ITEM 1. BUSINESS.
General
Indiana United Bancorp ("Company") was initially formed in Owensboro, Kentucky, in 1982 as First Commonwealth Bancorp. The Company reincorporated under the laws of the State of Indiana under its present name in 1983, and relocated in Greensburg, Indiana, in anticipation of acquiring Union Bank and Trust Company of Greensburg. In 1987, Peoples Bank in Portland, Indiana was acquired and as of December 31, 1991, Regional Federal Savings Bank, New Albany, Indiana ("Regional Bank") was acquired. Effective July 1, 1994, the Company merged Union Bank and Trust Company of Greensburg into Peoples Bank, Portland, and renamed the combined bank, Union Bank and Trust Company of Indiana ("Union Bank"). Through these subsidiaries ("Banks"), the Company operates twelve offices with 143 full-time equivalent employees in eastern and southern Indiana. As of December 31, 1996, the Company had consolidated assets of $328 million, consolidated deposits of $276 million and shareholders' equity of $28 million.
Through its subsidiaries, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agri-business and real estate mortgage loans; issuing credit cards; renting safe deposit facilities; providing general agency personal and business insurance services; providing personal and corporate trust services; and providing other corporate services such as payroll processing, letters of credit and repurchase agreements.
Currently, national retailing and manufacturing subsidiaries, brokerage and insurance firms, and credit unions are fierce competitors within the financial services industry. The relaxation of regulatory constraints as to geographic expansion has also intensified competition among more traditional providers of banking services. The permissibility of banks and bank holding companies to acquire thrift institutions will undoubtedly further redefine the competitive marketplace.
The Company's subsidiaries are located in non-metropolitan areas and their business is centered in loans and deposits generated within markets considered to be largely rural in nature. In addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies located within their service areas, they also compete, directly and indirectly, with all providers of financial services.
Employees
As of December 31, 1996, the Company and its subsidiaries had approximately 143 full-time equivalent employees to whom it provides a variety of benefits and with whom it enjoys excellent relations.
Regulation and Supervision of the Company
The Company is a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"). This Act subjects BHCs to regulations of the Federal Reserve Board ("FRB") and restricts the business of BHCs to banking and related activities. In addition, Indiana United is a nondiversified unitary savings and loan holding company subject to regulations, examinations, supervision and reporting requirements of the Office of Thrift Supervision ("OTS").
Under the BHCA, a BHC is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of voting stock of any company which is not a bank or engaging in any activity other than managing or controlling banks. A BHC may, however, own shares of a company engaged in activities which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Acquisitions by the Company of banks and savings associations are subject to federal and state regulation. Any acquisition by the Company of more than five percent of the voting stock of any bank requires prior approval of the FRB. Acquisition of savings associations is also subject to the approval of the OTS.
Indiana law permits BHCs to acquire BHCs and banks out of state on a reciprocal basis, subject to certain limitations. Under current law, the Company may acquire banks, and may be acquired by BHCs, located in any state in the United States which permits reciprocal entry by Indiana BHCs. Under the BHCA, BHCs may acquire savings associations without geographic restrictions.
A BHC and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit, lease or sale of property, or the provision of any property or service.
The Company is under the jurisdiction of the Securities and Exchange Commission ("SEC) and state securities commission for matters relating to the offering and sale of its securities. The Company is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading.
The Company's income is principally derived from dividends paid on the common stock of its subsidiaries. The payment of these dividends is subject to certain regulatory restrictions.
Under FRB policy, the Company is expected to act as a source of financial strength to, and commit resources to support, its affiliates. As a result of such policy, the Company may be required to commit resources to its affiliate banks in circumstances where it might not otherwise do so.
Regulation and Supervision of the Subsidiary Banks
Union Bank is supervised, regulated and examined by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Regional Bank is supervised, regulated and examined by the OTS. A cease-and-desist order may be issued against the banks, if the respective agency finds that the activities of the bank represents an unsafe and unsound banking practice or violation of law.
The deposits of Union Bank are insured by the Bank Insurance Fund ("BIF") of the FDIC. The deposits of Regional Bank are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC has the authority to change premiums twice per year. Commencing in 1997 through 1999, thrift institutions will pay approximately five times higher assessment rates than commercial banks (6.44 cents versus 1.29 cents per $100). After the three year period, BIF and SAIF-insured institutions will pay the same assessment rate of 2.43 cents per $100 of deposits. Based on Current deposit levels, Union Bank deposit insurance expense will increase approximately $22,000 and Regional Bank will save approximately $155,000 compared to the assessment rates paid in 1996 as a result of these changes.
Branching by banks in Indiana is subject to the jurisdiction, and requires the prior approval, of the bank's or savings bank's primary federal regulatory authority and, if the branching bank is a state bank, of the DFI. Under Indiana law, the banks may branch anywhere in the state.
The Company is a legal entity separate and distinct from its subsidiary Banks. There are various legal limitations on the extent to which the Banks can supply funds to the Company. The principal source of the Company's funds consists of dividends from its subsidiary Banks. State and Federal law restrict the amount of dividends which may be paid by banks and savings banks. In addition, the Banks are subject to certain restrictions on extensions of credit to the Company, on investments in the stock or other securities of the Company and in taking such stock or securities as collateral for loans.
Legislation
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") represented a comprehensive and fundamental change to banking supervision and mandates the development of additional regulations governing almost every aspect of the operations, management and supervision of banks and BHCs.
FDICIA also included several supervisory reforms related to the frequency of regulatory examinations and audit requirements. FDICIA also required the adoption of safety and soundness standards on matters such as loan underwriting and documentation, and compensation and other employee benefits; mandated consumer protection disclosures with respect to deposit accounts; and the establishment of a risk-based deposit insurance system. To date, many of the provisions of FDICIA have been implemented.
FDICIA requires banking regulators to take prompt corrective actions with respect to depository institutions that fall below certain capital levels and prohibit any depository institution from making a capital distribution that would cause it to be considered undercapitalized. Banking regulators were also required to revise their capital standards to take into account interest rate risk. A policy statement has been proposed providing a supervisory framework to measure and monitor interest rate risk at individual banks. Banks may use an internal model which provides a measure of the change in a bank's economic value. The results of the supervisory and internal models would be one factor regulators will consider in their assessment of capital adequacy. Other factors will also be considered.
Certain regulations define relevant capital measures for five capital categories. A "well capitalized" institution is one that has a total risk- based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a leverage ratio of at least 5% and is not subject to regulatory direction to maintain a specific level for any capital measure. An "adequately capitalized" institution is one that has ratios greater than 8%, 4% and 4%. An institution is "undercapitalized" if its respective ratios are less than 8%, 4% and 4%. "Significantly undercapitalized" institutions have ratios of less than 6%, 3% and 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity to total assets that is 2% or less. Institutions with capital ratios at levels of "undercapitalized" or lower are subject to various limitations which, in most situations, will reduce the competitiveness of the institution.
The Riegle Community Development and Regulatory Improvement Act of 1994 ("Act") was signed into law in 1994. The Act contains seven titles pertaining to community development and home ownership protection, small business capital formation, paperwork reduction and regulatory improvement, money laundering and flood insurance. No regulations have yet been approved.
In September, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Branching Act") was enacted. In general, the Branching Act permits BHCs that are adequately capitalized and adequately managed to acquire banks located in any other state after September 1995, subject to certain total deposit limitations. The Branching Act permits full interstate branching after June 1, 1997. States may elect to prohibit interstate branching and merger transactions if they enact legislation before June 1, 1997 that applies equally to all out-of-state banks and expressly prohibits mergers involving out-of-state banks.
The monetary policies of regulatory authorities have a significant effect on the operating results of banks and BHCs. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and its subsidiaries cannot be predicted.
The Deposit Insurance Funds Act was enacted in 1996 and contained several major provisions. The new law recapitalized the SAIF by a one-time assessment on all SAIF-insured deposits. For 1997 through 1999 the banking industry will help pay for the Financing Corp. ("FICO") bond interest payments at an assessment rate that is one-fifth the rate paid by thrifts. Beginning January 1, 2000, the FICO interest payments will be paid pro-rata by banks and thrifts. Deposit shifting is prohibited for three years and the $2,000 annual minimum deposit insurance assessment were repealed. The BIF and SAIF will be merged on January 1, 1999 providing a law is passed by that date merging the bank and thrift charters. In addition, there were more than forty regulatory relief provisions in this bill.
Capital Requirements
The Company and its subsidiary Banks must meet certain minimum capital requirements mandated by the FRB, FDIC, OTS and DFI. These regulatory agencies require BHCs and banks to maintain certain minimum ratios of primary capital to total assets and total capital to total assets. The FRB requires BHCN to maintain a minimum Tier 1 leverage ratio to 3 percent capital to total assets; however, for all but the most highly rated institutions which do not anticipate significant growth, the minimum Tier 1 leverage ratio is 3 percent plus an additional cushion of 100 to 200 basis points. As of December 31, 1996, the Company's leverage ratio of capital to total assets was 8.33 percent.
The FRB, OTS and FDIC each have approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company and its subsidiaries had capital to assets ratios and risk-adjusted capital ratios at December 31, 1996, in excess of the applicable regulatory minimum requirements.
ITEM 2.

ITEM 2. PROPERTIES.
Indiana United Bancorp owns no physical properties and has no need for space other than is available at the offices of its subsidiaries. Its subsidiaries own, free of encumbrances, all of the facilities from which they conduct business, except for a portion of the land upon which the Union Bank has constructed its principal office and drive-in facility in Portland, which is under long term lease arrangements and the IGA supermarket branch in Greensburg. The Company is considering relocating certain Union Bank branches and intends to relocate the Grantline Branch of Regional Bank. Relocating the Grantline Branch and the possibility of relocating certain Union Bank branches is intended to increase visibility, enhance drive-thru banking and ATM accessibility and improve ingress and egress. The Company has 12 locations of which Union Bank has 9 locations and Regional Bank has 3 locations. At December 31, 1996, the Company had $5,919,000 invested in premises and equipment.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
The subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of business. Management is presently not aware of any such claims.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 1996 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required under this item is incorporated by reference to the inside back cover of the Company's Annual Report to Shareholders, Exhibit 13.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to page 4 of the Company's Annual Report to Shareholders, Exhibit 13.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to pages 4 through 16 of the Company's Annual Report to Shareholders, Exhibit 13.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are incorporated herein by reference to pages 17 through 27 of the Company's Annual Report to Shareholders, Exhibit 13.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
In connection with its audits for the two most recent fiscal years ended December 31, 1996, there have been no disagreements (as defined in Item 4(b) of Form 8-K) with the Company's independent certified public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.
PART IV
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 its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 1997.
INDIANA UNITED BANCORP
By /s/ Robert E. Hoptry Robert E. Hoptry, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities with the Company and on the dates indicated.


Item 1. (continued) PART 1
Item 1. BUSINESS
ORGANIZATION AND SEGMENTS -------------------------
Providian Corporation (the "Company"), an insurance and diversified financial services company based in Louisville, Kentucky, was incorporated in Delaware in 1969 by Commonwealth Life Insurance Company ("Commonwealth Life"). The objective was to achieve earnings growth through acquisitions of other insurance companies and, thus, affect economies of scale and the sharing of commonly needed resources, while preserving the strengths of acquired companies' marketing operations. The name of the Company was changed from Capital Holding Corporation to Providian Corporation effective May 12, 1994.
Through affiliates of its Providian Agency Group, Providian Direct Insurance and Providian Capital Management business units, the Company offers accumulation, life and annuity, accident and health and property and casualty insurance products and certain fee-based products. The Company's Providian Bancorp affiliates provide consumer loans, deposits and other banking and related services and certain fee-based products.
Changes in Control of Registrant - --------------------------------
On December 28, 1996, Providian Corporation executed a Plan and Agreement of Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant to which Merger Sub will merge with Providian Corporation. In connection with this merger, Providian Corporation will spin off Providian Bancorp, Inc. to Providian Corporation shareholders (the "Distribution"). For each share of Providian Corporation stock owned, shareholders will receive one share of Providian Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement, among other things, (a) Providian Corporation will be the surviving corporation in the merger and become a wholly owned subsidiary of AEGON, and (b) each shareholder of Providian Corporation will be entitled to receive a number of shares of AEGON common stock in exchange for shares of Providian Corporation's common stock.
Shareholders of Providian Corporation will receive in exchange for each share of common stock, a fraction of an AEGON common share equal to $28.00 divided by the "AEGON Share Price." Generally, the "AEGON Share Price" is equal to the average, during the 20 trading days immediately preceding the last business day before the date of the merger, of the average daily high and low prices per share of an AEGON common share on the New York Stock Exchange (the "Fair Market Value at the Effective Time"). The AEGON Share Price, however, is subject to a collar, for the purposes of calculating the exchange ratio, which provides that the AEGON Share Price shall be $61.153 if the Fair Market Value at the Effective Time is equal to or greater than $61.153 and shall be $50.034 if the Fair Market Value at the Effective Time is equal to or less than $50.034. The Merger Agreement also provides that AEGON may terminate the agreement if the AEGON Share Price is more than $66.713 and that Providian Corporation may terminate the agreement if the AEGON Share Price is less than $44.475, unless the other party agrees to a "make-whole" provision. In general, the "make-whole" provision would mean that the value of the AEGON common shares issued in the merger would not be more than $30.545 or less than $24.889 for each share of Providian Corporation common stock.
The Board of Directors of Providian Corporation has unanimously approved the Merger Agreement and the Distribution. The merger is subject to approval by various regulatory authorities, approval by Providian Corporation's shareholders and certain other conditions. The Distribution will occur only if all of the conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary obligations of the Board of Directors of Providian Corporation, Providian Corporation would be required to pay to AEGON liquidated damages of $80 million to $100 million.
Because consummation of the merger and the Distribution is subject to the above conditions, no representations can be made as to whether, or when, the merger and Distribution will be completed or as to the possible impact of the merger and Distribution on the financial condition and results of operations of the Company should the merger and Distribution occur.
Providian Agency Group - ----------------------
By 1976, the Company had acquired Peoples Life Insurance Company ("Peoples Life") in Washington, D.C.; National Standard Life Insurance Company ("National Standard") in Orlando, Florida; Georgia International Life Insurance Company ("Georgia International") in Atlanta, Georgia; Home Security Life Insurance Company ("Home Security") in Durham, North Carolina; and several other companies that were subsequently merged into these affiliates. On October 1, 1985, Peoples Life and Home Security Life were merged to form Peoples Security Life Insurance Company ("Peoples Security") with headquarters in Durham. On March 31, 1987, the Company sold Georgia International to Southmark Corporation. On April 1, 1988, National Standard was merged into Commonwealth Life. On September 8, 1989, the Company acquired Southlife Holding Company and its primary operating companies, Public Savings Life Insurance Company ("Public Savings Insurance") and Security Trust Life Insurance Company ("Security Trust"), headquartered in Nashville, Tennessee. In December, 1991, the Company created Capital Security Life Insurance Company ("Capital Security"), as the successor to Public Savings Insurance. On November 14, 1991, the Company acquired Durham Corporation and its primary operating company, Durham Life Insurance Company ("Durham Life"), with headquarters in Raleigh, North Carolina. On September 30, 1994, Durham Life was merged into Peoples Security. On January 31, 1996, Capital Security was merged into Security Trust and Security Trust's name was changed to Capital Security. Following this merger, Agency Group's business is conducted primarily through three affiliates: Commonwealth Life, Peoples Security and Capital Security.
Providian Direct Insurance - --------------------------
In 1979, Commonwealth Life's property and casualty operation was recapitalized, made a direct subsidiary of the Company and later renamed Providian Property and Casualty Insurance Company ("Providian P&C"). On December 31, 1986, the Company acquired Worldwide Underwriters Insurance Company, which has been renamed Providian Auto and Home Insurance Company ("Providian Auto"), located in St. Louis, Missouri, and the personal lines property and casualty insurance business of the Wausau Insurance Companies. Concurrently, it made Providian P&C a direct subsidiary of Providian Auto. These two affiliates, together with Providian Fire Insurance Company, a subsidiary of Providian P&C, form the property and casualty line of business of the Providian Direct Insurance business unit.
National Liberty Corporation ("National Liberty") in Valley Forge, Pennsylvania, was acquired on January 14, 1981, and added a nationwide direct marketing operation to what previously had been a regional, agent based marketing system.
In addition, National Home Life Assurance Company, which has been renamed Providian Life and Health Insurance Company ("Providian Life") and which is domiciled in Missouri, was also acquired as National Liberty's primary operating company, together with its principal subsidiaries, Veterans Life Insurance Company ("Veterans Life") and National Home Life Insurance Company of New York, which has been renamed First Providian Life and Health Insurance Company ("First Providian").
Effective January 15, 1993, Providian Auto acquired Academy Insurance Group ("Academy") and its affiliates. Academy principally markets life insurance to active duty military service personnel.
Providian Capital Management - ----------------------------
In 1987, the group accumulation product business, previously managed in Providian Agency Group, and the individual accumulation product business, previously managed by National Liberty, were moved to Providian Capital Management. Affiliates of Providian Agency Group and Providian Direct Insurance offer these group and individual accumulation products. In addition to the marketing and management of accumulation (investment-type) products, Providian Capital Management manages the Company's insurance-related investment portfolios.
Providian Bancorp - -----------------
In April, 1984, the Company acquired a controlling interest in First Deposit Corporation (which, effective November 11, 1994, changed its name to Providian Bancorp, Inc.), located in San Francisco, California, which owns, among other subsidiaries, a grandfathered non-bank bank (First Deposit National Bank) and a credit card bank (Providian National Bank, which changed its name from First Deposit National Credit Card Bank effective January 1, 1995). Ownership was increased each year until 1989 when the remaining shares were purchased. At December 31, 1996, the Company owned 100% of the common stock and 100% of the outstanding preferred stock of Providian Bancorp. These affiliates form the Providian Bancorp business unit.
Financial information about business segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
PRODUCTS --------
Insurance - ---------
Commonwealth Life, Peoples Security, Capital Security, Providian Life, Veterans Life, First Providian and Academy write a variety of group and individual, nonparticipating life insurance products. These include universal life, traditional and interest-sensitive whole life insurance, term life insurance, accidental death and dismemberment coverage and premium waiver disability insurance.
The following table reconciles total life insurance in force for the year ended December 31, 1996:
Total Life Insurance (dollars in millions) ---------------------
In force at December 31, 1995 $66,131 (1) Sales and additions 10,346
Terminations: Surrender and Conversion 2,313 Lapse 7,771 Reinsurance -- Other 1,617 --------- Subtotal 11,701 --------- In force at December 31, 1996 $64,776 (1) =========
Number of policies in force before reinsurance ceded at December 31, 1996 6,287,573 =========
(1) Reinsurance assumed has been included. Reinsurance ceded has not been deducted.
Commonwealth Life, Peoples Security, Capital Security, Providian Life, Veterans Life, First Providian and Academy also issue an assortment of individual and group accident and health insurance products. These include coverages for regular income during periods of hospitalization, scheduled reimbursement for specific hospital/surgical expenses and cancer treatments, hospice care, deductible and co-payment amounts not covered by other health insurance and lump sum payments for accidental death or dismemberment and provide benefits for death and injury resulting from an accident. Additionally, Providian Life offers a Medicare supplement product.
Providian Auto and its subsidiaries underwrite personal lines automobile and umbrella liability coverages mainly for standard and preferred risks.
Accumulation - ------------
The group line of accumulation products, offered through Commonwealth Life, Peoples Security and Providian Life, consists of floating and fixed rate guaranteed investment contracts ("GICs"), Trust GICs and separate account products offered to group customers, including pension funds, banks, mutual funds and other organizations. The Trust GIC product, an off-balance sheet fee-based product, permits the plan sponsor to own and retain assets related to these contracts and Commonwealth Life and Peoples Security provide benefit responsiveness in the event that qualified plan benefit requests exceed plan cash flows.
Through Providian Life, Commonwealth Life and Peoples Security, the Company offers individual accumulation products including immediate life annuities (primarily structured settlements), variable annuities, single premium and flexible premium deferred annuities and individual retirement annuities. Single premium deferred annuities and flexible premium deferred annuities are offered at a fixed interest rate on either a fixed or indexed basis. In addition, flexible premium deferred annuities are offered on a variable contract basis.
Banking - -------
Providian Bancorp affiliates offer both secured and unsecured loans, as well as a broad range of deposit products. The receivables portfolio consists primarily of unsecured consumer loans which use a VISA(R) or MasterCard(R) credit card as the credit extension vehicle, a revolving cash loan product without a credit card, a savings deposit secured line of credit using a VISA(R) or MasterCard(R) credit card, a home equity secured loan product and insurance premium finance installment loans. Deposit products include retail and institutional certificates of deposit and money market deposit accounts.
Fee-Based Products - ------------------
Providian Bancorp has developed fee-based strategic protection products and services such as Credit Protection, Home Protection(R), First Health Advantagesm and DrivePro(R). Certain of these products are also marketed by Providian Agency Group and Providian Direct Insurance.
MARKETING ---------
Providian Agency Group markets individual insurance products primarily through agents, who call on customers in their homes to sell policies and provide related services. In addition, such agents market certain of the fee-based products described above. Substantially all of the agents are employees of Providian Agency Group, Inc. and do not represent insurers other than Agency Group. Such representatives receive compensation from sales commissions, and from renewal and service commissions. The compensation arrangement is designed to reward representatives who not only sell new policies, but who also effectively maintain and service in-force business to meet Company sales and persistency objectives. In addition to its agent sales organization, marketing partnerships have also been formed whereby products are distributed through the insurance and marketing organizations of third parties.
Providian Direct Insurance primarily uses television and print media solicitation, direct mail, telephone and third-party programs to market its insurance products and certain fee-based products. Additional mail correspondence and telephone communications are used to follow up and close sales. Sponsored marketing programs are conducted through major banks, oil companies, department stores, associations and other businesses with large customer bases. Academy's products are marketed to active duty military personnel on military bases through independent Agents/Counselors. Property and casualty products are also marketed through a portion of the home service agents of Agency Group.
Group accumulation products of Providian Capital Management are marketed through a small sales staff, bank trustees, municipal GIC brokers, GIC fund managers, brokers and direct marketing. Individual products are marketed through financial planners, stock brokerage firms, independent agents, pension consultants, savings and loan associations, banks and other financial institutions and direct mail programs.
Providian Bancorp's consumer loan and deposit products are primarily marketed using direct mail and telemarketing channels and other direct response methods. Insurance premium finance installment loans are primarily marketed through agents under the management of a third party vendor.
Except for Providian Agency Group's marketing partnerships arrangements, the Company's Providian Agency Group affiliates concentrate their marketing efforts in the Southeast and Mid-Atlantic states, while the Providian Direct Insurance, Providian Capital Management, Providian Agency Group (through its marketing partnerships arrangements) and Providian Bancorp business units market their products nationwide.
RISK ----
Risk is integral to insurance but, as is customary in the insurance business, risk exposure is kept within acceptable limits. The Company's subsidiaries retain no more than $1 million of life insurance and $250 thousand of accidental death benefits for any single life. Excess coverages are reinsured externally. At December 31, 1996, approximately $3.7 billion, or approximately 5.7 percent of total life insurance in force, was reinsured with nonaffiliated insurance companies. The Company would become liable for the reinsured risks if the reinsurers could not meet their obligations.
The Company's life insurance affiliates in many cases require evidence of insurability before issuing individual life policies including, in some cases, a medical examination or a statement by an attending physician. Home office underwriters review that evidence and approve the issuance of the policy in accordance with the application if the risk is acceptable. Some applicants who are substandard risks are rejected, but many are offered policies with higher premiums or restricted coverages. As of December 31, 1996, approximately 2.06 percent of life insurance in force was represented by risks which were substandard at the time the policy was issued. The majority of individual health insurance is Providian Direct Insurance business and written without evidence of insurability, relying on safeguards such as product design, limits on the amount of coverage, and premiums which recognize the resultant higher level of claims.
The Company's annuities and structured settlements carry reinvestment and mortality risks. Additionally, deferred annuities are subject to disintermediation under some circumstances. Providian Capital Management employs appropriate underwriting and investment strategies to minimize these risks.
Banking Group's unsecured consumer loans are principally generated through direct mail and telemarketing solicitations and are made to a prescreened list of prospective accountholders, followed by credit verification. Banking Group uses proprietary technology and credit models to target creditworthy unsecured consumer loan customers who are expected to be eligible for a high credit line and who are likely to respond to the offer and resolve their balances.
Detailed discussions about the Company's investments are included in Note D to the Consolidated Financial Statements on pages 51 and 52 of the Company's 1996 Annual Report and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. As a diversified financial services company, many of the Company's assets and liabilities are monetary in nature and thus are sensitive to changes in the interest rate environment. Additional information about interest rate risk is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
REGULATION ----------
Insurance - ---------
The business of the Company's insurance subsidiaries is subject to regulation and supervision by the insurance regulatory authority of each state in which the subsidiaries are licensed to do business. Such regulators grant licenses to transact business; regulate trade practices; approve policy forms; license agents; approve certain premium rates; establish minimum reserve and loss ratio requirements; review form and content of required financial statements; prescribe the type and amount of investments permitted; and assure that capital, surplus and solvency requirements are met. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (the "NAIC"), a self-regulatory organization of state insurance commissioners, insurance companies are examined periodically by one or more of the supervisory agencies.
In 1992, the NAIC adopted a "Risk Based Capital for Life and/or Health Insurers Model Act" (the "Model Act") which was designed to identify inadequately capitalized life and health insurers. The Model Act defines two key measures: (i) Total Adjusted Capital, which equals an insurer's statutory capital and surplus plus its Asset Valuation Reserve, plus half its liability for policyholder dividends, and (ii) Risk Based Capital. Risk Based Capital is determined by a complex formula which is intended to take into account the various risks assumed by an insurer. The NAIC adopted a similar, though more elaborate model act for property/casualty insurers in 1993. Should an insurer's Adjusted Capital fall below certain prescribed levels (defined in terms of its Risk Based Capital), the Model Act provides for four different levels of regulatory attention:
"Company Action Level": Triggered if an insurer's Adjusted Capital is less than 100% but greater than or equal to 75% of its Risk Based Capital; requires the insurer to submit a plan to the appropriate regulatory authority that discusses proposed corrective action.
"Regulatory Action Level": Triggered if an insurer's Adjusted Capital is less than 75% but greater than or equal to 50% of its Risk Based Capital; authorizes the regulatory authority to perform a special examination of the insurer and to issue an order specifying corrective actions.
"Authorized Control Level": Triggered if an insurer's Adjusted Capital is less than 50% but greater than or equal to 35% of its Risk Based Capital; authorizes the regulatory authority to take whatever action it deems necessary.
"Mandatory Control Level": Triggered if an insurer's Adjusted Capital falls below 35% of its Risk Based Capital; requires the regulatory authority to place the insurer under its control.
Since the Total Adjusted Capital levels of the Company's insurance subsidiaries currently exceed all of the action levels as defined by the NAIC's Model Acts, these Model Acts currently have no impact on the Company's operations or financial condition.
Prior to creation of the Model Act, the NAIC created the Insurance Regulatory Information System ("IRIS") ratios as an early warning system for use by state insurance regulators. The effect on the Company of these IRIS ratios has been the need to discuss with regulators any ratios which fell outside the expected ranges; however, there has been no heightened level of review of the Company as a result of these ratios.
Although the federal government does not directly regulate insurance business, except with respect to Medicare supplement plans, legislation and administration policies concerning premiums, age and gender discrimination, financial services and taxation, among other areas, can significantly affect the insurance business.
Banking - -------
The primary regulator of Providian Bancorp's consumer banking subsidiaries, First Deposit National Bank and Providian National Bank, is the Office of the Comptroller of the Currency ("OCC"). The banks' deposits are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC") and accordingly, the banks are subject to certain regulations of the FDIC. As members of the Federal Reserve System, the banks are also subject to regulation by the Board of Governors of the Federal Reserve System. In 1996, Providian Bancorp obtained FDIC insurance for a third banking subsidiary, Providian Credit Services, Inc., a Utah industrial loan company, which is regulated by the Utah department of Financial Institutions and the FDIC.
Regulations of the OCC, the FDIC and other applicable federal regulatory agencies affect many areas of banking operations, including capital ratios, reserve requirements, the payment of dividends and permitted investments.
First Deposit National Bank must comply with certain restrictions under the Bank Holding Company Act in order to maintain its grandfathered status. These restrictions include a limitation on its ability to engage in certain new activities. Providian National Bank's charter generally limits its activities to credit card operations. Notwithstanding their direct or indirect ownership of First Deposit National Bank, Providian National Bank and Providian Credit Services, Inc., neither Providian Bancorp, Inc. nor the Company is a "bank holding company" within the meaning of the Bank Holding Company Act. But for these grandfather rights, the Company would be required to register as a bank holding company and would be subject to the restrictions set forth with the Company's activities to those owning and managing banks and certain other activities deemed by the Federal Reserve to be closely related to banking and a proper incident thereto.
The relationship between Providian Bancorp's consumer banking subsidiaries and their customers is extensively regulated by federal and state consumer protection laws. The most significant laws include the federal Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting and Truth-in-Savings Acts. These laws impose disclosure requirements when a consumer credit loan is advertised, when it is extended and in connection with monthly billing statements, limit the liability of credit card holders for unauthorized use, prohibit certain discriminatory practices and limit the manner in which consumer credit reports may be used.
Holding Company - ---------------
States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. The Company and its subsidiaries have registered as a holding company system pursuant to such legislation in Kentucky, Missouri, North Carolina, New York, Illinois and New Jersey.
Insurance holding company system statutes and rules impose various limitations on investments in subsidiaries and may require prior regulatory approval for the payment of dividends and other distributions in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurance company to the holding company or its affiliates. The NAIC is seeking changes in state law which would further restrict the amount of dividends which could be paid without prior approval.
Separate Accounts - -----------------
Separate accounts of the Company's subsidiaries which offer individual variable annuities are registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and the Securities Act of 1993 and are governed by the provisions of the Internal Revenue Code of 1986, as amended, pertaining to the tax treatment of annuities.
COMPETITION -----------
The insurance industry is highly competitive with over 1,700 life insurance companies competing in the United States, some of which have substantially greater financial resources, broader product lines and larger staffs than the Company's insurance subsidiaries. Additionally, life insurance companies face increasing competition from banks, mutual funds and other financial entities for attracting investment funds.
The Company's insurance subsidiaries differentiate themselves through progressive marketing techniques, product features, price, customer service, stability and reputation, as well as competitive credit ratings. The insurance subsidiaries maintain their competitive position by their focus on lower risk markets and efficient cost structure. Other competitive strengths include integrated asset/liability management, risk management and innovative product engineering.
The credit card and consumer revolving loan industry business in which Providian Bancorp's subsidiaries are engaged is highly competitive. The industry has recently experienced rising charge-offs and continued competitive pressure. Competitors continually refine their use of advertising, target marketing, balance transfers, pricing competition, incentive programs and changes in the terms of certain credit cards, including lowering the rate of interest charged on balances and adopting "tiered" or "risk-adjusted" or "performance-based" rates under which the annual percentage rate is lowered or raised for the issuer's most or least creditworthy customers.
In response to the competitive environment, Providian Bancorp's subsidiaries have implemented a variety of new programs to attract and retain customers, including reducing interest rates on selected accounts and marketing additional fee-based products. Providian Bancorp's subsidiaries have generally retained the right to alter various charges, fees and other terms with respect to consumer credit accounts. In addition, Providian Bancorp has experienced steady growth in its secured loan products and is increasing its efforts to offer additional products to underserved markets.
EMPLOYEES ---------
The total number of persons employed by the Company and its subsidiaries is approximately 9,300.
FOREIGN OPERATIONS ------------------
Substantially all of the Company's operations are conducted in the United States.
ITEM 2.

ITEM 2. PROPERTIES
Principal properties of the Company and its subsidiaries include home offices located in Louisville, Kentucky (Commonwealth Life) and Valley Forge, Pennsylvania (Providian Life and Health and Providian Auto and Home Insurance), which are owned; offices in Pleasanton, California (Providian Bancorp), which are owned; and Louisville, Kentucky (Providian Corporation), Durham, North Carolina (Peoples Security and Capital Security) and San Francisco and Sacramento, California (Providian Bancorp), which are leased.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The last subsection titled "Legal Proceedings," of Note L - Commitments and Contingencies on page 61 of the 1996 Annual Report is incorporated by reference.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock Dividend and Market Data, and Quarterly Price Ranges of Common Stock and Dividends Per Common Share on page 38 and page 39 of the Annual Report for the year ended December 31, 1996 are incorporated by reference.
Item 6.

Item 6. SELECTED FINANCIAL DATA
Selected Financial Data on pages 18 and 19 of the Annual Report for the year ended December 31, 1996, is incorporated by reference.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Results and Analysis on pages 19 and 20, Results by Business Segment on pages 20 through 30, Asset Liability Management and Review on pages 30 through 36 and Liquidity and Capital Resources and Inflation on pages 37 and 38 of the Annual Report for the year ended December 31, 1996, are incorporated by reference.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Providian Corporation and Subsidiaries included on pages 41 through 45 and Quarterly Financial Data on page 39 of the Annual Report for the year ended December 31, 1996, are incorporated by reference.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" of the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the Commission within 120 days following the end of the Registrant's fiscal year end, is incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Principal Occupation and Business Experience - ------------ --------------------------------------------
Irving W. Bailey II Chairman of the Board of Directors, Age: 55 Providian Corporation, since November 1988, and Chief Executive Officer, Providian Corporation, since April 1988. President, Providian Corporation, from September 1987 to December 1994, and Chief Operating Officer, Providian Corporation, September 1987 to April 1988. Executive Vice President and Chief Investment Officer, Providian Corporation, from February 1981 to September 1987.
Shailesh J. Mehta President and Chief Operating Officer, Age: 47 Providian Corporation, since December 1994. Executive Vice President, Providian Corporation, from August 1993 to December 1994. Chairman and CEO, Providian Direct Insurance from August 1993 to December 1994. Also, President and CEO - Providian Bancorp, and Chairman of the Board, President and Chief Executive Officer of Providian Bancorp, Inc. and subsidiaries from April 1988 to January 1995. He served as Executive Vice President and Chief Operating Officer of Providian Bancorp from March 1986 until his election as its CEO.
Robert L. Walker Senior Vice President - Finance and Chief Age: 46 Financial Officer, Providian Corporation, since August 1993. He served as Vice President and General Counsel, Providian Corporation, from December 1991 to August 1993, and Vice President, Corporate Tax, Providian Corporation, from March 1988 to December 1991.
Steven T. Downey Vice President and Controller, Age: 39 Providian Corporation, since November 1993. He served as Director, Finance and Accounting - Providian Capital Management, from January 1993 to November 1993, and Second Vice President and Assistant Controller, Providian Corporation, from August 1991 to January 1993. Prior to joining Providian Corporation, he was with Ernst & Young LLP, Certified Public Accountants, from 1978 to 1991.
James V. Elliott Senior Vice President and General Counsel, Age: 52 Providian Corporation, since January 1995. General Counsel, Providian Bancorp, Inc., since 1989 and a Senior Vice President, Providian Bancorp,Inc., from March 1993 through December,1994. During 1993, he was also responsible for Providian Bancorp's emerging business operation.
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience - ------------ --------------------------------------------
Lawrence Pitterman Senior Vice President of Administration, Age: 49 Providian Corporation, since January 1991. Vice President, Human Resources, Providian Bancorp, Inc. from July 1990 to December 1990; Vice President, Corporate Communications, from 1989 to 1990; and Vice President, First Deposit Savings Bank, from 1987 to 1989.
Robert S. Greer, Jr. Chief Operating Officer and President of Age: 49 Agency Group since July 1995. He was President of the Home Service Division of United Insurance Company of America since 1991, while continuing to serve as President of Union National Life Insurance Company and Union National Fire Insurance Company since 1985. These companies are owned by UNITRIN, Inc.
Frederick C. Kessell President, Providian Capital Management Age: 48 since April 1996 and Chief Investment Officer, Providian Capital Management, since May 1993. Managing Director, Chief Investment Officer - Providian Capital Management, from May 1989 to May 1993, and Vice President, Fixed Income Securities - Providian Capital Management, Providian Corporation, from May 1985 to May 1989.
A. Sami Siddiqui Executive Vice President - Providian Age: 44 Bancorp, since January 1995. He originally joined Providian Bancorp in 1985 as Vice President, and for seven years, he managed various areas of unsecured spread business, including product development, market management, and the marketing services group. He was later promoted to Senior Vice President. He worked as an independent consultant from July 1992 through December 1994.
David J. Miller Chief Operating Officer - Providian Direct Age: 37 Insurance since September, 1996 and is responsible for all aspects of marketing and marketing support,strategic partnerships, insurance operations and information systems. He originally joined Providian Direct Insurance in 1994 as Vice President with responsibility for all direct-sold life and health insurance and non-insurance products, marketing support and strategic partnerships. Prior to joining Providian, he was with Progressive Insurance from 1987 to 1994, where he served as division controller and product manager and was responsible for several national auto insurance programs.
EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience - ------------ --------------------------------------------
David B. Smith Executive Vice President of Providian Age: 45 Bancorp since January 1997, with responsibilities in the Unsecured Spread business and Providian Home Loan perations. From July 1996 to January 1997, he was Senior Vice President of Providian Bancorp. From 1995 to July 1996 he was Chief Technology Officer for Providian Corporation and in 1991 he was responsible for life insurance marketing, systems and operations for Providian Direct Insurance. From 1990 to 1994, he was Senior Vice President of Providian Bancorp with responsibilities in various aspects of operations, systems and marketing for the Unsecured Spread business.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The sections entitled "Directors' Compensation,"Executive Compensation and Other Information,"Stock Options and Stock Appreciation Rights (SARs)", "Option Exercises and Holdings," "Pension Plans" and "Human Resources Committee Executive Compensation Report" of the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the Commission within 120 days of the Registrant's fiscal year-end, are incorporated by reference.
Item l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed within 120 days of the Registrant's fiscal year-end, is incorporated by reference.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2)--The response to these portions of Item 14 is submitted as a separate section of this report.
(a) (3)--The response to this portion of Item 14 is submitted as a separate section of this report.
(b) None.
(c) Exhibits are submitted as a separate section of this report.
(d) Financial statement schedules are submitted as a separate section of this report.
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 its behalf by the undersigned, thereunto duly authorized, in the City of Louisville, and the Commonwealth of Kentucky, on the 19th day of February 1997:
PROVIDIAN CORPORATION
/s/ Irving W. Bailey II ----------------------- Irving W. Bailey II Chairman 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 in the capacities indicated on the 19th day of February 1997:
SIGNATURE TITLE --------- -----
/s/ Irving W. Bailey II Chairman, Chief Executive --------------------------- Officer and Director Irving W. Bailey II
/s/ Shailesh J. Mehta President, Chief Operating --------------------------- Officer and Director Shailesh J. Mehta
/s/ Robert L Walker Senior Vice President and -------------------------- Chief Financial Officer Robert L Walker
/s/ Steven T. Downey Vice President and Controller ---------------------------- Steven T. Downey
/s/ John L. Clendenin Director --------------------------- John L. Clendenin
/s/John M. Cranor III Director ---------------------------- John M. Cranor III
/s/Lyle Everingham Director ----------------------------- Lyle Everingham
SIGNATURE TITLE --------- -----
/s/Raymond V. Gilmartin Director -------------------------------- Raymond V. Gilmartin
/s/J. David Grissom Director ------------------------------- J. David Grissom
/s/Watts Hill, Jr. Director -------------------------------- Watts Hill, Jr.
Ned C. Lautenbach Director
/s/F. Warren McFarlan Director -------------------------------- F. Warren McFarlan
Martha R. Seger Director -------------------------------- Martha R. Seger
/s/Larry D. Thompson Director -------------------------------- Larry D. Thompson
ANNUAL REPORT ON FORM 10-K
ITEM l4(a)(1), (2) and (3), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
LIST AND INDEX OF EXHIBITS
YEAR ENDED DECEMBER 31, 1996
PROVIDIAN CORPORATION
LOUISVILLE, KENTUCKY
FORM 10-K--ITEM 14(a)(1) and (2)
PROVIDIAN CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following Consolidated Financial Statements of Providian Corporation and Subsidiaries, included on pages 41 through 62 of the Annual Report for the year ended December 31, 1996, are incorporated by reference in Item 8:
Page
Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994 41
Consolidated Statements of Financial Condition - December 31, 1996 and 1995 42 - 43
Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 44
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 45
Notes to Consolidated Financial Statements 46 - 62
The following financial statement schedules and the related Report of Independent Auditors are included in Item 14(d):
Schedule I - Summary of Investments - Other Than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplementary Insurance Information Schedule IV - Reinsurance
Information required in Schedule V, "Valuation and Qualifying Accounts," is included in Note D to the Consolidated Financial Statements of Providian Corporation and subsidiaries, incorporated herein by reference. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Providian Corporation
We have audited the Consolidated Financial Statements of Providian Corporation and subsidiaries listed in the accompanying index to financial statements (Item 14(a)). Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Providian Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note C to the Consolidated Financial Statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities.
/s/ERNST & YOUNG LLP
Louisville, Kentucky February 4, 1997
See notes to condensed financial statements.
See notes to condensed financial statements.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note A Basis of Presentation
In the parent company only condensed financial statements of Providian Corporation (the "Company"), investment in subsidiaries is stated at cost plus equity in undistributed income of subsidiaries since date of acquisition. The condensed financial statements of the parent company should be read in conjunction with the Consolidated Financial Statements and related Notes of Providian Corporation and Subsidiaries.
Note B Plan and Agreement of Merger and Reorganization
On December 28, 1996, Providian Corporation executed a Plan and Agreement of Merger and Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and LT Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant to which Merger Sub will merge with Providian Corporation. In connection with this merger, Providian Corporation will spin off Providian Bancorp, Inc. to Providian Corporation shareholders (the "Distribution"). For each share of Providian Corporation stock owned, shareholders will receive one share of Providian Bancorp, Inc. in the Distribution. Pursuant to the Merger Agreement, among other things, (a) Providian Corporation will be the surviving corporation in the merger and become a wholly owned subsidiary of AEGON, and (b) each shareholder of Providian Corporation will be entitled to receive a number of shares of AEGON common stock in exchange for shares of Providian Corporation's common stock.
Shareholders of Providian Corporation will receive in exchange for each share of common stock, a fraction of an AEGON common share equal to $28.00 divided by the "AEGON Share Price." Generally, the "AEGON Share Price" is equal to the average, during the 20 trading days immediately preceding the last business day before the date of the merger, of the average daily high and low prices per share of an AEGON common share on the New York Stock Exchange (the "Fair Market Value at the Effective Time"). The AEGON Share Price, however, is subject to a collar, for the purposes of calculating the exchange ratio, which provides that the AEGON Share Price shall be $61.153 if the Fair Market Value at the Effective Time is equal to or greater than $61.153 and shall be $50.034 if the Fair Market Value at the Effective Time is equal to or less than $50.034. The Merger Agreement also provides that AEGON may terminate the agreement if the AEGON Share Price is more than $66.713 and that Providian Corporation may terminate the agreement if the AEGON Share Price is less than $44.475, unless the other party agrees to a "make-whole" provision. In general, the "make-whole" provision would mean that the value of the AEGON common shares issued in the merger would not be more than $30.545 or less than $24.889 for each share of Providian Corporation common stock.
The Board of Directors of Providian Corporation has unanimously approved the Merger Agreement and the Distribution. The merger is subject to approval by various regulatory authorities, approval by Providian Corporation's shareholders and certain other conditions. The Distribution will occur only if all of the conditions necessary for the merger are satisfied.
Should the Merger Agreement be terminated as a result of certain fiduciary obligations of the Board of Directors of Providian Corporation, Providian Corporation would be required to pay to AEGON liquidated damages of $80 million to $100 million.
Because consummation of the merger and the Distribution is subject to the above conditions, no representations can be made as to whether, or when, the merger and Distribution will be completed or as to the possible impact of the merger and Distribution on the financial condition and results of operations of the Company should the merger and Distribution occur.
Note C Federal Income Tax
The Company files a consolidated federal income tax return with certain of its subsidiaries. The federal income tax benefit in the accompanying condensed financial statements reflects the Company's allocable share of the consolidated income tax provision. See Note H to the Consolidated Financial Statements of Providian Corporation and Subsidiaries for a description of the components of the consolidated federal income tax provision.
Note D Note Payable to Providian LLC
In May 1994, Providian LLC was formed and capitalized through the purchase of common shares by the Company. On May 12, 1994 Providian LLC completed the issuance of 4,000,000 shares of Cumulative Monthly Income Preferred Stock (MIPS) at $25 per share. The total proceeds of $127 million from the issuance of the MIPS and the common stock were subsequently lent to the Company to provide permanent funding for the redemption of the Company's Adjustable Rate Cumulative Preferred Stock, Series F. The note receivable from the Company that results from such loans constitutes the only material assets of Providian LLC. The MIPS is redeemable at the option of Providian LLC (with the Company's consent) in whole or in part on or after May 31, 1999 at a redemption price of $25 per share plus accumulated and unpaid dividends. Upon liquidation of Providian LLC, the holders of the MIPS are entitled to $25 per share plus accumulated and unpaid dividends. The MIPS pays monthly dividends at an annual rate of 8.875 percent. The Company has unconditionally guaranteed all legally declared and unpaid dividends of Providian LLC. The note payable to Providian LLC is included in Notes, accounts payable and other liabilities to subsidiaries in the accompanying Condensed Statement of Financial Condition.
Note E Long-Term Debt
Long-term debt of the Company at December 31, 1996 and 1995 consisted of Debentures and Notes in the amount of $718 million and $721 million, respectively. See Note I to the Consolidated Financial Statements of Providian Corporation and Subsidiaries for a description of the terms and aggregate maturities of the Company's long-term debt.
Note F Common Stock
During 1996, 1995 and 1994, the Company announced plans to repurchase a total of 11,500,000 shares of the Company's common stock on the open market. Through December 31, 1996, the Company repurchased 9,500,000 shares (1,256,000 shares in 1996, 3,910,000 shares in 1995 and 4,334,000 shares in 1994) at an aggregate cost of $337 million ($55 million in 1996, $143 million in 1995 and $139 million in 1994).
Note G Preferred Stock
The Company has 6,000,000 shares of preferred stock, par value $5, authorized for issuance in series.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Redeemable Cumulative Preferred Stock Held By Subsidiary The Company has designated 587,400 shares of preferred stock as redeemable cumulative preferred stock to be issued in different series with varying annual dividend rates. The shares outstanding at December 31, 1996 and 1995 were 467,400 and 547,400, respectively. The subsidiary has the right, on an annual basis, to waive receipt of dividends and has waived any dividends payable through 1996. The characteristics of the redeemable preferred stock are as follows:
Shares outstanding Dividend Shares Year at December 31 Period of Series rate authorized issued 1996 1995 redemption ------ ---- ---------- ------ ---- ---- ----------
B 12.25 32,800 1980 32,800 41,000 1991-2000
C 14.00 75,000 1981 75,000 90,000 1992-2001
D 15.00 60,000 1982 60,000 70,000 1993-2002
E 14.25 90,000 1982 90,000 105,000 1993-2002
G 12.00 198,000 1983 78,000 91,000 1993-2002
H 11.50 70,000 1984 70,000 80,000 1994-2003
I 12.00 61,600 1984 61,600 70,400 1994-2003
======= ======= ======== 587,400 467,400 547,400 ======= ======= ========
Mandatory pro-rata sinking fund payments are required to redeem 10% of each series of redeemable preferred stock annually, beginning approximately ten years after issuance at $100 per share. As the shares are redeemed, they are retired thereby reducing the total authorized shares of each series. The Company redeemed the following shares of cumulative preferred stock in 1996: 8,200 of the Series B; 15,000 of the Series C; 10,000 of the Series D; 15,000 of the Series E; 13,000 of the Series G; 10,000 of the Series H; and 8,800 of the Series I. The aggregate amount of mandatory pro-rata sinking fund payments required for redemption of the redeemable preferred stock in each of the following years are: 1997-$8 million; 1998-$8 million; 1999-$8 million, 2000-$8 million and 2001-$7 million. The Company shall have the annual non-cumulative option to double any sinking fund payment subject to an aggregate limitation of 25% of the total issue. The redeemable preferred stock is non-callable for approximately ten years and callable thereafter at $105 per share plus accrued dividends. However, in the event the Company is required to obtain approval of a specified percentage of the holders of the issue to effect a merger, consolidation, or sale of assets and such approval is denied, then the Company may redeem the preferred stock in its entirety at $100 per share plus accrued dividends.
Adjustable Rate Cumulative Preferred Stock - ------------------------------------------ On March 2, 1994, the Company redeemed, at face value, all 1,000,000 shares of its Series F, Adjustable Rate Cumulative Preferred Stock, at $100 per share plus accrued and unpaid dividends through the date of redemption.
Note H Management and Service Fees
The Company provides its subsidiaries with general management support, including services in the data processing, human resources, legal and financial areas. The related charges are billed to the subsidiaries being serviced as management fees, and are computed using various allocation methods
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
which are, in the opinion of management, reasonable in relation to services rendered.
Note I Contribution of Note Receivable to Subsidiary
On December 29, 1995, the Company made a non-cash investment of $307.7 million into one of its wholly-owned subsidiaries. This investment was made through the contribution to the subsidiary of a note receivable held by the Company.
Note J Subsequent Event
On February 4, 1997, Providian Bancorp, Inc. ("Bancorp"), a wholly owned subsidiary of the Company, issued $160 million of redeemable preferred stock, which pays quarterly dividends at an annual rate of 9.525%. Bancorp intends to use the proceeds from the issuance to retire debt and redeem preferred stock held by the Company ($43 million and $63 million, respectively, at December 31, 1996). The Company plans to use the proceeds to redeem its $95 million Sinking Fund Debentures during 1997.