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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission file number 1-12897
PROVIDIAN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2933952
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(State of incorporation) (I.R.S. Employer Identification No.)
201 Mission Street, San Francisco, California 94105
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(Address of principal executive offices) (Zip Code)
(415) 543-0404
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 12, 1999, 141,850,031 shares of the registrant's Common Stock were
outstanding, and the aggregate market value of the Common Stock held by non-
affiliates of the registrant was $16,103,762,541, calculated by reference to the
closing price of the registrant's Common Stock as reported on the New York Stock
Exchange. For purposes of such calculation, shares owned by directors and
executive officers of the registrant have been treated as owned by affiliates of
the registrant, although such treatment is not an admission of affiliate status
of any such person.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to stockholders for the year ended
December 31, 1998, are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 11, 1999 (to be filed pursuant to
Regulation 14A) are incorporated by reference into Part III of this Report.
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PROVIDIAN FINANCIAL CORPORATION
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1 Business........................................................................ 4
Executive Officers of the Registrant............................................ 16
ITEM 2 Properties...................................................................... 16
ITEM 3 Legal Proceedings............................................................... 17
ITEM 4 Submission of Matters to a Vote of Security Holders............................. 17
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters........... 17
ITEM 6 Selected Financial Data......................................................... 17
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 17
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk...................... 18
ITEM 8 Financial Statements and Supplementary Data..................................... 18
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 18
PART III
ITEM 10 Directors and Executive Officers of the Registrant.............................. 18
ITEM 11 Executive Compensation.......................................................... 18
ITEM 12 Security Ownership of Certain Beneficial Owners and Management.................. 19
ITEM 13 Certain Relationships and Related Transactions.................................. 19
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 19
Signatures................................................................................ 25
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PART I
ITEM 1. BUSINESS
GENERAL
Providian Financial Corporation (the "Company"), based in San Francisco,
California, was incorporated in Delaware in 1984 under the name "First Deposit
Corporation." The name of the Company was changed from First Deposit
Corporation to Providian Bancorp, Inc. in 1994 and to Providian Financial
Corporation in 1997. The Company conducted its operations as a wholly owned
subsidiary of Providian Corporation until June 10, 1997, when all of the then
outstanding shares of common stock of the Company were spun off to the
stockholders of Providian Corporation. The Company is listed on the New York
Stock Exchange and the Pacific Exchange under the symbol PVN.
The Company, operating through its subsidiaries, is a diversified consumer
lender, offering a range of loan products, including credit cards, revolving
lines of credit, home loans, secured credit cards, and fee-based products. The
Company also offers various deposit products. With over $14 billion in assets
under management and eight million customers, the Company ranks among the ten
largest bankcard issuers in the nation.
The Company conducts its business through its wholly owned subsidiaries.
Each subsidiary performs a particular role in support of the business, depending
in part on the powers granted to it by its chartering regulator or state of
incorporation. However, the Company's various business areas are generally
operated in a consolidated manner among the different legal entities. The
Company's lending activities are conducted primarily through Providian National
Bank ("PNB") and Providian Bank ("PB"). Providian Bancorp Services ("PBS")
performs a variety of servicing activities in support of its affiliates.
BUSINESS STRATEGY
The Company seeks to build shareholder value by generating profitable
growth in its core markets, developing unique marketing, credit, and
profitability management capabilities that provide competitive advantages, and
making acquisitions on an opportunistic basis. The Company's focus is on
increasing the profitability and persistency of each customer relationship as
well as the number of customer relationships and the number of markets served.
The Company uses a customer focused, return oriented and credit driven
approach, which the Company refers to as an "engineering approach." This
approach emphasizes market selection, customer targeting, customer acquisition
and profitability management. The Company segments consumer markets to identify
potential customers who meet the Company's profitability and risk guidelines,
and targets them with products tailored to their needs. The Company's customer
acquisition strategy focuses on meeting consumer needs by providing customized
products and services, with the goal of creating long-term, profitable customer
relationships. Profitability management is centered on balancing risk and
return to achieve targeted profits. The Company invests for long-term growth by
focusing on the areas that management views as having the highest value,
including the continuous improvement of operations, infrastructure and
technology.
The Company's engineering approach is technology and information intensive.
The Company has collected extensive data from its historical experience and test
programs, which it analyzes to identify and respond to consumer needs. Drawing
on its proprietary databases and analytical techniques, the Company has
developed targeting and credit models to identify potential customers. The
Company relies on internally developed technology to customize credit lines,
rates and terms. After an account is opened, account performance is monitored
and a variety of account management tools are used to build the customer
relationship. The Company combines pricing, credit and collections into one
integrated strategy
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for managing risk and return. Product pricing is based on an analysis of credit
risk, as well as on competitive factors and customer price sensitivity. Credit
analysis is continuously updated to reflect the Company's experience in managing
credit risk. Collections efforts focus on the action or inaction of the customer
("event driven"), rather than on the passage of time. Utilizing this engineering
approach, the Company has evolved from a one-market, one-product company in
1985, when it introduced its first product, to a multi-market, multi-product
provider of consumer financial services.
The Company markets its products to consumers nationwide, primarily through
the mail, telemarketing and other direct marketing channels. By using direct
marketing rather than a branch-based distribution system, the Company seeks to
avoid high overhead costs and maintain the flexibility to easily enter and exit
geographic markets.
PRODUCTS AND SERVICES
Credit Card Business
Through its Credit Card Business, the Company offers unsecured, secured and
partially secured credit card loans generated primarily through Visa and
MasterCard credit cards. This Business also includes a portfolio of unsecured
consumer revolving line of credit loans that are accessed by checks rather than
credit cards. As of December 31, 1998, the Company's Credit Card Business had
$12.1 billion of managed loans outstanding (of which $5.1 billion were on-
balance sheet).
The Company serves a broad spectrum of customers with its credit card
products, which range from higher line platinum and gold cards to lower line
classic and secured credit cards. Under the Company's "primary lender" strategy
for qualified consumers, the Company makes "universal" offers and customizes
specific product terms at the time of sale. Subject to the Company's risk
parameters, the Company seeks to meet as many of the customer's credit needs as
possible. Consumers who qualify for gold or platinum credit cards may receive a
credit line of $5,000 or more, based on their borrowing needs, interest at fixed
or variable rates, and other special features and services.
The Company's lower line products are designed to serve individuals who
have limited access to credit and are underserved by traditional financial
institutions due primarily to a lack of credit history or past credit problems.
Through its proprietary targeting and credit risk models, the Company has been
able to identify customers in this population that it believes will have
significantly lower default rates than the average for such population
generally, allowing the Company to offer a prudent mix of product features
designed to meet the customer's needs, consistent with the Company's
profitability and risk guidelines. Products offered to this population
generally have processing and/or annual membership fees, lower credit limits,
and pricing that reflects the higher operating costs and delinquencies
associated with these products. Through these products, the Company provides
consumers access to the credit card payment system and an opportunity to
establish or reestablish their credit standing.
The credit process for the products offered by the Credit Card Business
generally begins with a "prescreening" review to identify creditworthy consumers
who are likely to be interested in and eligible for an account, based on
proprietary credit and targeting criteria. The Company establishes pricing and
credit limits based on the customer's credit profile, loan feature preferences
and price sensitivity and on the Company's profitability and risk guidelines.
The Company monitors customers' risk profiles continually and may adjust product
features and/or pricing as the relationship evolves. For example, the Company
periodically adjusts credit limits based on its evaluation of a customer's
credit behavior, thereby strengthening profitable relationships and reducing
loss exposure over time, and interest rates may increase if the customer fails
to comply with the account agreement. The Company typically charges late fees,
returned check fees and overlimit fees, and may charge other fees it considers
appropriate, pursuant to the terms of the account agreement. The Company
reserves the right to change or terminate any terms,
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conditions, services or features of the account (including increasing or
decreasing periodic finance charges, other charges or minimum payment
requirements).
Under current collections policy for the Credit Card Business, the Company
uses risk assessment and segmentation to determine when to contact a customer
whose account balance has become past due, with an emphasis on early
intervention and telephone contact. Arrangements may be made with customers to
extend or change payment schedules. Because collections efforts are event-
driven, accounts are suspended, closed, and, if appropriate, referred for legal
collection based on customer behavior rather than the passage of time. Legally
permissible collections activities continue after an account is charged off.
For a discussion of the Company's charge-off policy, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
Quality."
The Company has developed a number of fee-based products that are marketed
to customers of the Credit Card Business as add-ons to existing credit products.
These products, which focus on broad themes--home, health, credit, auto and
travel--generally offer a package of benefits or services that the Company
assembles from internal sources or third-party vendors. They include Providian
Health Advantage, DrivePro, PricePro, Credit Protection and Home Protection/1/.
Providian Health Advantage offers emergency credit, prescription and other
health-related discounts and referrals. DrivePro offers emergency credit,
emergency towing service, auto maintenance discounts and other auto- and travel-
related benefits. PricePro offers shopping-related discounts. Credit
Protection offers nonaccrual of interest and deferral of payments on the
Company's credit card loans, and Home Protection offers a standby loan to assist
with mortgage or rent payments, in case of unemployment, disability or
hospitalization. New fee-based products and channels of distribution for such
products continue to be developed. See "Cautionary Statements--Growth, Product
Development and Acquisitions."
During 1998, the Company acquired three credit card portfolios consisting
of approximately $2.5 billion in credit card assets and representing
approximately 1.7 million customer accounts. In January 1999, the Company
purchased a credit card portfolio consisting of approximately $150 million in
credit card assets and 120,000 customer accounts. The accounts acquired in such
portfolio acquisitions undergo a conversion process, in which account histories,
servicing records and account terms are converted to the Company's computer
systems. Following conversion, the Company utilizes its segmentation, account
management, and risk management capabilities in an effort to improve the
performance of the acquired portfolios.
Home Loan Business
The Company's Home Loan Business products, which are currently offered to
targeted individuals in over 40 states, consist of home equity lines of credit
and home equity loans. As of December 31, 1998, the Company's Home Loan
Business had $1.1 billion of managed home loans outstanding (of which $606.7
million were on-balance sheet).
The primary focus of the Home Loan Business is to target homeowners with
high levels of unsecured debt and offer them an opportunity to consolidate their
debt through a home equity line of credit or home equity loan. Customers are
able to consolidate their debt and enjoy a lower interest rate than would be
available through their credit card, and may also gain tax advantages.
The Company's Home Loan Business strategy focuses on the following: (i)
evaluating the customer's credit history in addition to the real estate which
secures the loan; (ii) marketing directly to customers, which permits both
customer and regional selectivity and allows the Company to react quickly to
local economic and real estate market changes; (iii) utilizing a two-step
process of lead generation and
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/1/ Providan Health Advantage, DrivePro, PricePro and Home Protection are
registered service marks of the Company.
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lead conversion with a universal offer and customization of loan terms; and (iv)
establishing primary lender relationships by successfully targeting customers
likely to consolidate debt. Many of the skills used by the Company to execute
its Home Loan Business strategy were originally developed for the Credit Card
Business. These skills, including database marketing, customer targeting and
risk management, have been adapted by the Company specifically for its Home Loan
Business.
Consistent with its "primary lender" strategy, the Company customizes
specific account terms at the time of sale. The Company determines credit
lines, interest rates, fees, loan-to-value ratios, and other account terms based
on the customer's credit profile, loan feature preferences and other risk
parameters. The Company offers home equity lines of credit and home equity
loans with higher loan-to-value ratios, which may exceed 100%, when the Company
considers such offers prudent based on the customer's credit quality and other
factors. Credit risk models are focused primarily on the customer's credit
history and ability to pay rather than the value of the real estate securing the
loan. In general, the home equity lines of credit are structured as 15-year
loans, with a 10-year revolving period followed by a five-year amortization
period. Interest rates on the home equity lines of credit are generally
variable and are indexed based on the prime rate. The home equity loans are
structured as fixed rate loans that amortize fully over a 15-year period.
Collections efforts in the Home Loan Business are internally managed, from
the initial contacts with the borrower to the time that an account is referred
to outside counsel for foreclosure or other legal action when appropriate.
Home Loan Business customers are offered a fee-based product called Home
Protection as an add-on to existing loan products. Home Protection provides for
nonaccrual of interest and deferral of payments on the Company's loans in case
of unemployment, disability or hospitalization.
Other Businesses
During 1998, the Company established a new wholly owned subsidiary, First
Select Corporation ("FSC"). FSC purchases charged-off credit card assets from
other financial institutions, with special emphasis on credit card accounts that
have been recently charged off. FSC purchases the assets with the expectation
that it will be able to use its collections and account management capabilities
to increase their value. See "Cautionary Statements--Growth, Product
Development and Acquisitions." In 1998, FSC purchased charged-off credit card
assets having a pre-charge-off face amount of approximately $136 million,
representing approximately 30,000 customer accounts. FSC currently has
commitments for up to $500 million in face amount of charged-off credit card
assets to be sold to FSC in 1999.
In February 1999, the Company acquired GetSmart.com, an online referral
service for consumer borrowing, which provides loan information and lender
connections through proprietary search and application technology. In
connection with the acquisition, the Company also announced the centralization
of various E-commerce initiatives being developed across its business lines,
including internet-generated retail deposits and credit card applications.
The Company expects to begin originating loans in the United Kingdom in the
first half of 1999 through a London-based international branch of PNB.
GEOGRAPHIC DIVERSITY
The Company's loan portfolios are geographically diverse, with no
significant regional concentration of credit risk. See Note 8 to Consolidated
Financial Statements on page 54 of the Company's Annual Report to stockholders
for the year ended December 31, 1998.
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SEGMENT INFORMATION
For financial information about the Company's primary segments, see Note 20
to Consolidated Financial Statements on pages 65 and 66 of the Company's Annual
Report to stockholders for the year ended December 31, 1998.
COMPETITION
The Company faces intense and increasing competition from other consumer
lenders. In particular, the Company's Credit Card Business competes with
national, regional and local bankcard issuers and with other general purpose
credit card issuers. The Company also competes, to a lesser extent, with
issuers of single purpose cards, such as department stores and oil companies.
There has also been a trend toward consolidation in the industry as major
issuers increase the size of their credit card businesses through acquisitions
and mergers. This trend has accelerated in recent years, and large issuers may
compete with the Company by leveraging their size, brand names and vendor
relationships to gain market share. In addition, competitors are continually
introducing new techniques to attract and retain customers. Some of the most
heavily used techniques are advertising, target marketing, balance transfers,
price competition, including "teaser" rates, incentive programs and co-branding
(for example, using the name of a sports team or a professional association on
credit cards). Competition for customers in the lower line credit card market
has also increased as additional lenders have been attracted to this market
opportunity.
The Company's Home Loan Business also faces intense competition. More
competitors are now employing direct marketing programs to attract home loan
customers. These competing programs include some that are similar to the
programs and strategies that the Company has used to attract new home loan
customers and encourage borrowings by those customers.
In addition to competition for customers, the Company faces competition
when it seeks to obtain funds to use in its business. This competition comes
from banks, savings institutions, money market funds, credit unions and a wide
variety of other entities that take deposits, sell debt securities or sell
securities backed by assets such as loan receivables.
FUNDING AND LIQUIDITY
Through its banking subsidiaries, the Company offers deposit products
directly to consumers. These deposit products include money market deposit
accounts and certificates of deposit ("CDs") ranging in term from three months
to five years. The Company markets its retail deposits primarily by submitting
its offered rates to national surveys, providing toll-free numbers for potential
and existing customers to obtain rate quotes, and providing rates and
fulfillment materials on the Company's website. The Company also maintains
relationships with national broker-dealer networks which offer retail CDs to
their customers under master CD structures. In addition, the Company's banking
subsidiaries offer directly-placed and broker-placed wholesale CDs and
negotiable CDs to institutional investors.
The Company has also obtained funding through term federal funds,
uncommitted overnight federal funds lines, a committed revolving credit facility
(currently $1 billion) and bank notes under a program launched in February 1998.
Under the bank note program, PNB issued $400 million of medium-term bank notes
in 1998 and $550 million of medium-term bank notes in the first quarter of 1999.
The Company also obtained funding through the issuance of $160 million of
mandatorily redeemable capital securities in 1997 and is a party to several
short-term credit facilities totaling $275 million.
The Company obtains a significant portion of its funding through
securitizations. A securitization generally involves the transfer by the
Company to a trust or other special purpose entity of loan receivables
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generated by a pool of accounts. The trust or special purpose entity may issue
either certificates representing undivided ownership interests in the pool of
transferred loan receivables or notes collateralized by the loan receivables.
The securitization generally results in the removal of the loan receivables from
the Company's balance sheet for financial and regulatory accounting purposes.
For tax purposes, the investor certificates and any notes are generally
characterized as indebtedness of the Company. The primary objectives of the
Company's securitization activities are to diversify its funding sources and
obtain an efficient all-in cost of funds, including the cost of capital. For
further discussion of the Company's funding and liquidity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Funding and Liquidity."
ORGANIZATIONAL STRUCTURE
The Company operates principally through the following wholly owned
subsidiaries:
Providian National Bank. Headquartered in Tilton, New Hampshire, PNB is a
national banking association organized under the laws of the United States and
is a member of the Federal Deposit Insurance Corporation (the "FDIC"). PNB was
originally organized as a state bank in 1853 and converted to a national bank
charter in 1865. It changed its name from First Deposit National Bank ("FDNB")
on January 1, 1998, when the former Providian National Bank, then an affiliate
of FDNB, merged with and into FDNB.
Providian Bank. Headquartered in Salt Lake City, Utah, PB is an industrial
loan corporation organized under the laws of Utah and is a member of the FDIC.
Providian Bancorp Services. Headquartered in San Francisco, California, PBS
provides legal and human resources support, accounting and finance services,
data processing, loan and deposit processing, credit card account opening,
customer service, collections, and related services for its affiliates on a cost
reimbursement basis.
EMPLOYEES
As of December 31, 1998, the Company (on a consolidated basis) had 6,110
employees and a total workforce, including temporaries and contract employees,
of 6,847.
REGULATORY MATTERS
As a national bank, PNB is subject to regulation by its primary regulator,
the Office of the Comptroller of the Currency (the "Comptroller"). The deposits
of PNB are insured up to applicable limits by the Bank Insurance Fund (the
"BIF") of the FDIC. Accordingly PNB is subject to assessment for deposit
insurance premiums and to certain regulations of the FDIC. As a member of the
Federal Reserve System, PNB is also subject to regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board").
The operations of PNB's international branch in London, England will be
subject to regulation and supervision by the Financial Services Authority of the
United Kingdom (the "FSA") and the Comptroller. PNB has received approval from
the Federal Reserve Board and conditional approval from the FSA to establish
such international branch.
As an FDIC-insured Utah industrial loan corporation that is not a member of
the Federal Reserve System, PB is subject to regulation by its primary federal
regulator, the FDIC, and by the Utah Department
9
of Financial Institutions. The deposits of PB are insured up to applicable
limits by the BIF. Accordingly PB is subject to assessment for deposit insurance
premiums and to certain regulations of the FDIC. PB is also subject to limited
regulation by the Federal Reserve Board with respect to reserves it must
maintain against its transaction accounts and certain other deposits.
Holding Company Status
Although the Company is the holding company of PNB and PB, it is not
required to register as a bank holding company under the BHCA. PNB is a national
banking association, but prior to 1987 it was not a "bank" under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), because it did not both
accept demand deposits and make commercial loans. PNB is a "bank" under the
BHCA, as amended by the Competitive Equality Banking Act of 1987 ("CEBA"), which
revised the definition of "bank" to include generally all FDIC-insured
institutions. However, CEBA grandfathered the ownership of "nonbank banks" that
existed on March 5, 1987, subject to certain restrictions. These restrictions
include prohibitions on new activities and on affiliate overdrafts and
limitations on PNB's ability to cross-market its products and services with
products and services of its affiliates. PB is not a "bank" as defined in the
BHCA because it qualifies for an exemption under CEBA as an industrial loan
corporation organized under the laws of Utah and acquired by the Company on or
before August 10, 1987.
The Company could be required to register as a bank holding company under
the BHCA if PNB ceases to observe the CEBA restrictions or if the Company or any
of its affiliates acquires an additional insured depository institution
(excluding exempt institutions such as credit card banks) or a significant
portion of such an institution's assets. If the Company were required to
register as a bank holding company, it would be subject to the restrictions set
forth in the BHCA, which, among other things, would limit the Company's
activities to those deemed by the Federal Reserve Board to be closely related to
banking and a proper incident thereto; however, such restrictions, if they were
to apply to the Company, would not have a material adverse effect on the
Company's business as currently conducted. While CEBA has imposed regulatory
burdens on the Company, it has had no material effect on the Company's ability
to execute its business plan.
Investment in the Company and its Subsidiary Banks
Each of PNB and PB is an "insured depository institution" within the
meaning of the Change in Bank Control Act of 1978 (the "CIBC Act").
Consequently, written approval of the applicable primary federal regulator is
required before an individual or entity may acquire "control," as such term is
defined in the CIBC Act, of the Company. A change in control of PB would also
require approval from the Utah Commissioner of Financial Institutions under the
Utah Financial Institutions Act.
For purposes of the BHCA, an individual or entity may not acquire "control"
of the Company, and a bank holding company may not directly or indirectly
acquire ownership or control of more than 5% of the voting shares of the
Company, without the prior written approval of the Federal Reserve Board.
Because the Company's CEBA grandfather rights are nontransferable, if an
individual or entity acquired "control" of the Company or if a bank holding
company acquired ownership or control of more than 5% of the voting shares of
the Company, the Company would be required to limit its activities and its non-
banking subsidiaries' activities to those deemed by the Federal Reserve Board to
be closely related to banking and a proper incident thereto.
Dividends and Transfers of Funds
A primary source of funds for the Company is dividends from its banking
subsidiaries. Federal law limits the extent to which PNB or PB can supply funds
to the Company and its affiliates through dividends, loans or otherwise. These
limitations include minimum regulatory capital requirements, restrictions
concerning the payment of dividends, and Sections 23A and 23B of the Federal
Reserve Act of 1913 governing transactions between a financial institution and
its affiliates. In addition, PNB and PB are subject to federal regulatory
oversight to assure safety and soundness. In general, federal banking laws
prohibit an insured depository institution from making dividend distributions if
such distributions are not paid out of available earnings or would cause the
institution to fail to meet applicable capital adequacy
10
standards. See "--Capital Requirements." PB is subject to similar Utah laws
governing industrial loan corporations and the general supervision of the Utah
Department of Financial Institutions.
Capital Requirements
PNB is subject to risk-based capital guidelines adopted by the Comptroller,
and PB is subject to risk-based capital guidelines adopted by the FDIC. Risk-
based capital ratios are determined by allocating assets and specified off-
balance sheet commitments to several weighted categories, with higher levels of
capital being required for the categories perceived as representing greater
risk. For a discussion of these guidelines, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Capital Adequacy."
Under current guidelines, institutions are required to maintain a minimum
total risk-based capital ratio (total Tier 1 and Tier 2 capital to risk-weighted
assets) of 8%, and a Tier 1 risk-based capital ratio (Tier 1 capital to risk-
weighted assets) of 4%. The Comptroller and the FDIC may, however, set higher
capital requirements when an institution's particular circumstances warrant.
The Comptroller and the FDIC have established guidelines prescribing a minimum
"leverage ratio" (Tier 1 capital to adjusted total assets as specified in the
guidelines) of 3% for institutions that meet certain criteria, including the
requirement that they have the highest regulatory rating, and a minimum of 4%
for institutions that do not meet the criteria. Institutions experiencing or
anticipating significant growth are expected to maintain capital ratios well
above the minimum. As of December 31, 1998, PNB had a total risk-based capital
ratio of 10.08%, a Tier 1 risk-based capital ratio of 9.06% and a leverage ratio
of 11.06%, and PB had a total risk-based capital ratio of 10.58%, a Tier 1 risk-
based capital ratio of 9.22% and a leverage ratio of 6.85%.
In 1995, the Comptroller and the FDIC amended the risk-based capital
standards pertaining to asset transfers in which an institution retains recourse
risk but contractually limits its exposure. Under the "low level recourse"
regulation that was adopted, the amount of risk-based capital required in
connection with such asset transfers will not exceed the institution's maximum
contractual liability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Adequacy." In addition, in
November 1997 the federal banking regulators proposed for comment regulations
establishing new risk-based capital requirements for recourse arrangements and
direct credit substitutes. If adopted, these regulations may increase the cost
of credit enhancement provided by banks in connection with the securitization of
consumer loan receivables while possibly reducing the cost of senior securities
issued in such transactions. The Company is unable at this time to assess the
impact this proposal would have on its business.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") expanded the powers of federal bank regulatory authorities to take
corrective action with respect to banks that do not meet minimum capital
requirements. For these purposes, FDICIA established five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under regulations adopted by
the Comptroller and the FDIC, an institution is generally considered to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater; "adequately capitalized" if it has a total risk-based capital ratio of
8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and,
generally, a leverage ratio of 4% or greater; and "undercapitalized" if it does
not meet any of the "adequately capitalized" tests. An institution is deemed to
be "significantly undercapitalized" if it has a total risk-based capital ratio
under 3% and "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%.
An "adequately capitalized" institution is permitted to accept brokered
deposits only if it receives a waiver from the FDIC and pays interest on
deposits at a rate that is not more than 75 basis points higher than the
prevailing rate in its market. Undercapitalized institutions cannot accept
brokered deposits, are subject to growth limitations and must submit a capital
restoration plan. "Significantly undercapitalized" institutions may be subject
to a number of additional requirements and restrictions. "Critically
undercapitalized" institutions are subject to appointment of a receiver or
conservator and, beginning 60 days after becoming "critically undercapitalized,"
may not make any payment of principal or interest on their subordinated debt
(subject to certain exceptions).
As of December 31, 1998, each of PNB and PB met the requirements to be
considered a "well capitalized" institution. Under the regulatory definition of
brokered deposits, as of December 31, 1998, PNB had brokered deposits of $1.5
billion.
FDICIA also required federal banking agencies to revise their risk-based
capital standards to adequately address concentration of credit risk, interest
rate risk and risk arising from non-traditional
11
activities. The Comptroller and the FDIC have identified these risks and an
institution's ability to manage them as important factors in assessing overall
capital adequacy, but have not quantified them for use in formula-based capital
calculations. The Comptroller and the FDIC have further revised their risk-based
capital rules to address market risk. Financial institutions with 10% of total
assets in trading activity, or $1 billion in trading, are required to use
internal risk measurement models to calculate their capital exposure and to hold
capital in support of that exposure. The level of the Company's trading activity
is currently below these thresholds.
Deposit Insurance Assessments
Under the FDIC's risk-based insurance assessment system, each insured
institution is placed in one of nine risk categories, based on its level of
capital, supervisory evaluations, and other relevant information. The
assessment rate applicable to PNB and PB depends in part on the risk assessment
classification assigned to them by the FDIC and in part on the BIF assessment
schedule adopted by the FDIC. BIF-insured institutions are currently assessed
premiums at an annual rate between 0% to 0.27% of eligible deposits. PNB and PB
are currently assessed at the 0% rate. PNB and PB are also subject to
assessment for payment of Financing Corporation ("FICO") bonds issued in the
1980s as part of the resolution of the problems of the savings and loan
industry. FICO assessment rates are currently 0.01176% and may be adjusted
quarterly to reflect a change in assessment base for the BIF. Beginning January
1, 2000, BIF-insured deposits are required to be assessed at one-fifth the rate
assessed on deposits insured by the Savings Association Insurance Fund.
Consumer Protection Laws
The relationship of the Company's lending subsidiaries and their customers
is extensively regulated by federal and state consumer protection laws. The
most significant laws include the Truth-in-Lending Act of 1968, Equal Credit
Opportunity Act of 1974, Fair Credit Reporting Act of 1970, Truth-in-Savings Act
of 1991, Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, and
Electronic Funds Transfer Act of 1978. These statutes, among other things,
impose disclosure requirements when a consumer credit loan is advertised, when
the account is opened and when monthly billing statements are sent. In
addition, these statutes limit the liability of credit card holders for
unauthorized use, prohibit discriminatory practices in extending credit, and
impose limitations on the types of charges that may be assessed and on the use
of consumer credit reports.
The National Bank Act of 1864 authorizes national banks to charge customers
interest at the rates allowed by the laws of the state in which the bank is
located, regardless of an inconsistent law of the state in which the bank's
customers are located. PNB relies on this ability to "export" rates to
facilitate its nationwide credit card and consumer lending businesses. State
institutions such as PB enjoy a similar right under the Depository Institutions
Deregulation and Monetary Control Act of 1980. In 1996, the United
States Supreme Court held that late payment fees are "interest" and therefore
can be "exported" under the National Bank Act, deferring to the Comptroller's
interpretation that interest includes late payment fees, insufficient funds
fees, overlimit fees and certain other fees and charges associated with
12
credit card accounts. This decision does not directly apply to state
institutions such as PB. Although several courts have upheld the ability of
state institutions to export certain types of fees, a number of lawsuits have
been filed alleging that the laws of certain states prohibit the imposition of
late fees. It is impossible to determine whether courts will follow existing
precedents, and if not, what impact it will have on PB's ability to impose
certain fees.
Legislative Developments
Various legislative proposals have been introduced in Congress in recent
years. These include proposals imposing a statutory cap on credit card interest
rates and fees, substantially revising the laws governing consumer bankruptcy,
requiring additional disclosures and prohibiting certain practices with respect
to open-end credit plans, protecting consumer privacy by limiting the use of
social security numbers and the transfer of personal information, permitting
affiliations between banks and commercial, insurance or securities firms, and
other regulatory restructuring proposals. In recent years state legislatures
have entertained similar proposals, as well as proposals to restrict
telemarketing activities and to expand consumer protection laws. Neither the
outcome of these proposals nor their impact on the Company, should they become
law, can be predicted with certainty.
Several states have passed legislation to tax the income of out of state
lenders derived from loans, including credit card loans, made to residents of
such states. This development has not materially affected the Company's
business results.
Members of Congress and government officials have from time to time
suggested the full or partial elimination of the mortgage interest deduction for
federal income tax purposes. Since the interest paid on the Company's Home Loan
Business products is generally deductible under current law, the reduction or
elimination of this tax benefit could have a material adverse effect on the
demand for those products.
CAUTIONARY STATEMENTS
Certain statements contained herein are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. Forward-looking statements include
expressions of the "belief," "anticipation" or "expectations" of management,
statements as to industry trends or future results of operations of the Company,
and other statements which are not historical fact. Forward-looking statements
are based on certain assumptions by management and are subject to risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date hereof.
The Company undertakes no obligation to update any forward-looking statements.
The risks and uncertainties that could cause actual results to differ from
those in the forward-looking statements include the following:
Intense Competition
The Company faces intense and increasingly aggressive competition from
other consumer lenders in all of its product lines. Many of the Company's
competitors are substantially larger and have greater financial resources than
the Company, and customer loyalty is often limited. Competitive practices, such
as the offering of lower interest rates and fees and the offering of incentives
to customers, could hurt the Company's ability to attract and retain customers.
The Company's success has also attracted new lenders to traditionally
underserved markets such as the lower line credit card market, resulting in
increased
13
competition. As a result, the rate at which new loans are originated may
decrease, or the rate at which customers repay their loans may increase, which
could hurt the Company's profitability.
In October 1998, the U.S. Justice Department filed a complaint against
MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International,
Inc., asserting that duality (the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks) restrains
competition between Visa and MasterCard in the market for general purpose card
products and networks in violation of the antitrust laws. The government seeks
as relief that only member banks "dedicated" to one association be permitted to
participate in the governance of that association. In addition, the complaint
challenges the rules adopted by both MasterCard and Visa that restrict member
banks from joining American Express, Discover/Novus or other competitive
networks. MasterCard and Visa have stated that they consider the suit without
merit, and intend to deny the allegations of the complaint. Neither the
ultimate outcome of this litigation nor its effect on the competitive
environment in the credit card industry if the lawsuit succeeds can be predicted
with any certainty.
Increased Delinquencies and Credit Losses
The delinquency rate on the Company's consumer loans has increased in
recent years. The rate at which the Company's consumer loans are charged off as
uncollectible, referred to as the credit loss rate, has also increased in recent
years. These increases reflect a number of factors, including (i) an increase in
balances outstanding under lower line credit card products, which generally
experience higher delinquency and credit loss rates, (ii) the Company's
acquisition of loan portfolios from third parties, which have generally
experienced higher delinquency and credit loss rates compared to loans
originated by the Company, and (iii) an increase in the number of customers
seeking protection under the bankruptcy laws. Increased delinquencies and credit
losses could occur in the future in the event of a national or regional economic
downturn or recession, or for other reasons. Delinquency and credit loss rates
also generally increase as the average age of a loan portfolio, referred to as
"seasoning," increases. Increased credit loss rates could result if the
proportion of younger loans in the Company's total portfolio is reduced due to
slower growth in new loan originations, an increase in acquisitions of seasoned
portfolios, and the normal seasoning of the Company's rapidly growing lower line
credit card portfolio.
Vendor Relationships
The Company's business depends on a number of services provided by third
parties, including nationwide credit bureaus, postal and telephone service
providers, bankcard associations and providers of transaction processing
services. A major disruption in one or more of these services could
significantly hurt the Company's operations.
Interest Rate Changes
The rate of interest the Company pays on its borrowings may increase if
market interest rates rise. If the rate of interest the Company earns on its
loans does not increase by the same amount, the Company's earnings could be
reduced. The Company's earnings could also be hurt in a period of falling
interest rates if the rates on its consumer loans fall faster than those on its
borrowings or if customers prepay fixed rate loans in order to refinance them at
lower rates. The Company seeks to manage these risks through the use of
measurement, monitoring and hedging techniques. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Asset/Liability
Risk Management."
14
Cost and Availability of Funding
The Company obtains funding for its lending operations primarily from
depositors, institutional investors, commercial lenders and securitizations.
Changes in the credit market or the securitization market could make one or more
of these funding sources more expensive or unavailable. These changes could
result from changes in the regulatory, tax and accounting environment,
competition for funds, events that disrupt capital markets, or other reasons
beyond the Company's control. Competition for funding sources comes from a wide
variety of institutions, many of which have greater resources and higher
financial ratings than those of the Company.
Government Policy and Regulation
Federal and state laws significantly limit the types of activities in which
the Company's banking subsidiaries may engage. In addition, federal and state
consumer protection and debtor relief laws limit the manner in which the Company
may offer, extend, manage and collect loans. Congress and the states may enact
new laws and amendments to existing laws that further restrict consumer lending,
including changes to the laws governing bankruptcy, which could make it more
difficult or expensive for the Company to collect its loans, or impose limits on
the interest and fees that the Company may charge its customers. The Company's
earnings could also be hurt by changes in government fiscal or monetary
policies, including changes in the Company's rate of taxation, and by changes in
general social and economic conditions.
Growth, Product Development and Acquisitions
A major contributor to the Company's recent growth and increase in earnings
has been the development and expansion of fee-based products and lower line
credit card products. Competition in these markets is likely to intensify.
There can be no assurance that recent rates of growth in these products will
continue, or that the Company will be able to develop new products and services
that will enable it to sustain its recent rates of earnings growth. In
addition, a portion of the Company's recent growth in managed loans and
customer accounts resulted from portfolio acquisitions. There can be no
assurance that the acquired portfolios will perform as expected, that the
Company will continue to acquire loan portfolios, or that such acquisitions will
be profitable.
Management and Operations
The Company's growth and profitability depend on its ability to retain key
executives and managers, attract capable employees, maintain and develop the
systems necessary to operate its businesses and control the rate of growth of
its expenses. Expenses could significantly increase due to acquisition-related
conversion costs and other acquisition-related expenses, new product
development, increased funding or staffing costs and other internal and external
factors.
Other Industry Risks
The Company faces the risk of fraud by accountholders and third parties, as
well as the risk that increased criticism from consumer advocates and the media
could hurt consumer acceptance of its products. There is also a risk of
litigation, including class action litigation, challenging the Company's product
terms, rates, disclosures, collections or other practices, under state and
federal consumer protection statutes and other laws.
Year 2000 Readiness
The Company is heavily dependent on computer systems for its operations.
The Company processes data through its own information technology systems and
those of third party vendors and providers. Computer errors with respect to the
Year 2000 could cause system failures and disrupt the Company's operations.
Although the Company has taken steps to identify and correct potential Year 2000
15
problems, there can be no guarantee that the Company's efforts to address Year
2000 issues will be successful. Specific factors that might affect the outcome
of such efforts include the availability of qualified personnel, success in
identifying and modifying all relevant computer systems, the sufficiency and
outcome of Year 2000 testing, adequate resolution of Year 2000 issues by
governmental agencies, businesses and other third party providers to the
Company, and unanticipated costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Non-Interest Expense--Impact of
Year 2000" for a discussion of the Company's efforts to address this problem.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Principal Occupation and Business Experience
- ------------ --------------------------------------------
Shailesh J. Mehta Chief Executive Officer of the Company since 1988 and
Age: 49 Chairman of the Board and President of the Company since
June 1997. Mr. Mehta was President and Chief Operating
Officer of Providian Corporation, the Company's former
parent, from December 1994 to June 1997.
Seth A. Barad Executive Vice President of the Company since January 1997,
Age: 43 with responsibility for the management of marketing and
operations for lower line credit card products. Mr. Barad
joined the Company as Senior Vice President in October 1994.
Prior to working at the Company, he spent one year at GE
Capital, a financial services company, where he was
responsible for managing corporate card and purchasing card
products.
David Alvarez Executive Vice President of the Company since June 1997,
Age: 30 responsible for the management of marketing and operations
for higher line credit card products. Mr. Alvarez was
Senior Vice President of the Company from November 1995 to
June 1997, with responsibilities for credit card and home
loan marketing. He was Vice President, Marketing from June
1993 to November 1995. Mr. Alvarez joined the Company in
1990.
Ellen Richey Executive Vice President, General Counsel and Secretary of
Age: 50 the Company since June 1997. Ms. Richey was Senior Vice
President, General Counsel and Secretary of the Company from
January 1995 to June 1997, and Deputy General Counsel from
January to December 1994. Ms. Richey joined the Company in
1994.
David J. Petrini Executive Vice President, Chief Financial Officer and
Age: 38 Treasurer of the Company since December 1998. Mr. Petrini
was Senior Vice President and Chief Financial Officer of the
Company from January 1997 to December 1998, Senior Vice
President and Senior Financial Officer of the Company from
December 1994 to January 1997 and Vice President of the
Company from 1990 to December 1994. Mr. Petrini joined the
Company in 1986.
ITEM 2. PROPERTIES
The Company leases its executive offices at 201 Mission Street, San
Francisco, California, currently consisting of approximately 133,250 square
feet. The initial lease term, which is renewable, expires on July 31, 2001.
The Company owns its processing center at 4900, 4920, 4940, 5020 and 5040
Johnson Drive, Pleasanton, California, consisting of approximately 282,420
square feet. PNB's offices are located at 295 Main Street, Tilton, New
Hampshire, which is owned, and at 44 Main Street, Belmont, New
16
Hampshire, and MacMillan House, 96 Kensington High Street, London, England,
which are leased. PB's offices are located at 5215 Wiley Post Way, Salt Lake
City, Utah, and are leased.
Significant operations centers are located at the following leased
premises: 150 Spear Street, San Francisco, California (130,629 square feet); 160
Spear Street, San Francisco, California (60,713 square feet); and 2700 Gateway
Oaks Drive, Sacramento, California (91,174 square feet). New operations centers
are scheduled to open at 1333 Broadway Street, Oakland, California, 3801 South
Collins Boulevard, Arlington, Texas, and 4450 Rosewood Drive, Pleasanton,
California, in the second quarter of 1999. Additional leased support premises
are located at 53 and 54 Regional Drive, Concord, New Hampshire; 10400 Linn
Station Road, Louisville, Kentucky; 435 Executive Court North, Fairfield,
California; and 5215 Wiley Post Way, Salt Lake City, Utah.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in various legal actions arising
in the ordinary course of the Company's business. In the opinion of the
Company, any liability that is likely to arise with respect to these actions
will not have a material adverse effect on the consolidated financial condition
or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the market for the registrant's common equity and
related stockholder matters is incorporated by reference to the information
under the caption "Common Stock Price Ranges and Dividends," on page 73 of the
registrant's Annual Report to stockholders for the year ended December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
Information concerning selected financial data is incorporated by reference
to the information under the caption "Selected Financial Data," on pages 20 and
21 of the registrant's Annual Report to stockholders for the year ended December
31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information concerning management's discussion and analysis of financial
condition and results of operations is incorporated by reference to the
information under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 22 through 41 of the registrant's
Annual Report to stockholders for the year ended December 31, 1998.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning quantitative and qualitative disclosures about
market risk is incorporated by reference to the information under the caption
"Asset/Liability Risk Management," on pages 39 through 41 of the registrant's
Annual Report to stockholders for the year ended December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning financial statements and supplementary data is
incorporated by reference to the information under the captions "Consolidated
Statements of Financial Condition," on page 44, "Consolidated Statements of
Income," on page 45, "Consolidated Statements of Changes in Shareholders'
Equity," on page 46, "Consolidated Statements of Cash Flows," on page 47, "Notes
to Consolidated Financial Statements," on pages 48 through 71, "Report of
Independent Auditors," on page 43, and "Quarterly Data," on page 72, of the
registrant's Annual Report to stockholders for the year ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and compliance with Section 16(a) of the
Exchange Act is incorporated by reference to the information under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
Information concerning executive officers of the Company may be found in
Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
to the information under the captions "Directors' Compensation," "Executive
Compensation and Other Information," "Option Grants," "Option Exercises and
Holdings," "Executive Employment and Change in Control Agreements,"
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions" and "Human Resources Committee Executive Compensation Report" in
the registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
18
ITEM l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the information under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference to the information under the caption "Compensation
Committee Interlocks and Insider Participation and Certain Transactions" in the
registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following Report of Independent Auditors and consolidated financial
statements of Providian Financial Corporation and subsidiaries,
including the notes thereto, included on pages 43 through 71 of the
Annual Report to stockholders for the year ended December 31, 1998, are
incorporated by reference herein:
Page
----
Report of Independent Auditors 43
Consolidated Statements of Financial Condition 44
December 31, 1998 and 1997
Consolidated Statements of Income 45
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity 46
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows 47
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 48-71
(a)(2) Financial Statement Schedules.
None.
19
(a) (3) List and Index of Exhibits
The following exhibits are incorporated by reference or filed herewith.
References to the 1997 Form 10 are to the Company's Registration Statement on
Form 10 effective April 18, 1997.
Exhibit
Number Description of Exhibit
------- ----------------------
2 Agreement and Plan of Distribution, dated as of December 28, 1996, between
Providian Corporation and the Company (incorporated by reference to Exhibit
2.1 to the 1997 Form 10).
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 1997).
3.2 Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.1 Rights Agreement, dated as of June 1, 1997, between the Company and First
Chicago Trust Company of New York (incorporated by reference to Exhibit 10.1
to the Company's quarterly report on Form 10-Q for the quarter ended June
30, 1997), as amended by Amendment No. 1 to Rights Agreement dated February
17, 1999 (incorporated by reference to Exhibit 4 to the Company's report on
Form 8-K filed on March 26, 1999).
4.2 Certificate of Designation of Series A Junior Participating Preferred Stock,
dated June 1, 1997 (incorporated by reference to Exhibit 4.1 to the
Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997).
4.3 Certificate of Trust of Providian Capital I, dated as of January 21, 1997
(incorporated by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
4.4 Amended and Restated Trust Agreement, dated as of February 4, 1997, among
the Company, as Depositor, The Bank of New York, as Property Trustee, and
The Bank of New York (Delaware), as Delaware Trustee (incorporated by
reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
4.5 Junior Subordinated Indenture, dated as of February 4, 1997, between the
Company and The Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
4.6 Guarantee Agreement, dated as of February 4, 1997, between the Company, as
Guarantor, and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
20
10.1* Employment Agreement, dated as of March 27, 1997, between the Company and
Shailesh J. Mehta (incorporated by reference to Exhibit 10.1 to the 1997
Form 10).
10.2* Form of Change of Control Employment Agreement, as entered into between the
Company and each of the following executive officers of the Company on the
dates indicated: Seth A. Barad, David B. Smith, and David Alvarez, August
19, 1997; Ellen Richey, August 29, 1997 (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.3* Supplemental Compensation Agreement, dated as of August 25, 1997, between
the Company and David B. Smith (incorporated by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.4* Providian Financial Corporation 1997 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on Form
S-8, File Number 333-28767).
10.5* Providian Financial Corporation Management Incentive Plan (incorporated by
reference to the form of such Management Incentive Plan filed as Exhibit
10.3 to the 1997 Form 10).
10.6* Providian Financial Corporation Deferred Compensation Plan for Senior
Executives and Directors, as amended and restated effective June 1, 1999.
10.7* Providian Financial Corporation Stock Ownership Plan, as amended and
restated June 23, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
and Appendixes A and B to Providian Financial Corporation Stock Ownership
Plan, as amended on October 21, 1998 (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.8* Providian Financial Corporation 1997 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.2 to the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 1997).
10.9 Trademark License Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.3 to the 1997 Form 10).
10.10 General Intellectual Property Assignment and Renunciation, dated as of June
10, 1997, between Providian Corporation and the Company (incorporated by
reference to the form of such agreement filed as Exhibit 2.4 to the 1997
Form 10).
10.11 Short-Form Assignment, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.5 to the 1997 Form 10).
21
10.12 Transition Services Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.6 to the 1997 Form 10).
10.13 Tax Disaffiliation Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.7 to the 1997 Form 10).
10.14 Guarantee Agreement, dated as of June 10, 1997, among AEGON USA, Inc.,
Providian Corporation and the Company (incorporated by reference to the form
of such agreement filed as Exhibit 2.8 to the 1997 Form 10).
10.15 Employee Benefits Agreement, dated as of June 10, 1997, between Providian
Corporation and the Company (incorporated by reference to the form of such
agreement filed as Exhibit 2.9 to the 1997 Form 10).
10.16 Credit Agreement, dated as of January 12, 1999, among Providian National
Bank and Providian Bank, as Borrowers, Providian Financial Corporation, as
Guarantor, the Lenders named therein, the Syndication Agents named therein,
and The Chase Manhattan Bank, as Administrative Agent.
10.17 Pooling and Servicing Agreement, dated as of June 1, 1993, among First
Deposit National Bank, as Seller and Servicer, First Deposit National Credit
Card Bank, as Seller, and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to First Deposit Master Trust's Registration
Statement on Form S-3, File Number 33-84844).
10.18 Amendment No. 1, dated as of August 1, 1994, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer, First
Deposit National Credit Card Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.3 to First Deposit Master
Trust's Registration Statement on Form S-3, File Number 33-84844).
10.19 Amendment No. 2, dated as of June 1, 1995, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the First Deposit Master
Trust's report on Form 8-K filed on June 24, 1995).
10.20 Amendment No. 3, dated as of March 1, 1997, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Providian Master Trust's
report on Form 8-K filed on March 17, 1997).
10.21 Amendment No. 4, dated as of June 1, 1998, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.6 to the Providian Master Trust's
Amendment No. 1 to Form S-3 filed on July 17, 1998).
22
10.22 Amendment No. 5, dated as of August 1, 1998, to the Pooling and Servicing
Agreement, among First Deposit National Bank, as Seller and Servicer,
Providian National Bank, as Seller, and Bankers Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Providian Master Trust's
report on Form 8-K filed on September 8, 1998).
10.23 Supplemental Agreement No. 1, dated as of January 1, 1998, to the Pooling
and Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 99.1 to the Providian Master
Trust's report on Form 8-K filed on January 9, 1998).
10.24 Series 1995-1 Supplement, dated as of June 1, 1995, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.2 to the First Deposit
Master Trust's report on Form 8-K filed on July 24, 1995).
10.25 Series 1996-1 Supplement, dated as of June 1, 1996, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the First Deposit
Master Trust's report on Form 8-K filed on July 16, 1996).
10.26 Series 1997-1 Supplement, dated as of March 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on March 2, 1997).
10.27 Series 1997-2 Supplement, dated as of March 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.2 to the Providian Master
Trust's report on Form 8-K filed on March 2, 1997).
10.28 Series 1997-3 Supplement, dated as of June 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on June 23, 1997).
10.29 Series 1997-4 Supplement, dated as of November 1, 1997, to the Pooling and
Servicing Agreement, among First Deposit National Bank, as Seller and
Servicer, Providian National Bank, as Seller, and Bankers Trust Company, as
Trustee (incorporated by reference to Exhibit 4.1 to the Providian Master
Trust's report on Form 8-K filed on December 4, 1997).
10.30 Distribution Agreement, dated as of February 20, 1998, between the Company
and the Agents named therein (incorporated by reference to Exhibit 10.30 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1997).
23
10.31 Issuing and Paying Agency Agreement, dated as of February 20, 1998, between
the Company and The First National Bank of Chicago (incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).
12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividend Requirements
13 Portions incorporated herein of the Annual Report to stockholders for the
year ended December 31, 1998.
21 Subsidiaries of the Company.
23 Consent of independent auditors.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
(b) Reports on Form 8-K.
None.
(e) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Year Ended December 31
--------- ----------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
--------- ---------- --------- --------- ---------
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits 10.88 14.20 5.93 4.90 5.17
Including interest on deposits 2.93 2.66 2.34 2.34 2.69
EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK:
Excluding interest on deposits 10.88 13.28 5.19 4.32 4.40
Including interest on deposits 2.93 2.63 2.25 2.24 2.51
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999 PROVIDIAN FINANCIAL CORPORATION
By /s/ Shailesh J. Mehta
------------------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- ----------------------------------------- ------------------
/s/ Shailesh J. Mehta Chairman, President and Chief March 31, 1999
- -------------------------- Executive Officer and Director
Shailesh J. Mehta
/s/ David J. Petrini Executive Vice President, Chief March 31, 1999
- -------------------------- Financial Officer and Treasurer
David J. Petrini (Principal Financial Officer)
/s/ Daniel Sanford Senior Vice President and March 31, 1999
- ------------------------- Controller (Principal Accounting
Daniel Sanford Officer)
/s/ Christina L. Darwall Director March 31, 1999
- -------------------------
Christina L. Darwall
/s/ James V. Elliott Director March 31, 1999
- --------------------------
James V. Elliott
/s/ Lyle Everingham Director March 31, 1999
- -------------------------
Lyle Everingham
25
/s/ J. David Grissom Director March 31, 1999
- -------------------------
J. David Grissom
/s/ F. Warren McFarlan Director March 31, 1999
- --------------------------
F. Warren McFarlan
/s/ Ruth M. Owades Director March 31, 1999
- -------------------------
Ruth M. Owades
/s/ Larry D. Thompson Director March 31, 1999
- -------------------------
Larry D. Thompson
/s/ John L. Weinberg Director March 31, 1999
- -------------------------
John L. Weinberg
26