15,000
Investment securities 4,927 4,927 3,691 3,691
Reserve account receivable 123,687 123,687 91,875 91,875
Loans held for securitization 123,330 140,301
Loans receivable 3,003,115 3,406,331 2,292,362 2,631,776
Interest receivable 44,734 44,734 31,044 31,044
Liabilities
Deposits 2,157,765 2,171,801 1,680,450 1,675,743
Term federal funds purchased 336,000 336,000 198,000 198,000
Notes payable to banks 321,000 321,000 235,000 235,000
Notes payable to affiliates 95,800 95,993 99,800 99,353
Bank notes 189,880 189,880
Off-Balance-Sheet Instruments
Interest rate swaps 4,819 (6,164)
Interest rate caps 108 135
Lending commitments:
Equity lines secured by second
deeds of trust 711 27
Excess servicing fee 190,100 164,000
</TABLE>
NOTE M -- 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, 1995 and 1994
amounted to $1.3 million, respectively.
A retirement benefit is provided for annual contributions to employee retirement
accounts regardless of any participation in the 401(k) plan. The Company
recorded a contribution of $3.0 million and $2.6 million related to the
retirement of employees with at least one year of employment as of December 31,
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.
<PAGE>
