UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
1-12897
----------------------
(Commission File Number)
PROVIDIAN FINANCIAL CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2933952
- --------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
201 Mission Street, San Francisco, California 94105
---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(415) 543-0404
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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
--- ---
As of April 30, 1998, there were 95,080,793 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
March 31, 1998
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial
Condition.............................................3
Condensed Consolidated Statements of Income..............4
Condensed Consolidated Statements of Changes in
Shareholders' Equity...................................5
Condensed Consolidated Statements of Cash Flows..........6
Notes to Condensed Consolidated Financial
Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................24
Item 5. Other Information.......................................24
Item 6. Exhibits and Reports on Form 8-K........................24
Signatures...............................................................25
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
March 31 December 31
1998 1997
------------ -------------
<S>
Assets: <C> <C>
Cash and cash equivalents $ 87,333 $ 112,522
Federal funds sold 319,890 114,960
Investment securities at cost (which approximates market value) 270,542 172,756
Loans held for securitization or sale 100,000 450,233
Loans receivable, less allowance for credit losses of $249,440
in 1998 and $145,312 in 1997 3,420,182 2,815,364
Due from securitizations 476,518 472,145
Interest receivable 85,655 80,434
Premises and equipment, net 65,689 61,625
Other assets 193,916 169,374
------------ -------------
Total assets $ 5,019,725 $ 4,449,413
============ =============
Liabilities:
Deposits: $ 3,388,258 $ 3,212,766
Term federal funds purchased 220,000 150,000
Notes payable to banks 74,000 82,000
Long-term notes payable 199,852 -
Accrued expenses and other liabilities 337,208 249,533
------------ -------------
Total liabilities 4,219,318 3,694,299
Company obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated deferrable
interest debentures of the Company
(Capital Securities) 160,000 160,000
Shareholders' Equity:
Common stock,
Par value $.01 per share, authorized: 400,000,000 shares;
issued: 1998 - 95,163,801 shares; 1997 - 95,156,545 shares 954 954
Additional paid-in capital - 4,217
Retained earnings 650,944 599,856
Common stock held in treasury - at cost:
(1998 - 261,519 shares; 1997 - 268,775 shares) (11,491) (9,913)
------------ -------------
Total shareholders' equity 640,407 595,114
------------ -------------
Total liabilities and shareholders' equity $ 5,019,725 $ 4,449,413
============ =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
Three Months Ended
March 31
---------------------------------------
1998 1997
<S> --------------- ----------------
Interest income: <C> <C>
Loans $ 170,070 $ 146,325
Investment securities 6,507 5,846
------------ -------------
Total interest income 176,577 152,171
Interest expense:
Deposits 46,153 44,012
Borrowings 8,603 6,086
------------ -------------
Total interest expense 54,756 50,098
Net interest income 121,821 102,073
Provision for credit losses 57,656 33,802
------------ -------------
Net interest income after provision
for credit losses 64,165 68,271
Non-interest income:
Loan servicing income 114,116 93,822
Credit product fee income 96,408 39,036
Other 179 139
------------ -------------
210,703 132,997
Non-interest expenses:
Salaries and employee benefits 59,734 50,624
Solicitation 41,612 28,123
Occupancy, furniture and equipment 11,266 8,245
Data processing and communication 15,754 11,733
Other 53,687 34,062
------------ -------------
182,053 132,787
------------ -------------
Income before income taxes 92,815 68,481
Income tax expense 36,707 25,319
------------ -------------
Net Income $ 56,108 $ 43,162
============ =============
Basic earnings per share $ 0.59 N/A
============ =============
Earnings per share - assuming dilution $ 0.58 N/A
============ =============
Dividends paid per share $ 0.05 N/A
============ =============
Weighted average common shares outstanding - basic (000) 94,841 N/A
============ =============
Weighted average shares and assumed conversions (000) 96,514 N/A
============ =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share data) (unaudited)
<CAPTION>
7.25% Common
Cumulative Additional Stock
Preferred Common Paid-In Retained Held in
Stock Stock Capital Earnings Treasury Total
---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 63 $ 5 $ 63,706 $ 419,370 $ - $ 483,144
Net Income 43,162 43,162
Redemption of preferred stock (63) (63,206) (63,269)
Cash dividend: -
Preferred - paid to former parent (1,006) (1,006)
========== ========== ============ ============= ============ =============
Balance at March 31, 1997 $ - $ 5 $ 500 $ 461,526 $ - $ 462,031
========== ========== ============ ============= ============ =============
Balance at December 31, 1997 $ - $ 954 $ 4,217 $ 599,856 $ (9,913) $ 595,114
Net Income 56,108 56,108
Cash dividend: -
Common - $0.05 per share (4,763) (4,763)
Purchase of 137,200 common -
shares for treasury (7,654) (7,654)
Exercise of stock options (1,623) (257) 2,692 812
Issuance of restricted and -
unrestricted stock less -
forfeited shares 1,401 3,384 4,785
Deferred compensation related to -
grant of restricted and unrestricted -
stock less amortization of $837 (3,948) (3,948)
Net tax effect from exercise of stock options -
and issuance of restricted stock (47) (47)
========== ========== ============= ============= ============ =============
Balance at March 31, 1998 $ - $ 954 $ - $ 650,944 $ (11,491) $ 640,407
========== ========== ============ ============= ============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands) (unaudited)
<CAPTION>
Three Months Ended
March 31
----------------------------------------
1998 1997
--------------- ------------
<S> <C> <C>
Operating Activities:
Net Income $ 56,108 $ 43,162
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 57,656 33,802
Depreciation and amortization of premises and equipment 4,131 3,539
Amortization of net loan acquisition costs 9,776 7,467
Amortization of discount on sale of loans receivable 130 126
Amortization of deferred compensation
related to restricted and unrestricted stock 837 -
(Increase) decrease in deferred income tax benefit (12,544) 7,847
Increase in interest receivable (5,221) (610)
Increase in other assets (21,170) (15,264)
Increase in accrued expenses and other liabilities 89,803 9,230
--------------- --------------
Net Cash Provided by Operating Activities 179,506 89,299
Investing Activities:
Net increase in money market instrument investments (99,937) (199,895)
Net cash used for loan originations and principal
collections on loans receivable (133,779) (40,841)
Net proceeds from securitization of loans 769,870 1,024,960
Portfolio acquisitions (948,462) -
Increase in due from securitizations (4,373) (184,666)
Purchases of investment securities (24) (220,348)
Proceeds from maturities of investment securities - 219,660
Increase in federal funds sold (204,930) (418,970)
Net purchases of premises and equipment (8,195) (8,032)
--------------- --------------
Net Cash (Used) Provided by Investing Activities (629,830) 171,868
Financing Activities:
Net increase (decrease) in deposits 175,492 (397,589)
Proceeds from issuance of term federal funds 250,000 204,000
Repayment of term federal funds (180,000) (25,000)
Decrease in notes payable to banks (8,000) (5,000)
Decrease in note payable to affiliates - (42,500)
Increase in long-term notes payable 199,852 -
Proceeds from the issuance of capital securities - 160,000
Redemption of preferred stock - (63,269)
Purchase of treasury stock (7,654) -
Dividends paid (4,763) (1,006)
Proceeds from exercise of stock options 208 -
--------------- --------------
Net Cash Provided (Used) by Financing Activities 425,135 (170,364)
--------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents (25,189) 90,803
Cash and Cash Equivalents at beginning of year 112,522 82,946
--------------- --------------
Cash and Cash Equivalents at end of period $ 87,333 $ 173,749
=============== ==============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 1998 (unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of
Providian Financial Corporation and its wholly owned subsidiaries (collectively
referred to as the "Company"). The Company's subsidiaries offer a range of
consumer lending products, deposit products and fee-based products. The
principal operating subsidiaries of the Company are Providian National Bank and
Providian Bank, which are financial institutions principally engaged in consumer
lending activities. Providian Financial Corporation also has a subsidiary,
Providian Bancorp Services, which provides administrative and customer services
to its consumer lending affiliates.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments considered necessary to a fair statement of the
results for the interim period presented have been included. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results for the year ended
December 31, 1998. The notes to the financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 should
be read in conjunction with these consolidated financial statements. All
significant intercompany balances and transactions have been eliminated. Certain
prior period amounts have been reclassified to conform to the 1998 presentation.
Note 2 - Significant Accounting Policies
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expense, gains and losses) in the financial
statements. The adoption of SFAS No. 130 has had no material effect on the
Company's consolidated results of operations, financial position or cash flows.
Note 3 - Earnings Per Share
Historical earnings per share for the quarter ending March 31, 1997 are not
presented because prior to June 10, 1997, when the Company was spun off from its
former parent, Providian Corporation (the "Spinoff"), all of the shares of
common stock of the Company were held by its former parent, and such information
would not be meaningful. Pro forma earnings per share, with and without dilution
for the quarter ended March 31, 1997, have been computed by dividing net income
reported for the period by the pro forma weighted average number of common
shares outstanding for the applicable period.
The pro forma number of common shares outstanding prior to the Spinoff was
determined on the basis of the number of shares of Providian Corporation common
stock then outstanding, since shareholders of Providian Corporation received one
share of the Company's common stock for each share of Providian Corporation
common stock held on the record date for the Spinoff. Included in the
computation of fully diluted common shares prior to the Spinoff are Providian
Corporation options which were exercised between January 1, 1997 and June 10,
1997. These options have been included because, when they were exercised, they
became eligible to be converted to the Company's common stock in connection with
the Spinoff.
<PAGE>
March 31
(In thousands, except per share data) 1998 1997 (1)
----------------------------------------------------------------------------
Income available to common stockholders $56,108 $43,162
================= ==============
Weighted average shares outstanding--Basic 94,841 94,164
Effect of dilutive securities
Restricted Stock issued--non vested 335 -
Employee stock options 1,338 394
----------------- --------------
Dilutive potential common shares 1,673 394
================= ==============
Adjusted weighted average shares and assumed
conversions 96,514 94,558
================= ===============
Earnings per share $0.59 $0.46
================= ===============
Earnings per share--assuming dilution $0.58 $0.46
================= ===============
(1) Earnings per share for the three months ended March 31, 1997 are presented
on a pro forma basis. For purposes of pro forma earnings per share, net income
has not been adjusted dividends on preferred stock, which was redeemed in
February 1997 out of proceeds from the issuance of mandatorily redeemable
capital securities.
Note 4 - Loan Portfolio Acquisition and Allowance for Credit Losses
During the first quarter, the Company completed its purchase of a portfolio
of unsecured credit card loans from First Union Direct Bank, N.A. ("First
Union") for approximately $948 million in cash (the "Portfolio Acquisition"). In
addition, on May 1, 1998, the Company purchased an additional portfolio of
credit card loans from First Union for approximately $974 million in cash,
subject to certain post-closing adjustments. These two portfolios include
approximately 1,050,000 account relationships, records and other rights. The
Company did not, and does not plan to, acquire any fixed assets or employees of
First Union in connection with the acquisition of these portfolios. The Company
records the allowance for credit losses for acquired loan portfolios upon
purchase to reflect the credit quality and expected collectibility of the loans
included in the acquisition.
The activity in the allowance for credit losses for the quarters ended
March 31, 1998 and 1997 is as follows (in thousands):
March 31
1998 1997
---------------------------------------------------------------------------
Balance at beginning of period $145,312 $114,540
Provision for credit losses 57,656 33,802
Reserve acquired 105,367 -
Charge-offs (64,420) (30,591)
Recoveries 5,525 1,507
------------------------------------
Net charge-offs (58,895) (29,084)
====================================
Balance at end of period $249,440 $119,258
====================================
<PAGE>
Note 5 - Senior and Subordinated Bank Notes
In February 1998, one of the Company's banking subsidiaries, Providian
National Bank ("PNB"), established a program for the issuance of senior and
subordinated debt instruments to further diversify its available funding
sources. Under this program, PNB from time to time may issue fixed or variable
rate debt instruments in the aggregate principal amount of up to $4 billion,
with maturities ranging from seven days to 15 years. During the quarter ended
March 31, 1998, PNB issued $200 million in principal amount of long-term notes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
Providian Financial Corporation is a diversified consumer lender, offering
a range of lending products, including unsecured credit cards, revolving lines
of credit, home loans, secured and partially secured credit cards, and fee-based
products, primarily through direct mail and direct telemarketing account
origination channels. Through these products, the Company seeks to achieve
diversified earnings sources, with both spread-based and fee-based income from
loans and related products and services. The foregoing products include unbanked
products ("Unbanked Products") offered by the Company, primarily consisting of
secured and partially secured credit cards and certain unsecured credit card
products which are designed to serve a population that the Company believes has
been largely underserved by traditional financial institutions. The Company also
offers deposit products to customers nationwide. The primary factors affecting
the profitability of the Company's consumer products are the number of customer
accounts and outstanding loan balances, net interest margins, credit usage,
level of fee income, credit quality, and the level of solicitation servicing,
and other expenses.
Forward-Looking Statements
Certain statements contained herein include forward-looking information
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 as to future results of
operations of the Company, and other statements which are not historical fact.
Undue reliance should not be placed on forward-looking statements.
Forward-looking statements are not guarantees of future performance.
Forward-looking statements are based on certain assumptions by management and
are subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. These risks and
uncertainties include, but are not limited to, competition, delinquencies,
credit losses, outside vendor relationships, funding costs and availability,
general economic conditions, government policy and regulations, and risks
related to growth, product development, acquisitions and operations. These and
other risks and uncertainties are described in the Company's 1997 Annual Report
on Form 10-K under the heading "Cautionary Statements." The Company undertakes
no obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
Earnings Summary
Net income for the quarter ended March 31, 1998 was $56.1 million, or $0.58
per share, compared to net income of $43.2 million, or $0.46 pro forma per
share, for the quarter ended March 31, 1997. As stated in Note 3 to the
Company's condensed consolidated financial statements, the Company's historical
earnings per share have not been presented for periods prior to the quarter
ended June 30, 1997 because prior to June 10, 1997 all of the Company's common
stock was held by its former parent, Providian Corporation, and such information
would not be meaningful.
The overall growth in earnings for the quarter is primarily attributable to
growth in managed loans outstanding, higher net interest margins and increased
non-interest income, offset by higher net credit losses and increased
non-interest expenses. Average managed loans outstanding increased from $9.2
billion for the quarter ended March 31, 1997 to $10.5 billion for the quarter
ended March 31, 1998, reflecting the impact of marketing and customer activation
efforts combined with the Portfolio Acquisition. End of period managed loans
receivable increased from $9.1 billion as of March 31, 1997 to $10.7 billion as
of March 31, 1998. On-balance sheet loans also increased year over year to $3.8
billion as of March 31, 1998, compared to $2.7 billion as of March 31, 1997.
<PAGE>
From December 31, 1997 to March 31, 1998, total managed loans outstanding
increased from $9.9 billion to $10.7 billion, reflecting limited balance
attrition offset by the loans acquired in the Portfolio Acquisition. Including
the accounts in the Portfolio Acquisition, the Company added 1.1 million new
customer accounts during the three months ended March 31, 1998. These new
accounts added to the Company's customer base for fee-based product sales. On
May 1, 1998, the Company purchased an additional portfolio of unsecured credit
card receivables and related accounts from First Union.
Return on average total managed assets for the three months ended March 31,
1998 was 1.84%, compared to 1.69% for the same period during 1997. This higher
return is primarily the result of higher net interest margins driven by growth
in the number of Unbanked Product accounts as well as increased fee-based
product and other fee income. Return on average shareholders' equity for the
three months ended March 31, 1998 was 36.14%, compared to 35.34% for the same
period in 1997, reflecting the increased return on average total managed assets
for the period, offset by a higher ratio of average equity to average managed
assets.
Managed Loan Portfolio
The Company's consumer loan products include unsecured credit cards,
revolving lines of credit, home loans, and secured and partially secured credit
cards. Since 1989, the Company has securitized unsecured credit card and
revolving lines of credit and, beginning in 1996, home equity lines of credit.
During the quarter ended March 31, 1998, the Company securitized secured and
partially secured credit card receivables for the first time. Securitized loans
are not considered assets of the Company and therefore are not shown on its
statement of financial condition. It is, however, the Company's practice to
analyze its financial performance on a managed loans basis. In order to do so,
the Company's income statement and statement of financial condition are adjusted
to reverse the effect of securitization.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No.125"), which
provided new accounting and reporting standards for securitization and other
similar transactions, effective January 1, 1997. Under SFAS No. 125, the Company
recognizes an "interest only strip receivable" asset, available for sale, equal
to the present value of the projected excess servicing income of the transferred
assets.
The following table summarizes selected data on the Company's managed
consumer loan portfolio:
<TABLE>
- --------------------------------------------------------------------------------
TABLE 1 - MANAGED CONSUMER LOAN PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31
-------------------------------
(Dollars in thousands) 1998 1997
-------------- -----------
<S> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 3,769,622 $ 2,676,305
Securitized consumer loans 6,886,014 6,397,460
-------------- -----------
Total managed consumer loan portfolio $ 10,655,636 $ 9,073,765
============== ===========
Average Balances:
On-balance sheet consumer loans $ 3,980,578 $ 3,527,729
Securitized consumer loans 6,558,094 5,626,157
-------------- -----------
Total average managed consumer loan portfolio $ 10,538,672 $ 9,153,886
============== ===========
Operating Data and Ratios:
Reported:
Average earning assets $ 4,437,060 $ 3,976,327
Return on average assets 4.35% 3.85%
Net interest margin (1) 10.98% 10.27%
Managed:
Average earning assets $ 10,995,154 $ 9,602,484
Return on average assets 1.84% 1.69%
Net interest margin (1) 10.55% 10.12%
(1) Net interest margin is equal to net interest income divided by
average earning assets.
</TABLE>
<PAGE>
The Company services the accounts underlying the securitized loans and
earns a stated monthly servicing fee, which is generally offset by the servicing
costs incurred by the Company. The finance charge and fee revenue generated by
the securitized loans, in excess of interest paid to investors, related credit
losses, servicing fee, credit enhancement costs and other program expenses, is
referred to as excess servicing income. Revenue resulting from excess servicing
income is recognized first as a reduction of the interest only strip receivable
and, to the extent the amount received exceeds the related component of the
interest only strip receivable (which was recorded at present value), as loan
servicing income. The effect of this treatment is to reduce net interest income
and the provision for credit losses, and to increase non-interest income, on the
Company's statement of income. For the three months ended March 31, 1998 and
1997, as a result of securitization, the Company's net interest income was
reduced by $168.2 million and $140.9 million, respectively; the provision for
credit losses was reduced by $119.6 million and $109.5 million, respectively;
and non-interest income was increased by $48.6 million and $31.4 million,
respectively.
Net Interest Income
Net interest income represents the interest earned from the Company's
on-balance sheet consumer loans less the related interest expense related to
deposits and borrowings. As a result of the Company's securitization of consumer
loans, the volume of on-balance sheet loans, deposits and borrowings will vary
over time.
Net interest income for the first quarter of 1998 totaled $121.8 million,
compared to $102.1 million for the same period of 1997. This increase is
primarily attributable to higher average on-balance sheet consumer loans
combined with higher net interest margins. Interest expense as a percentage of
average interest-bearing assets declined 10 basis points for the first quarter
of 1998 compared to the first quarter of 1997. The annualized net interest
margin on average earning assets for the first quarter of 1998 was 10.98%,
compared to 10.27% for the same period in the prior year.
On a managed loan basis, managed net interest income for the quarter ended
March 31, 1998 was $290.1 million, compared to $243 million for the same period
in 1997, an increase of $47.1 million, or 19.4%. The managed net interest margin
on average managed loans increased to 11.09% for the quarter ended March 31,
1998, from 10.47% for the quarter ended March 31, 1997. These increases in
managed net interest income and the managed net income margin resulted from an
increase in average managed loans as well as higher finance charge yields on
selected portfolio segments that were repriced in the prior year.
Statement of Average Balances, Income and Expense, Yields and Rates
The following table provides an analysis of interest income, interest
expense, net interest margin and average balance sheet data for the three month
periods ended March 31, 1998 and 1997, as prepared from historical financial
information:
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
TABLE 2 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31
-------------------------------------------------------------------------------
1998 1997
------------------------------------- -----------------------------------------
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ------------ -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets
Consumer loans $ 3,980,578 $ 170,070 17.09% $ 3,527,729 $ 146,325 16.59%
Interest-earning cash 40,963 556 5.43% 99,478 1,289 5.18%
Federal funds sold 211,429 2,904 5.49% 309,800 4,061 5.24%
Investment securities 204,090 3,047 5.97% 39,320 496 5.05%
------------- ------------ -------- ------------- ------------ ---------
Total interest-earning assets 4,437,060 $ 176,577 15.92% 3,976,327 $ 152,171 15.31%
Allowance for loan losses (227,560) (116,841)
Other assets 948,937 626,638
------------- -------------
Total assets $ 5,158,437 $ 4,486,124
============= =============
Liabilities and Equity
Interest-bearing liabilities
Deposits $ 3,425,203 $ 46,153 5.39% $ 3,258,540 $ 44,012 5.40%
Borrowings 587,279 8,603 5.86% 400,995 6,086 6.07%
------------- ------------ -------- ------------- ------------ ---------
Total interest-bearing liabilities 4,012,482 $ 54,756 5.46% 3,659,535 $ 50,098 5.48%
Other liabilities 365,405 238,307
------------- -------------
Total liabilities 4,377,887 3,897,842
Capital securities 160,000 99,555
Equity 620,550 488,727
------------- -------------
Total liabilities and equity $ 5,158,437 $ 4,486,124
============= =============
Net Interest Spread 10.46% 9.83%
======== =========
Interest income to average
interest-earning assets 15.92% 15.31%
Interest expense to average
interest-earning assets 4.94% 5.04%
-------- ---------
Net interest margin 10.98% 10.27%
======== =========
</TABLE>
Interest Volume and Rate Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets, the average interest rate paid on
interest-bearing liabilities and by changes in the volume of interest-earning
assets and interest-bearing liabilities. The quarter ended March 31, 1998
compared to the prior year quarter reflects growth in consumer loans and
investment securities, which was partially offset by increased securitization
activity in the first quarter of 1998, resulting in higher on-balance sheet
earning assets. Increasing yields on loans combined with slightly lower rates on
deposits and borrowings increased the rate of net interest income realized
during the quarter ended March 31, 1998 compared to the same quarter of 1997.
The following table sets forth the dollar amount of the increase (decrease) in
interest income and interest expense resulting from changes in the volume, rates
and interest income:
<PAGE>
- --------------------------------------------------------------------------------
TABLE 3 - INTEREST VARIANCE ANALYSIS
- --------------------------------------------------------------------------------
Three Months Ended March 31
1998 vs. 1997
----------------------------------------------
Increase
(Dollars in thousands) (Decrease) Volume Rate
--------------- ----------- ---------
Interest Income:
Consumer loans $ 23,745 $ 19,230 $ 4,515
Federal funds sold (1,157) (2,352) 1,195
Other securities 1,818 1,307 511
--------------- ----------- ----------
Total interest income 24,406 18,185 6,221
Interest Expense:
Deposits 2,141 2,695 (554)
Borrowings 2,517 3,910 (1,393)
--------------- ----------- ----------
Total interest expense 4,658 6,605 (1,947)
--------------- ----------- ----------
Net interest income $ 19,748 $ 11,580 $ 8,168
=============== =========== ==========
(1) The change in interest due to both volume and rate has been allocated in
proportion to the relationship of the absolute dollar amounts of the change
in each. The changes in income and expense are calculated independently for
each line in the table.
Non-Interest Income
Non-interest income, which consists primarily of loan servicing income, fee
income from credit products and other fee-based product income, represented
approximately 54% of gross on-balance sheet revenues for the three months ended
March 31, 1998, compared to approximately 47% for the three months ended March
31, 1997. The higher non-interest income resulted from higher loan servicing
income, due primarily to higher average securitized assets and increased sales
of fee-based products.
Loan Servicing Income
Average securitized loans, which are reduced by principal collections
accumulated in principal funding accounts prior to being paid to securitization
investors, were $6.6 billion during the three months ended March 31, 1998,
compared to $5.6 billion for the same period of 1997, a 18% increase. Loan
servicing income increased 22%, to $114.1 million, for the quarter ended March
31, 1998, compared to $93.8 million for the same period in 1997. The increase in
loan servicing income resulted from improved net interest margins, offset in
part by moderate increases in credit loss rates, on higher average securitized
loans. Further offsetting the increase in loan servicing income was a decrease
in the gain on sale of assets recognized pursuant to SFAS No. 125, which became
effective January 1, 1997. Gains recorded upon securitization, recognized in
accordance with SFAS No. 125, were $2.8 million and $34.2 million during the
three months ended March 31, 1998 and 1997, respectively. The decrease reflects
the impact of SFAS No. 125 during the first quarter of 1997, when the Company
was required to recognize both excess servicing income generated by securitized
balances existing at December 31, 1996 and gains on additional loan sales made
during that quarter. The Company recognizes gains from such loan sales as "loan
servicing income" on its statement of income and the related asset as a
component of "due from securitizations" on its statement of financial condition.
Any future gains that will be recognized by the Company in accordance with SFAS
No. 125 will depend on the timing, performance and amount of future
securitizations.
Credit Product Fee Income
Credit product fee income totaled $96.4 million for the quarter ended March
31, 1998, compared to $39.0 million for the prior year quarter. This 147%
increase resulted from increased credit card membership and processing fees,
increased income from sales of the Company's fee-based products and an increase
in late, overlimit and cash advance fees.
<PAGE>
Non-Interest Expense
Non-interest expense for the three months ended March 31, 1998 was $182.1
million, an increase of 37% over non-interest expense of $132.8 million for the
same period in the prior year. Salaries and employee benefits increased $9.1
million, or 18%, to $59.7 million for the three months ended March 31, 1997,
compared to $50.6 million for the same period in the prior year. This increase
reflects an increase in the employee base to support increased customer volume
and additional account acquisition efforts. Solicitation costs, which include
direct mail, postage, telemarketing and package materials for both new and
existing customers totaled $41.6 million for the quarter ended March 31, 1997, a
48% increase over the prior year quarter total of $28.1 million. This increase
in solicitation costs resulted from an increased investment in the direct mail
and direct telemarketing acquisition channels and from other initiatives
designed to improve customer activation and retention.
Some of the Company's older computer programs and certain vendor programs
were written using two digits rather than four to define the applicable year. As
a result, the Company launched a Year 2000 project to identify the programs,
assess the associated risk and modify the computer programs written with two
digit date formats. The Company has completed its assessment of internal and
vendor computer programs. Program modification and testing is currently underway
and is estimated for completion by June 1999. The total Year 2000 project costs
are being expensed as incurred and are not expected to have a material impact on
the Company's future financial results or condition.
Income Taxes
The Company's income tax expense, which includes both state and federal
taxes, was $36.7 million for the three months ended March 31, 1998, compared to
$25.3 million for the three months ended March 31, 1997. The overall current
effective income tax rate of 39.5% reflects an increase in state tax rates
associated with the Spinoff.
Asset Quality
Delinquencies and net credit losses experienced in the Company's consumer
loan portfolio reflect, among other factors, the creditworthiness of the
borrowers, the average age of accounts (generally referred to as "seasoning"),
the success of the Company's collection efforts and general economic conditions.
The establishment of the allowance for credit losses generally depends on
historical levels of credit losses and current trends. As new portfolios are
originated, management uses historical credit loss and delinquency analyses to
establish reserves for future credit losses, based on the aggregation of loss
behavior of similar but more seasoned loan portfolios. The allowance for credit
losses related to acquired loan portfolios is recorded upon purchase to reflect
the credit quality and expected collectibility of the loans included in the
acquisition.
The Company's policy is to recognize principal credit losses on all
unsecured loans (including the unsecured portion of any partially secured credit
card loans) which become 180 days delinquent, with the exception of bankrupt
accounts and accounts of deceased customers, both of which are charged-off upon
determination of collectibility. Home loans are reviewed for collectibility when
they become 60 days delinquent, and credit losses are recognized for the amount
by which the book value of the loan exceeds the estimated net realizable value
of the underlying collateral. The Company continues to pursue collection of
charged-off loans when appropriate, and subsequent collections on charged-off
loans are recognized as recoveries.
Delinquencies
An account is considered delinquent if the minimum payment is not received
by the next billing date. Interest and fee income continue to accrue on an
account after the account becomes delinquent (unless the customer is bankrupt or
is deceased) until the loan is either repaid or recognized as a credit loss. The
following table presents delinquency information as of March 31, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TABLE 4 - DELINQUENCIES
- ------------------------------------------------------------------------------------------------------------------
March 31
----------------------------------------------------------------------------------
1998 1997
-------------------------------------- ----------------------------------
% of % of
Total Total
(Dollars in thousands) Loans Loans Loans Loans
<S> <C> <C> <C> <C>
----------------- -------------- ----------------- --------------
Reported: (1)
Loans outstanding $ 3,769,622 100.00% $ 2,676,305 100.00%
Loans delinquent:
31 - 60 days 68,269 1.81% 48,070 1.80%
61 - 90 days 44,136 1.17% 26,003 0.97%
91 or more days 87,896 2.33% 56,076 2.09%
----------------- -------------- ----------------- --------------
Total $ 200,301 5.31% $ 130,149 4.86%
================= ============== ================= ==============
Managed:
Loans outstanding $ 10,655,636 100.00% $ 9,073,765 100.00%
Loans delinquent:
31 - 60 days 171,204 1.60% 154,535 1.70%
61 - 90 days 109,370 1.03% 86,264 0.95%
91 or more days 210,651 1.98% 169,070 1.87%
----------------- -------------- ----------------- --------------
Total $ 491,225 4.61% $ 409,869 4.52%
================= ============== ================= ==============
(1) Includes loans held for securitization.
</TABLE>
The managed loan delinquency rate as of March 31, 1998 was 4.61%, compared
to 4.22% as of December 31, 1997 and 4.52% as of March 31, 1997. The increase in
the managed loan delinquency rate over the prior quarter reflects the higher
rates of delinquency associated with the loans acquired in the Portfolio
Acquisition. Excluding the effect of the Portfolio Acquisition, the delinquency
rate at March 31, 1998 would have been 4.22% pro forma, level with the prior
quarter. The delinquency rate for on-balance sheet loans was 5.31% as of March
31, 1998, compared to 4.17% as of December 31, 1997 and 4.86% as of March 31,
1997. This increase in the on-balance sheet loan delinquency rate reflects the
effect of the loans acquired in the Portfolio Acquisition, which have not been
securitized, and the Company's Unbanked Product outstandings, which experience a
higher delinquency rate than the Company's other credit card loans. Unbanked
Products consisting of secured and partially secured credit card outstandings
are collateralized in whole or in part by customer savings accounts, which
mitigate the increased risk associated with higher delinquencies.
Net Credit Losses
Net credit losses for consumer loans consist of the principal amount of
charge-offs on loans to customers who are unwilling or unable to pay their loan
balances, including bankrupt and deceased customers, less current period
recoveries on previously charged-off accounts. Net credit losses exclude accrued
interest and fee income, which are written off as a reversal of current earnings
at the time of credit loss recognition. Losses from fraudulent activity are
included in non-interest expenses.
The following table presents the Company's net credit losses for consumer
loans for the three month periods ended March 31, 1998 and 1997:
<PAGE>
- --------------------------------------------------------------------------------
TABLE 5 - NET CREDIT LOSSES
- --------------------------------------------------------------------------------
Three Months Ended March 31
(Dollars in thousands) 1998 1997
----------------- -----------
Reported: (1)
Average loans outstanding $ 3,980,578 $ 3,527,729
Net charge-offs $ 58,895 $ 29,084
Net charge-offs as a percentage
of average loans outstanding 5.92% 3.30%
Managed:
Average loans outstanding $ 10,538,672 $ 9,153,886
Net charge-offs $ 178,518 $ 138,601
Net charge-offs as a percentage
of average loans outstanding 6.78 6.06%
(1) Includes loans held for securitization.
The managed net credit loss rate for the three months ended March 31, 1998
was 6.78%, compared to 6.42% for the quarter ended December 31, 1997 and 6.06%
for the quarter ended March 31, 1997. The increase over the prior quarter
reflects the higher credit loss rates on the loans acquired in the Portfolio
Acquisition and account seasoning. Excluding the impact of the Portfolio
Acquisition, the credit loss rate for the quarter ended March 31, 1998 would
have been 6.49% pro forma, a modest increase over the prior quarter and
reflective of the industry wide trend in consumer credit performance over the
prior year quarter.
Allowance and Provision for Possible Credit Losses
The Company maintains the allowance for credit losses at a level it
believes to be adequate to absorb future credit losses, net of recoveries,
inherent in the existing on-balance sheet portfolio. In evaluating the adequacy
of the allowance, management takes into consideration several factors, including
general economic conditions, asset quality, seasoning, security and trends in
credit losses and delinquencies.
The following table sets forth the activity in the allowance for possible credit
losses for the three months ended March 31, 1998 and 1997:
<TABLE>
- ----------------------------------------------------------------------------------------------------
TABLE 6 - SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended March 31
-------------------------------------
(Dollars in thousands) 1998 1997
----------------- --------------
<S> <C> <C>
Balance at beginning of period $ 145,312 $ 114,540
Provision for credit losses 57,656 33,802
Reserve acquired 105,367 -
Charge-offs (64,420) (30,591)
Recoveries 5,525 1,507
----------------- --------------
Net charge-offs (58,895) (29,084)
----------------- --------------
Balance at end of period $ 249,440 $ 119,258
================= ==============
Allowance for credit losses to loans at period-end (1) 6.80% 4.46%
(1) Excludes loans held for securitization.
</TABLE>
Funding, Liquidity and Market Risk
The Company's approach to funding its assets is to seek a diversified
funding mix and investor base. Funding products used by the Company include
direct and brokered retail and institutional deposits, term federal funds,
public and private securitizations, a committed revolving credit facility, long
term notes and mandatorily redeemable capital securities. Within funding product
categories, funding sources are further diversified based on the industry,
geographical location and type of investor. The Company currently offers a wide
range of maturity terms for its funding products ranging from one week to seven
years. Actual maturity distributions depend on several factors, including
expected asset duration, investor demand, relative costs, shape of the yield
curve and anticipated issuance in the securitization and capital markets.
Management's goal is to achieve a balanced distribution of maturities, avoiding
undue concentration in any one period. Management also monitors existing funding
maturities and seeks to ensure that appropriate amounts of backup liquidity are
available to support maturing funding sources.
The following table summarizes the contractual maturities of deposits as of
March 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 7 - CONTRACTUAL MATURITIES OF DEPOSIT
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 March 31, 1997
-------------------------------------------- -------------------------------------------
(Dollars in thousands) Direct Other Total Direct Other Total
Deposits Deposits Deposits Deposits Deposits Deposits
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------- -------------------------------------------
Three months or less $ 329,269 $ 117,726 $ 446,995 $ 403,220 $ 404,286 $ 807,506
Over three months through 12 months 642,500 218,602 861,102 552,950 180,119 733,069
Over one year through five years 534,545 578,904 1,113,449 308,389 304,733 613,122
Deposits without contractual maturity 897,721 68,991 966,712 779,472 59,355 838,827
-------------------------------------------- -------------------------------------------
Total Deposits $ 2,404,035 $ 984,223 $ 3,388,258 $ 2,044,031 $ 948,493 $2,992,524
============================================ ===========================================
</TABLE>
Deposits increased from $3.2 billion as of December 31, 1997 to $3.4
billion as of March 31, 1998. This increase resulted from management's efforts
to increase deposits to provide funding for on-balance sheet loans and
short-term investments used in liquidity management.
Interest expense on borrowings for the quarter ended March 31, 1998 was
$8.6 million, compared to $6.1 million for the quarter ended March 31, 1997.
This increase was the result of higher average borrowings of federal funds
purchased and notes payable to banks.
The Company maintains a $1.2 billion committed revolving credit facility
from a syndicate of domestic and international banks, which is scheduled to
expire in May 1999. Borrowings under this credit facility are available to three
of the Company's subsidiaries, Providian National Bank, Providian Bank and
Providian Credit Corporation (the "Borrowers"), and the credit facility is
guaranteed by Providian Financial Corporation. As of March 31, 1998, outstanding
borrowings under the credit facility totaled $74 million. Among other covenants,
the credit facility contains certain financial covenants applicable to the
Company, including consolidated asset return and capital requirements and a loan
delinquency test. In addition, certain financial ratios are required to be
maintained by each of the Borrowers. The unused commitment is available to the
Borrowers as funding needs may arise.
In February 1998, Providian National Bank ("PNB") established a program for
the issuance of senior and subordinated debt instruments to further diversify
funding sources. Under this program, PNB from time to time may issue fixed or
variable rate debt instruments in the aggregate principal amount of up to $4
billion, with maturities ranging from seven days to 15 years. During the quarter
ended March 31, 1998, PNB issued $200 million in principal amount of long-term
notes.
The Company is also a party to three separate 364-day credit facilities
totaling $275 million, under which short-term borrowings are available to the
Company for general corporate purposes. These short-term facilities contain
financial covenants generally similar to those contained in the Company's
revolving credit facility described above.
In February 1997, Providian Capital I, a subsidiary trust of the Company,
issued $160 million aggregate amount of mandatorily redeemable capital
securities bearing interest at 9.525%, which mature in February 2027.
The securitization of consumer loans is a significant source of the
Company's funding. Commercial paper-based conduit facilities and other variable
funding programs are used to securitize certain unsecured credit card, home
equity line of credit and, beginning in the quarter ended March 31, 1998,
secured and partially secured credit card receivables. As of March 31, 1998, the
Company had $2.0 billion of outstanding securitized loans under such conduit and
variable funding facilities. Outstanding term securitizations under the
Company's master trust totaled $4.9 billion as of March 31, 1998. Term
securitizations typically have either amortization periods during which
principal is paid to investors or principal accumulation periods during which
principal payments are aggregated for repayment to investors on an expected
maturity date. Amortization or accumulation of principal for previously
securitized loans totaled $375 million during the three months ended March 31,
1998. As securitized loans are reduced through principal repayment or principal
accumulation, the Company's on-balance sheet loans will increase, to the extent
such reductions are not offset by loan attrition. Such increases are funded by
the Company through new securitizations or other funding sources.
<PAGE>
The Company seeks to mitigate earnings volatility associated with interest
rate movements by generally matching the repricing characteristics of on- and
off-balance sheet assets and liabilities. Fixed rate liabilities generally fund
fixed annual percentage rate ("APR") assets, while variable rate liabilities
generally fund variable APR assets. Given the Company-directed repricing
characteristics of its credit card assets and historically favorable funding
rates for variable rate liabilities, the Company uses variable rate liabilities
to fund a portion of its fixed APR assets.
The Company uses derivative financial instruments, including interest rate
swap and cap agreements, with indices that generally correlate to managed assets
or liabilities to modify its net interest sensitivity to levels determined by
management to be appropriate based on the Company's current economic outlook.
The following table presents the notional amounts of interest rate swap, cap and
floor agreements for the periods indicated:
- --------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF INTEREST RATE SWAPS/CAPS
- --------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------------------
(Dollars in thousands) 1998 1997
----------------- ----------------
Interest rate swap agreements:
Beginning Balance $ 955,500 $ 1,290,500
Additions 100,000 33,333
Maturities 100,000 233,333
----------------- ----------------
Ending Balance $ 955,500 $ 1,090,500
================= ================
Interest rate caps and floors:
Beginning Balance $ 922,220 $ 1,522,450
Additions - 37,500
Maturities 212,750 100,000
----------------- ----------------
Ending Balance $ 709,470 $ 1,459,950
================= ================
The Company's goal in managing liquidity is to ensure that funding will be
available to support the Company's operations in varying business environments.
In addition to the Company's credit facilities, the Company maintains a
portfolio of high-quality securities such as U.S. government obligations,
commercial paper, interest bearing deposits with other banks, federal funds sold
and other cash equivalents. Investment securities increased from $172.8 million
as of December 31, 1997 to $270.5 million as of March 31, 1998. Federal funds
sold increased from $115.0 million to $319.9 million over the same period.
As part of its comprehensive risk management strategy, the Company entered
into an agreement to sell equity put warrants for 250,000 shares of the
Company's Common Stock in April 1998. The warrants entitle the holder to sell to
the Company, by physical delivery, shares of the Company's common stock at a
specified price per share. The warrants are intended to mitigate the price
volatility that may result from the Company's repurchase of its common stock to
cover grants made as part of the Company's equity-based benefit plans.
<PAGE>
Capital Adequacy
Each of the Company's banking subsidiaries is subject to risk-based capital
adequacy guidelines as defined by its primary federal regulator. Capital is
defined as either Tier 1 (core), which consists principally of shareholders'
equity less goodwill, or Tier 2 (supplementary), which also includes a portion
of the reserve for credit losses. Based on these definitions of capital, the
regulations further define three capital adequacy ratios that are used to
measure whether a financial institution achieves "well capitalized" or
"adequately capitalized" status:
<TABLE>
<CAPTION>
"Well "Adequately
Capitalized Capitalized
Capital Ratio Calculation Ratios" Ratios"
------------- --------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Total Risk-Based Total Risk-Based (Tier 1 + Tier 2/total risk-based assets) =>10% =>8% <10%
Tier 1 Tier 1 (Tier 1/total risk-based assets) => 6% =>4% <6%
Leverage Leverage (Tier 1/average total assets less intangibles) => 5% =>4% <5%
</TABLE>
As of March 31, 1998, each of the Company's banking subsidiaries was
considered "well capitalized" based on its risk-based capital ratios, as set
forth below:
<TABLE>
<CAPTION>
Providian
National Providian
Capital Ratio Bank Bank
--------------------------------------------------------- -------- -----------
<S> <C> <C>
Total Risk-Based (Tier 1 + Tier 2/total risk-based assets) 15.62% 20.60%
Tier 1 (Tier 1/total risk-based assets) 14.63% 19.21%
Leverage (Tier 1/average total assets less intangibles) 15.50% 10.27%
</TABLE>
On February 18, 1998, the Board of Directors of the Company approved a
first quarter dividend of $.05 per share payable on March 16, 1998 to
shareholders of record on March 2, 1998. The payment of dividends on the common
stock of the Company may in the future be limited by certain factors, including
regulatory capital requirements and financial covenants relating to the
maintenance of capital under the Company's credit facilities. In addition, if
the Company defers interest payments on the junior subordinated debentures
supporting dividend payments to holders of Providian Capital I's mandatorily
redeemable capital securities, the Company will not be permitted to declare
dividends on its common stock.
The primary source of funds for payment of accrued distributions on the
Capital Securities and dividends on the common stock of the Company is dividends
from its banking subsidiaries. The amount of dividends a bank may declare is
generally limited to the sum of its net profit for the current year and its
retained earnings for the prior two years, less any dividends declared during
the related three-year measurement period. Also, a bank may not declare
dividends if such declaration would leave the bank inadequately capitalized.
Therefore, the Company's ability to pay accrued distributions on the Capital
Securities and dividends on its common stock depends on the future net income
and capital requirements of the Company's banking subsidiaries.
PART II. OTHER INFORMATION
Item 1. 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 5. Other Information.
On May 1, 1998, the Company, through its subsidiary, Providian National
Bank, purchased from First Union Direct Bank, N.A. ("First Union") a portfolio
of unsecured credit card receivables and the related accounts, records and other
rights. The acquired portfolio consists of approximately 501,000 credit card
accounts, of which approximately 293,000 accounts are active. The purchase price
paid for the acquired portfolio was approximately $974 million, subject to
certain post-closing adjustments, and was established in negotiations between
the Company and First Union. The Company funded the acquisition with working
capital and funds drawn under the Company's revolving credit facility. The
Company did not and does not plan to acquire any fixed assets or employees of
First Union in connection with the portfolio acquisition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on February 13, 1998
describing the purchase of a portfolio of unsecured credit card receivables and
the related accounts, records and other rights by Providian National Bank, a
subsidiary of the Company, from First Union Direct Bank, N.A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providian Financial Corporation
(Registrant)
Date: May 14, 1998 /s/ David J. Petrini
--------------------
David J. Petrini
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Signatory)
Date: May 14, 1998 /s/ Daniel Sanford
------------------
Daniel Sanford
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN FINANCIAL CORPORATION AND
SUBSIDIARIES FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 87,333
<SECURITIES> 270,542
<RECEIVABLES> 3,769,622
<ALLOWANCES> 249,440
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 65,689
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 5,019,725
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 639,453
<TOTAL-LIABILITY-AND-EQUITY> 5,019,725
<SALES> 0
<TOTAL-REVENUES> 387,280
<CGS> 0
<TOTAL-COSTS> 182,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 57,656
<INTEREST-EXPENSE> 54,756
<INCOME-PRETAX> 92,815
<INCOME-TAX> 36,707
<INCOME-CONTINUING> 56,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,108
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
<FN>
<F1> Non-classified balance sheet
<F2> PP&E shown net
</FN>
</TABLE>
