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 September 30, 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 October 31, 1998, there were 94,403,221 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
September 30, 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.........................................28
Item 5. Other Information.........................................28
Item 6. Exhibits and Reports on Form 8-K..........................28
Signatures....................................................................29
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data) (unaudited)
September 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 142,975 $ 112,522
Federal funds sold 216,039 114,960
Investment securities at cost (which approximates market value) 186,005 172,756
Securities available for sale 88,064 --
Loan held for securitization or sale -- 450,233
Loans receivable, less allowance for credit losses of $409,077 at
September 30, 1998 and $145,312 at December 31, 1997 4,576,352 2,815,364
Due from securitizations 389,931 472,145
Interest receivable 99,085 80,434
Premises and equipment, net 75,664 61,625
Deferred taxes 175,454 66,511
Other assets 106,108 102,863
----------- -----------
Total assets $ 6,055,677 $ 4,449,413
=========== ===========
Liabilities:
Deposits $ 3,926,721 $ 3,212,766
Term federal funds purchased 309,000 150,000
Notes payable to banks -- 82,000
Long-term notes payable 399,737 --
Deferred fees 246,891 64,696
Accrued expenses and other liabilities 295,772 184,837
----------- -----------
Total liabilities 5,178,121 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: September 30, 1998 - 94,683,465 shares;
December 31, 1997 - 95,156,545 shares) 954 954
Additional paid-in capital -- 4,217
Retained earnings 765,543 599,856
Common stock held in treasury - at cost: (September 30, 1998 - 741,855
shares; December 31, 1997 - 268,775 shares) (48,941) (9,913)
----------- -----------
Total shareholders' equity 717,556 595,114
----------- -----------
Total liabilities and shareholders' equity $ 6,055,677 $ 4,449,413
=========== ===========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 210,565 $ 135,799 $ 565,848 $ 414,340
Investment securities 7,661 6,880 23,175 20,209
--------- --------- --------- ----------
Total interest income 218,226 142,679 589,023 434,549
Interest expense:
Deposits 51,153 40,499 146,276 122,466
Borrowings 9,997 3,749 31,161 16,201
--------- --------- --------- ----------
Total interest expense 61,150 44,248 177,437 138,667
Net interest income 157,076 98,431 411,586 295,882
Provision for credit losses 168,217 43,071 343,724 115,823
--------- --------- --------- ----------
Net interest income after provision
for credit losses (11,141) 55,360 67,862 180,059
Non-interest income:
Loan servicing income 156,341 111,320 427,134 296,146
Credit product fee income 199,236 67,881 416,491 150,633
Other 1,723 201 2,387 702
---------- -------- --------- ----------
357,300 179,402 846,012 447,481
Non-interest expenses:
Salaries and employee benefits 64,965 54,003 185,610 142,441
Solicitation 53,258 39,717 141,533 107,730
Occupancy, furniture and equipment 12,963 9,764 35,317 27,563
Data processing and communication 16,005 13,449 53,839 37,235
Other 63,315 38,868 165,185 92,747
---------- --------- --------- ----------
210,506 155,801 581,484 407,716
---------- --------- --------- ----------
Income before income taxes 135,653 78,961 332,390 219,824
Income tax expense 53,092 30,397 130,858 82,374
---------- --------- --------- ----------
Net Income $ 82,561 $ 48,564 $ 201,532 $ 137,450
========== ========= ========= ==========
Basic earnings per share $ 0.87 $ 0.51 $ 2.13 N/A
========== ========= ========= ==========
Earnings per share - assuming dilution $ 0.85 $ 0.50 $ 2.08 N/A
========== ========= ========= ==========
Dividends paid per share $ 0.05 $ 0.05 $ 0.15 $ 0.05
========== ========= ========= ==========
Weighted average common shares outstanding - basic (000) 94,696 95,047 94,744 N/A
========== ========= ========= ==========
Weighted average shares and assumed conversions (000) 97,000 96,059 96,792 N/A
========== ========= ========= ==========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders' Equity
(Dollars in thousands, except per share data) (unaudited)
7.25% Cumulative Common
Cumulative Additional Other stock
Preferred Common Paid-In Retained Comprehensive Held in
Stock Stock Capital Earnings Income Treasury Total
---------- -------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 63 $ 5 $ 63,706 $ 419,370 $ -- $ -- $ 483,144
Net Income 137,450 137,450
Cash dividend:
Common - $0.05 per share (4,762) (4,762)
Preferred (paid to former parent) (1,006) (1,006)
Redemption of preferred stock (63) (63,207) (63,270)
Net issuance of shares pursuant
to the Distribution Agreement 948 (499) (449) --
Purchase of 400,000 common
shares for treasury (14,616) (14,616)
Exercise of stock options (1,352) 3,168 1,816
Reimbursement relating to the
conversion of stock options 6,846 6,846
Issuance of restricted and
unrestricted stock less
forfeited shares 1 5,443 4,256 9,700
Deferred compensation related to
grant of restricted and
unrestricted stock (9,701) (9,701)
Amortization of deferred compensation 562 562
========== ======== ========== =========== =========== ========== ==========
Balance at September 30, 1997 $ -- $ 954 $ 1,798 $ 550,603 $ -- $ (7,192) $ 546,163
========== ======== ========== =========== =========== ========== ==========
Balance at December 31, 1997 $ -- $ 954 $ 4,217 $ 599,856 $ -- $ (9,913) $ 595,114
Comprehensive Income:
Net Income 201,532 201,532
Other comprehensive income,
net of income tax;
Unrealized loss on
securities net of
income taxes of $30 (266) (266)
----------
Comprehensive Income 201,266
Cash dividend:
Common - $0.15 per share (14,272) (14,272)
Cash Dividend Declared:
Common - $0.05 per share (7,101) (7,101)
Stock Dividend Declared:
Dividend rate of 50%. Par $0.01 473 (473) --
Purchase of 1,041,229 common
shares for treasury 4,251 (74,293) (70,042)
Exercise of stock options and other awards (12,334) (13,733) 31,580 5,513
Issuance of restricted and
unrestricted stock less
forfeited shares 1,420 3,685 5,105
Deferred compensation related to
grant of restricted and
unrestricted stock less amortization of $2,890 (2,215) (2,215)
Put warrant premium 1,325 1,325
Net tax effect from exercise of stock
options and issuance of restricted stock 2,863 2,863
========== ======== ========== =========== =========== ========= ==========
Balance at September 30, 1998 $ -- $ 954 $ -- $ 765,809 $ (266) $(48,941) $ 717,556
========== ======== ========== =========== =========== ========= ==========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROVIDIAN FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)(unaudited)
Nine Months Ended
September 30
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Activities:
Net Income $ 201,532 $ 137,450
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 343,724 115,823
Depreciation and amortization of premises and equipment 13,020 10,969
Amortization of net loan acquisition costs 34,750 28,592
Amortization of discount on sale of loans receivable 296 338
Amortization of deferred compensation
related to restricted and unrestricted stock 2,890 561
Amortization of deferred fees (117,319) (37,093)
(Increase) decrease in deferred income tax benefit (108,912) 10,920
Increase in deferred fees 299,514 55,073
Increase in interest receivable (18,651) (15,312)
Increase in other assets (37,663) (45,976)
Increase (decrease) in accrued expenses and other liabilities 106,697 (1,613)
------------ ------------
Net Cash Provided by Operating Activities 719,878 259,732
Investing Activities:
Adjustments to reconcile net income to net cash used by investing
activities:
Net increase in money market instrument investments (17,825) -
Net cash used for loan originations and principal
collections on loans receivable (782,028) (1,052,994)
Net proceeds from securitization of loans 1,050,019 1,556,590
Portfolio acquisitions (1,922,766) -
Decrease (increase) in due from securitizations 82,214 (122,554)
Purchases of investment securities (98,860) (471,549)
Proceeds from maturities of investment securities 15,075 307,419
Increase in federal funds sold (101,079) (103,410)
Net purchases of premises and equipment (27,391) (19,249)
------------ ------------
Net Cash (Used) Provided by Investing Activities (1,802,641) 94,253
Financing Activities:
Adjustments to reconcile net income to net cash provided by financing
activities:
Net increase (decrease) in deposits 713,955 (311,262)
Proceeds from issuance of term federal funds 594,000 304,000
Repayment of term federal funds (435,000) (287,000)
Decrease in notes payable to banks (82,000) (6,000)
Decrease in note payable to affiliates - (42,500)
Increase (decrease) in long-term notes payable 399,737 (50,000)
Proceeds from the issuance of capital securities - 160,000
Redemption of preferred stock - (63,270)
Reimbursement relating to conversion of stock options - 6,846
Purchase of treasury stock (70,042) (14,616)
Put warrant premium 1,325 -
Dividends paid (14,272) (5,768)
Proceeds from exercise of stock options 5,513 1,054
------------ -----------
Net Cash Provided (Used) by Financing Activities 1,113,216 (308,516)
------------ -----------
Net Increase in Cash and Cash Equivalents 30,453 45,469
Cash and Cash Equivalents at beginning of year 112,522 82,946
------------ -----------
Cash and Cash Equivalents at end of period $ 142,975 $ 128,415
============ ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 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 nine months ended
September 30, 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 nine months ending September 30, 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 nine months ended September 30, 1997, have been
computed below 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>
Nine Months Ended September 30
(In thousands, except per share data) 1998 1997 (1)
- --------------------------------------------------------------------------------
Income available to common stockholders $201,532 $137,450
=====================
Weighted average shares outstanding--basic 94,744 94,723
Effect of dilutive securities
Restricted stock issued--non vested 344 97
Employee stock options 1,704 687
-------- --------
Dilutive potential common shares 2,048 784
=====================
Adjusted weighted average shares and assumed
conversions 96,792 95,507
=====================
Earnings per share $ 2.13 $ 1.45
=====================
Earnings per share--assuming dilution $ 2.08 $ 1.44
=====================
(1) Earnings per share for the nine months ended September 30, 1997 are
presented on a pro forma basis. For purposes of pro forma earnings per
share, net income has not been adjusted for 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 Acquisitions and Allowance for Credit Losses
During the first nine months of 1998, the Company completed two purchases
of portfolios of unsecured credit card loans from First Union Direct Bank, N.A.
("First Union") for approximately $948 million and $974 million, respectively,
in cash (the "Portfolio Acquisitions"). These two portfolios included
approximately 1,050,000 account relationships and related 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 portfolio acquisitions. 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 nine months ended
September 30, 1998 and 1997 is as follows (in thousands):
Nine Months Ended September 30
1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of period $ 145,312 $ 114,540
Provision for credit losses 343,724 115,823
Reserve acquired 178,459 --
Charge-offs (279,877) (96,583)
Recoveries 21,459 9,309
---------------------------
Net charge-offs (258,418) (87,274)
---------------------------
Balance at end of period $ 409,077 $ 143,089
===========================
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 nine months
ended September 30, 1998, PNB issued $400 million in principal amount of
long-term notes with an average interest rate of 6.58%.
Note 6 - Shareholders' Equity
In June 1998, the Company entered into an agreement to purchase, on a
forward basis, 500,000 shares of its common stock. At the Company's election, in
September 1998 a final settlement of the agreement was made on a physical basis
and the agreement was terminated. As a result of the final settlement and
previous interim settlements, the Company purchased, in the aggregate, 500,000
shares of its common stock under the agreement at an effective price of $71.10
per share.
In July 1998, the Company entered into an agreement to purchase, on a
forward basis, an additional 500,000 shares of its common stock. At the
Company's election, the agreement may be settled on a physical basis or, subject
to certain conditions, on a net basis in shares of Providian Financial common
stock or in cash. To the extent that the market price of the Company's common
stock on a settlement date is higher than the forward purchase price, the net
differential is received by the Company. To the extent that the market price of
the Company's common stock on a settlement date is lower than the forward
purchase price, the premium amount is paid by the Company. As of September 30,
1998, the agreement covered 500,000 shares of the Company's common stock at a
forward price of $82.32 per share. The agreement has a term of one year but may
be settled earlier. If this agreement were settled on a net share basis at the
September 30, 1998 market price of the Company's common stock ($84.8125 per
share), the Company would receive approximately 14,700 shares of its common
stock. During the quarter ended September 30, 1998, interim premium settlements
totalling $418,482 were recorded as adjustments to additional paid in capital.
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 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, risks related to
growth, product development, acquisitions and operations, and year 2000
readiness. 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 September 30, 1998 was $82.6 million, or
$0.85 per diluted share, compared to net income of $48.6 million, or $0.50 per
diluted share, for the quarter ended September 30, 1997. Net income for the nine
months ended September 30, 1998 was $201.5 million, or $2.08 per diluted share,
compared to net income of $137.5 million, or $1.44 pro forma per diluted share,
for the first nine months of 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 the nine months ended September 30, 1997
because until 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
increased non-interest income, growth in managed loans outstanding and higher
year to date managed net interest margins, offset by higher net credit losses
and increased non-interest expenses. Credit product fee income increased 193.5%
to $199.2 million for the quarter ended September 30, 1998 compared to $67.9
million for the quarter ended September 30, 1997. Strong customer growth
combined with an increased penetration rate for sales of the Company's fee-based
products to its customer base fueled this increase in revenue. Average managed
loans outstanding increased to $11.6 billion for the quarter ended September 30,
1998 from $9.4 billion for the quarter ended September 30, 1997, reflecting the
impact of marketing and customer activation efforts and the Portfolio
Acquisitions. End of period managed loans receivable increased to $11.8 billion
as of September 30, 1998 from $9.5 billion as of September 30, 1997. On-balance
sheet loans also increased year over year to $5.0 billion as of September 30,
1998, compared to $3.0 billion as of September 30, 1997.
From December 31, 1997 to September 30, 1998, total managed loans
outstanding increased $1.9 billion to $11.8 billion from $9.9 billion,
reflecting new customer balances realized from marketing activity, activation of
existing customers and Portfolio Acquisitions, offset by balance attrition due
to payments and credit loss activity. The Company added 3.7 million new customer
accounts during the nine months ended September 30, 1998 of which approximately
1,050,000 are new accounts from the Portfolio Acquisitions. New accounts add to
the Company's customer base for fee-based product sales.
Return on average total managed assets for the three months ended September
30, 1998 was 2.63%, compared to 1.83% for the same period during 1997. The 80
basis point increase is primarily due to increased fee-based product and other
fee income and to higher managed net interest income driven by higher average
loan portfolio balances. Return on average shareholders' equity for the three
months ended September 30, 1998 was 45.74%, compared to 36.58% 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. The Company has securitized unsecured credit card and revolving lines of
credit since 1989 and home equity lines of credit since 1996. During the nine
months ended September 30, 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>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
TABLE 1 - MANAGED CONSUMER LOAN PORTFOLIO INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -----------------------------
(Dollars in thousands) 1998 1997 1998 1997
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 4,987,023 $ 3,098,427 $ 4,987,023 $ 3,098,427
Securitized consumer loans 6,791,163 6,444,925 6,791,163 6,444,925
------------ ----------- ------------ -----------
Total managed consumer loan portfolio $ 11,778,186 $ 9,543,352 $ 11,778,186 $ 9,543,352
============ =========== =========== ===========
Average Balances:
On-balance sheet consumer loans $ 4,793,697 $ 3,028,584 $ 4,393,731 $ 3,152,565
Securitized consumer loans 6,791,077 6,365,213 6,737,492 6,098,479
----------- ----------- ------------ -----------
Total average managed consumer loan portfolio $ 11,584,774 $ 9,393,797 $ 11,131,223 $ 9,251,044
============ =========== ============ ===========
Operating Data and Ratios:
Reported:
Average earning assets $ 5,317,068 $ 3,484,670 $ 4,930,255 $ 3,633,706
Return on average assets 5.74% 4.73% 4.89% 4.39%
Net interest margin (1) 11.82% 11.30% 11.13% 10.86%
Managed:
Average earning assets $ 12,108,145 $ 9,849,883 $ 11,667,747 $ 9,732,185
Return on average assets 2.63% 1.83% 2.13% 1.75%
Net interest margin (1) 11.82% 11.05% 11.07% 10.55%
(1) Net interest margin is equal to net interest income divided by average
earning assets
</TABLE>
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 September 30, 1998 and
1997, as a result of securitization, the Company's net interest income was
reduced by $200.9 million and $173.6 million, respectively; the provision for
credit losses was reduced by $110.6 million and $115.8 million, respectively;
and non-interest income was increased by $90.3 million and $57.8 million,
respectively. For the nine months ended September 30, 1998 and 1997, as a result
of securitization, the Company's net interest income was reduced by $557.0
million and $474.1 million, respectively; the provision for credit losses was
reduced by $357.8 million and $348.6 million, respectively; and non-interest
income was increased by $199.2 million and $125.5 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 with respect
to deposits and borrowings. The Company's securitization of consumer loans has a
significant effect on the volume of on-balance sheet loans and borrowings and,
to a lesser degree, on deposits, and will cause variations in such balances over
time.
Net interest income for the third quarter of 1998 totaled $157.1 million,
compared to $98.4 million for the same period of 1997. This increase is
primarily attributable to higher average on-balance sheet consumer loans,
offset, as expected, by the lower yields on consumer loans related to the
balances recorded in the Portfolio Acquisitions. Interest expense as a
percentage of average interest-bearing liabilities increased 9 basis points for
the third quarter of 1998 compared to the third quarter of 1997. The annualized
net interest margin on average earning assets for the third quarter of 1998 was
11.82%, compared to 11.30% for the same period in the prior year, due primarily
to higher average equity as a percentage of assets during 1998.
On a managed loan basis, managed net interest income for the quarter ended
September 30, 1998 was $357.9 million, compared to $272.0 million for the same
period in 1997, an increase of $85.9 million, or 31.6%. The managed net interest
margin on average managed loans increased to 12.01% for the quarter ended
September 30, 1998, from 11.57% for the quarter ended September 30, 1997. These
increases in managed net interest income and the managed net interest 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 tables provide an analysis of interest income, interest
expense, net interest margin and average balance sheet data for the three month
and nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE 2 - STATEMENTS OF AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30
------------------------------------- -------------------------------------
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 $ 4,793,697 $ 210,565 17.57% $ 3,028,584 $ 135,799 17.94%
Interest-earning cash 46,718 572 4.90% 71,657 1,281 7.15%
Federal funds sold 181,538 2,573 5.67% 232,093 3,308 5.70%
Investment Securities 295,115 4,516 6.12% 152,336 2,291 6.02%
----------- --------- --------- ----------- ---------- -------
Total interest-earning assets 5,317,068 $ 218,226 16.42% 3,484,670 $ 142,679 16.38%
Allowance for loan losses (376,307) (133,203)
Other assets 814,641 751,731
----------- -----------
Total assets $ 5,755,402 $ 4,103,198
=========== ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 3,683,045 $ 51,153 5.56% $ 2,927,184 $ 40,499 5.53%
Borrowings 646,355 9,997 6.19% 254,354 3,749 5.90%
----------- --------- --------- ----------- --------- -------
Total interest-bearing liabilities 4,329,400 $ 61,150 5.65% 3,181,538 $ 44,248 5.56%
Other liabilities 544,063 230,250
----------- -----------
Total liabilities 4,873,463 3,411,788
Capital securities 160,000 160,000
Equity 721,939 531,410
----------- -----------
Total liabilities and equity $ 5,755,402 $ 4,103,198
=========== ===========
NET INTEREST SPREAD: 10.77% 10.82%
========= =======
Interest income to
average interest-earning assets 16.42% 16.38%
Interest expense to
average interest-earning assets 4.60% 5.08%
--------- -------
Net interest margin 11.82% 11.30%
========= =======
Nine Months Ended September 30
-----------------------------------------------------------------------------------
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 $ 4,393,731 $ 565,848 17.17% $ 3,152,565 $ 414,340 17.52%
Interest-earning cash 38,463 1,514 5.25% 93,333 4,051 5.79%
Federal funds sold 204,344 8,536 5.57% 278,511 11,475 5.49%
Investment securities 293,717 13,125 5.96% 109,297 4,683 5.71%
----------- --------- -------- ----------- ---------- --------
Total interest-earning assets 4,930,255 $ 589,023 15.93% 3,633,706 $ 434,549 15.95%
Allowance for loan losses (301,279) (125,105)
Other assets 870,359 663,516
----------- -----------
Total assets $5,499,335 $ 4,172,117
=========== ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 3,566,480 $ 146,276 5.47% $ 3,002,449 $ 122,466 5.44%
Borrowings 686,961 31,161 6.05% 345,626 16,201 6.25%
----------- --------- -------- ----------- ---------- --------
Total interest-bearing liabilities 4,253,441 $ 177,437 5.56% 3,348,075 $ 138,667 5.52%
Other liabilities 416,807 179,034
----------- -----------
Total liabilities 4,670,248 3,527,109
Capital securities 160,000 140,073
Equity 669,087 504,935
----------- -----------
Total liabilities and equity $ 5,499,335 $ 4,172,117
=========== ===========
NET INTEREST SPREAD: 10.37% 10.43%
======== ========
Interest income to
average interest-earning assets 15.93% 15.95%
Interest expense to
average interest-earning assets 4.80% 5.09%
-------- --------
Net interest margin 11.13% 10.86%
======== ========
</TABLE>
<PAGE>
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 September 30, 1998
compared to the prior year quarter reflects growth in consumer loans and
investment securities, resulting in higher on-balance sheet earning assets.
Yields for on-balance sheet loans decreased for the quarter ended September 30,
1998 compared to the prior year quarter, reflecting lower average finance charge
yields on the Acquired Portfolios. The following table sets forth the dollar
amount of the increase (decrease) in interest income and interest expense
resulting from changes in volume, rates and interest income:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - INTEREST VARIANCE ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
1998 vs. 1997 1998 vs. 1997
------------------------------------------ -------------------------------------------
Increase Change due to (1) Increase Change due to (1)
(Dollars in thousands) (Decrease) Volume Rate (Decrease) Volume Rate
----------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Consumer loans $ 74,766 $ 77,622 $ (2,856) $ 151,508 $ 159,943 $ (8,435)
Federal funds sold (735) (718) (17) (2,939) (3,103) 164
Other securities 1,516 1,814 (298) 5,905 6,038 (133)
----------- --------- ---------- ---------- ---------- ----------
Total interest income 75,547 78,718 (3,171) 154,474 162,878 (8,404)
Interest Expense:
Deposits 10,654 10,865 (211) 23,810 24,444 (634)
Borrowings 6,248 6,412 (164) 14,960 14,491 469
----------- --------- ---------- ---------- ---------- ----------
Total interest expense 16,902 17,277 (375) 38,770 38,935 (165)
----------- --------- ---------- ---------- ---------- ----------
Net interest income $ 58,645 $ 61,441 $ (2,796) $ 115,704 $ 123,943 $ (8,239)
=========== ========= ========== ========== ========== ==========
(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.
</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 62% of gross on-balance sheet revenues for the three months ended
September 30, 1998, compared to approximately 56% for the three months ended
September 30, 1997. For the nine months ended September 30, 1998 and 1997, fee
income represented 59% and 51%, respectively, of gross on-balance sheet
revenues. The increase in non-interest income resulted from increased sales of
the Company's fee-based products and higher loan servicing income, due primarily
to higher average securitized assets.
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 $6.8 billion during the three months ended September 30, 1998,
compared to $6.4 billion for the same period of 1997, a 6% increase. Loan
servicing income increased 40%, to $156.3 million, for the quarter ended
September 30, 1998, compared to $111.3 million for the same period in 1997. For
the nine months ended September 30, 1998, loan servicing income increased 44.2%,
to $427.1 million, from $296.1 million for the same period in 1997. The increase
in loan servicing income resulted from higher net interest margins on
securitized receivables, 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 $1.8
million and $56.2 million during the nine months ended September 30, 1998 and
1997, respectively. The decrease reflects the impact of SFAS No. 125 during the
first nine months 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 period. 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 increased 193.5%, to $199.2 million, for the
quarter ended September 30, 1998, compared to $67.9 million for the prior year
quarter. For the nine months ended September 30, 1998, credit product fee income
increased 176.5%, to $416.5 million, from $150.6 million for the same period in
1997. These increases resulted from increased customer volume realized in all
fee categories. Managed fee-based product income, including the Company's Credit
Protection, Home Protection, DrivePro and other products, increased to $61.1
million for the quarter ended September 30, 1998 from $22.0 million for the same
period in 1997, reflecting higher penetration rates for sales of the Company's
fee-based products on an increasing customer base. The Company's accounting
policy with respect to fee-based products is to recognize related acquisition
expenses as incurred and to defer revenue and recognize it monthly over the term
of the fee-based product, beginning after the end of the free or money-back
guarantee period.
The growth in Unbanked Product customers has contributed to higher
membership and processing fees. In addition, late and overlimit fees have
increased as a result of increased volume and repricing initiatives implemented
in prior periods. The Company's Unbaked Products primarily consist of secured,
partially secured and unsecured credit cards designed to serve a population that
the Company believes has been largely underserved by traditional financial
institutions due to a lack of credit history or past credit problems.
Non-Interest Expense
Non-interest expense for the three months ended September 30, 1998 was
$210.5 million, an increase of 35% over non-interest expense of $155.8 million
for the same period in the prior year. Salaries and employee benefits increased
$11 million, or 20%, to $65 million for the three months ended September 30,
1997, compared to $54 million for the same period in the prior year. This
increase reflects an increase in the employee base to support increased customer
service volume and additional account acquisition efforts. Solicitation costs,
which include direct mail, postage, telemarketing and package materials for both
new and existing customers, totaled $53.3 million for the quarter ended
September 30, 1998, a 34% increase over the prior year quarter total of $39.7
million. This increase in solicitation costs resulted from increased investments
in the direct mail and direct telemarketing acquisition channels and from other
initiatives designed to improve customer activation and retention.
Year 2000
Many computer programs use two digits, rather than four, to refer to a
year. Unless these programs are corrected, they will be unable to interpret
dates beyond the year 1999, which could cause a system failure or other computer
errors. The Company, like all financial services institutions, is heavily
dependent on computer systems for its operations. The Company processes data
through its own information technology systems and the systems of third party
vendors and providers. In addition, various non-information technology systems
are affected by the Year 2000 issue, including elevators, security systems and
life safety systems.
To address this problem, and in accordance with Year 2000 readiness
guidelines established by the Office of the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, which regulate Providian's financial
institution subsidiaries, the Company launched a Year 2000 project in November
1996. Providian's Year 2000 project consists of five phases: (1) the planning
phase, in which the Year 2000 project team defined the approach to addressing
the Year 2000 issue; (2) an inventory of the Company's vendors, hardware,
internally developed systems and third party-provided software and the
identification of critical systems and critical vendors; (3) an assessment of
Year 2000 compliance; (4) modification of affected systems, including
replacement, repair, upgrade or retirement; and (5) testing for Year 2000
compliance.
Providian is currently in conformity with its financial institution
regulators' Year 2000 requirements. The planning, inventory and assessment
phases are substantially complete, including the inventory and assessment of
critical systems and vendors. In the modification phase, the Company
substantially completed remediation of internally developed systems in June
1998. Repair and replacement of third party-provided hardware and software are
scheduled to be completed by March 31, 1999, and infrastructure upgrades are
scheduled to be completed by June 30, 1999. In July 1998, the Company began
testing its internally developed and third party-provided systems for Year 2000
compliance. Testing of internally developed critical systems is scheduled to be
substantially completed by December 31, 1998, and testing of third
party-provided critical systems is scheduled to be substantially completed by
March 31, 1999. Final testing of all systems is scheduled to be completed by
mid- July 1999. Statements regarding completion dates for various aspects of the
Year 2000 project are estimates only. There can be no guarantee that the phases
of the Company's Year 2000 project described above will be completed when
anticipated.
Providian depends on technology and other services provided by third
parties, including technology vendors, credit providers and processing
providers, and on financial systems (such as payment and clearing systems) and
the utility infrastructure (such as power, transportation and
telecommunications). The Company relies on these third parties to assess the
impact of the Year 2000 issue on the technology and services they provide and to
take any necessary corrective action. A significant majority of Providian's
critical vendors have represented to the Company that their systems and products
will be Year 2000 compliant by June 30, 1999. The Company is monitoring the
progress of its critical vendors and other third parties and selectively
conducting tests to determine whether they have accurately assessed the problem
and taken corrective action. There can be no assurance that third parties that
supply products and services to the Company's critical systems will be
successful in taking corrective action in a timely manner.
If the Company is unsuccessful in its efforts to correct its critical
systems or if third parties on whom the Company relies do not correct their
systems, the Company could experience significant disruption to its operations
(including loan origination and servicing), its ability to obtain and provide
funds and its financial and accounting systems. Such disruption could result in
revenue loss and increased costs that could have a material adverse effect on
the Company's financial condition, liquidity and results of operations.
The Company is currently in the process of augmenting its existing business
resumption and disaster recovery plan to include contingency plans with respect
to disruptions that might result from Year 2000 issues. The Company expects
these contingency plans to be substantially completed during the first quarter
of 1999. There can be no assurance that any such plans will fully mitigate any
Year 2000 failures or problems.
The Company's total Year 2000 project costs are expected to be
approximately $10 million and the Company has incurred approximately $6 million
in Year 2000 project expenses through October 31, 1998. The Company expects to
fund all Year 2000-related costs through operating cash flows. Year 2000 costs
will be expensed as incurred, and the Company believes that such costs will not
have a material impact on the Company's future financial results or condition.
The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including statements regarding the expected costs of the Year 2000
project, are based on estimates, and actual results may differ materially from
those anticipated. Specific factors that might cause results to differ from
those anticipated include, but are not limited to, the availability of qualified
personnel, success in identifying and modifying all relevant computer systems,
the sufficiency and outcome of Year 2000 testing, adequate resolution of Year
2000 issues by governmental agencies, businesses and other third party providers
to the Company, and unanticipated costs. Such "forward-looking statements" speak
only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after such date or to reflect the occurrence of
unanticipated events.
Income Taxes
The Company's income tax expense, which includes both state and federal
taxes, was $53.1 million for the three months ended September 30, 1998, compared
to $30.4 million for the three months ended September 30, 1997. The overall
year-to-date 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. Subsequent to the acquisition of a portfolio, management uses
methods similar to those used for originated portfolios to establish reserves
for future credit losses.
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 delinquent no more than 180 days after the delinquency
occurs unless the accountholder cures the default by making a partial payment
that qualifies under the Company's standards. Bankrupt accounts and accounts of
deceased customers are charged-off upon notification of bankruptcy or death.
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 September 30, 1998 and
1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
TABLE 4 - DELINQUENCIES
- ----------------------------------------------------------------------------------------------------------
September 30
----------------------------------------------------------------
1998 1997
------------------------------------ -------------------------
% of % of
Total Total
(Dollars in thousands) Loans Loans Loans Loans
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Reported: (1)
Loans outstanding $ 4,987,023 100.00% $ 3,098,427 100.00%
Loans delinquent:
31 - 60 days 96,409 1.93% 55,497 1.79%
61 - 90 days 62,062 1.24% 33,787 1.09%
91 or more days 126,523 2.54% 70,338 2.27%
------------ ------------- ------------ ----------
Total $ 284,994 5.71% $ 159,622 5.15%
============ ============= ============ ==========
Managed:
Loans outstanding $ 11,778,186 100.00% $ 9,543,352 100.00%
Loans delinquent:
31 - 60 days 219,754 1.87% 164,744 1.72%
61 - 90 days 139,127 1.18% 97,058 1.02%
91 or more days 260,889 2.21% 180,045 1.89%
------------ -------------- ------------ ----------
Total $ 619,770 5.26% $ 441,847 4.63%
============ ============== ============ ==========
(1) Includes loans held for securitization.
</TABLE>
The managed loan delinquency rate as of September 30, 1998 was 5.26%,
compared to 4.22% as of December 31, 1997 and 4.63% as of September 30, 1997.
The increase in the managed loan delinquency rate over the prior year quarter
reflects the higher rates of delinquency associated with the loans acquired in
the Portfolio Acquisitions. Excluding the effect of the Portfolio Acquisitions,
the delinquency rate at September 30, 1998 would have been 4.69% pro forma,
slightly above the delinquency rate at September 30, 1997. The delinquency rate
for on-balance sheet loans was 5.71% as of September 30, 1998, compared to 4.17%
as of December 31, 1997 and 5.15% as of September 30, 1997. The increase in the
on-balance sheet loan delinquency rate reflects the effect of the loans acquired
in the Portfolio Acquisitions, 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. Secured and partially secured
Unbanked Product 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 (other than fee income related to fee-based products),
which are written off as a reversal of current earnings at the time of credit
loss recognition. Unpaid fee-based product revenue is recognized as part of the
principal amount of the loan balance and in the case of loan charge-offs, as
described above, is included in net credit losses. 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 and nine months ended September 30, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE 5 - NET CREDIT LOSSES
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- --------------------------------
(Dollars in thousands) 1998 1997 1998 1997
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Reported: (1)
Average loans outstanding $ 4,793,697 $ 3,028,584 $ 4,393,731 $ 3,152,565
Net charge-offs $ 114,429 $ 29,725 $ 258,418 $ 87,274
Net charge-offs as a percentage
of average loans outstanding 9.55% 3.93% 7.84% 3.69%
Managed:
Average loans outstanding $ 11,584,774 $ 9,393,797 $ 11,131,223 $ 9,251,044
Net charge-offs $ 225,089 $ 145,527 $ 616,303 $ 435,834
Net charge-offs as a percentage
of average loans outstanding 7.77% 6.20% 7.38% 6.28%
(1) Includes loans held for securitization.
</TABLE>
The managed net credit loss rate for the three months ended September 30,
1998 was 7.77%, compared to 7.56% for the quarter ended June 30, 1998 and 6.20%
for the quarter ended September 30, 1997. The increase over the prior quarter
reflects the higher credit loss rates on the loans acquired in the Portfolio
Acquisitions and account seasoning. During the quarter ended September 30, 1998,
the Company entered into an agreement to securitize previously charged-off
receivables which the Company continues to service. Cash proceeds received by
the Company under this agreement are treated as recoveries and have the effect
of reducing the net credit loss rate. In addition, during the quarter, the
Company revised its policy relating to Chapter 13 bankruptcies so that credit
losses are recognized immediately upon receipt of notification of filing, which
has the effect of increasing the net credit loss rate for the quarter. Excluding
only the Portfolio Acquisitions, the managed net credit loss rate for the
quarter ended September 30, 1998 would have been 5.78% pro forma, a decrease
from the prior quarter pro forma managed net credit loss rate (excluding
Acquired Portfolios) of 6.36%. Excluding the impact of the Portfolio
Acquisitions, the sale of previously securitized charged-off receivables and the
bankruptcy policy change, the managed credit loss rate for the quarter ended
September 30, 1998 would have been 6.18% pro forma.
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 and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
TABLE 6 - SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
(Dollars in thousands) 1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 355,789 $ 129,743 $ 145,312 $ 114,540
Provision for credit losses 168,217 43,071 343,724 115,823
Reserve acquired (500) - 178,459 -
Charge-offs (123,962) (33,850) (279,877) (96,583)
Recoveries 9,533 4,125 21,459 9,309
----------- ----------- ---------- -----------
Net charge-offs (114,429) (29,725) (258,418) (87,274)
----------- ----------- ---------- ----------
Balance at end of period $ 409,077 $ 143,089 $ 409,077 $ 143,089
=========== =========== ========== ===========
Allowance for credit losses to loans at period-end (1) 8.20% 4.76% 8.20% 4.76%
(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
retail and institutional deposits, term federal funds, public and private asset
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
September 30, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
TABLE 7 - CONTRACTUAL MATURITIES OF DEPOSIT
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1998 September 30, 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 $ 301,995 $ 186,922 $ 488,917 $ 251,005 $ 123,120 $ 374,125
Over three months through 12 months 849,989 315,254 1,165,243 662,996 193,040 856,036
Over one year through five years 678,503 610,865 1,289,368 437,071 461,029 898,100
Deposits without contractual maturity 912,176 71,017 983,193 891,386 59,202 950,588
------------------------------------ ------------------------------------
Total Deposits $ 2,742,663 $ 1,184,058 $ 3,926,721 $ 2,242,458 $ 836,391 $ 3,078,849
------------------------------------- ------------------------------------
</TABLE>
Deposits increased to $3.9 billion as of September 30, 1998 from $3.2
billion as of December 31, 1997. This increase resulted from management's
efforts to increase deposits to provide funding for on-balance sheet loans and
investment securities used in liquidity management.
Interest expense on borrowings for the quarter ended September 30, 1998 was
$10.0 million, compared to $3.7 million for the quarter ended September 30,
1997. This increase was the result of higher average borrowings of term federal
funds purchased and long-term notes payable.
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 September 30, 1998, there
were no outstanding borrowings under the credit facility. Among other covenants,
the credit facility contains certain financial covenants applicable to the
Company, including consolidated return on assets 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.
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. No borrowings under these short-term
facilities were outstanding at September 30, 1998.
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 nine
months ended September 30, 1998, PNB issued $400 million in principal amount of
long-term notes.
In addition, in June 1998 the Company filed a shelf registration for $2
billion of debt and/or equity securities with the Securities and Exchange
Commission. The availability and attractiveness of these and other sources of
funding will depend upon a number of factors, some of which will relate to the
financial condition and performance of the Company, and some of which will be
beyond the Company's control, such as prevailing interest rates and other market
conditions. There can be no assurance that additional debt or equity financing
will be available or be available on terms attractive to the Company.
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. As of September 30, 1998, the Company had $2.3 billion of
outstanding securitized loans under conduit and variable funding facilities.
Outstanding term securitizations under the Company's master trust totaled $4.5
billion as of September 30, 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. During the nine months
ended September 30, 1998, accumulated principal for previously securitized loans
of $1,050.0 million was paid to investors. 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.
The Company also pursues a strategy of opportunistic acquisitions which may
from time to time require funding. Potential funding sources for this purpose
include the following: cash flow from operations, borrowings under its revolving
credit facilities, asset securitzations, securities issued under its shelf
registration and issuances of privately placed debt or equity securities. There
can be no certainty, however, that funding for acquisitions will be available on
terms favorable to the Company.
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>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF INTEREST RATE SWAPS/CAPS/FLOORS
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -------------------------
(Dollars in thousands) 1998 1997 1998 1997
----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Beginning Balance $ 135,500 $ 955,500 $ 955,500 $ 1,290,500
Additions 500,000 - 666,667 63,333
Maturities - - 986,667 398,333
----------- ----------- --------- ------------
Ending Balance $ 635,500 $ 955,500 $ 635,500 $ 955,500
=========== =========== ========= ============
Interest rate caps and floors:
Beginning Balance $ 691,970 $ 1,347,200 $ 922,220 $ 1,522,450
Additions 172,481 - 504,981 -
Maturities 191,720 212,500 754,470 387,750
----------- ----------- --------- ------------
Ending Balance $ 672,731 $ 1,134,700 $ 672,731 $ 1,134,700
=========== =========== ========= ============
</TABLE>
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,
mortgage backed securities, commercial paper, interest bearing deposits with
other banks, federal funds sold and other cash equivalents. Investment
securities increased to $274.1 million as of September 30, 1998 from $172.8
million as of December 31, 1997. Federal funds sold increased to $216.0 million
from $115.0 million over the same period.
As part of its comprehensive risk management strategy, the Company may
enter into sale and purchase transactions on its common stock. The Company's
goal in managing equity risk is to mitigate the effect of price volatility on
stock option grants made as part of the Company's equity-based benefit plans.
During the first quarter of 1998, the Company entered into an agreement to sell
equity put warrants for 250,000 shares of the Company's stock. The warrants
entitle the holder to sell to the Company, by physical delivery, a specified
number of shares of the Company's common stock at a price of $64.60 per share.
These put warrants may only be exercised on the expiration date, which is
February 26, 1999.
In June 1998, the Company entered into an agreement to purchase, on a
forward basis, 500,000 shares of its common stock. At the Company's election, in
September 1998 a final settlement of the agreement was made on a physical basis
and the agreement was terminated. As a result the final settlement and previous
interim settlements, the Company purchased, in the aggregate, 500,000 shares of
its common stock under the agreement at an effective price of $71.10 per share.
In July 1998, the Company entered into an agreement to purchase, on a
forward basis, an additional 500,000 shares of its common stock. At the
Company's election, the agreement may be settled on a physical basis or, subject
to certain conditions, on a net basis in shares of Providian Financial common
stock or in cash. To the extent that the market price of the Company's common
stock on a settlement date is higher than the forward purchase price, the net
differential is received by the Company. To the extent that the market price of
the Company's common stock on a settlement date is lower than the forward
purchase price, the premium amount is paid by the Company. As of September 30,
1998, the agreement covered 500,000 shares of the Company's common stock at a
forward price of $82.32 per share. The agreement has a term of one year but may
be settled earlier. If this agreement were settled on a net share basis at the
September 30, 1998 market price of the Company's common stock ($84.8125 per
share), the Company would receive approximately 14,700 shares of its common
stock. During the quarter ended September 30, 1998, interim premium totalling
$418,482 were recorded as adjustments to additional paid in capital.
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 September 30, 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) 12.25% 11.20%
Tier 1 (Tier 1/total risk-based assets) 11.19% 9.84%
Leverage (Tier 1/average total assets less intangibles) 12.76% 9.81%
</TABLE>
During the nine months ended September 30, 1998, the Company paid dividends
on its common stock of $14.3 million, or $0.15 per share. On September 14, 1998,
the Board of Directors of the Company approved a three-for-two stock split in
the form of a stock dividend and a fourth quarter cash dividend of $.05 per
share of common stock payable on all shares, including the shares issued in the
stock split. The stock and cash dividends are payable on December 15, 1998 to
shareholders of record on December 1, 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
paid to the Company 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 September 14, 1998, the Board of Directors of the Company approved a
three-for-two stock split to be effected in the form of a stock dividend and a
fourth quarter cash dividend of $.05 per share of common stock payable on all
shares including the shares issued in the stock split. The stock and cash
dividends are payable on December 15, 1998 to shareholders of record on December
1, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 10.1 Appendixes A and B to Providian Financial Corporation
Stock Ownership Plan, as amended on October 21, 1998
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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: November 13, 1998 /s/ David J. Petrini
--------------------------------------
David J. Petrini
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Signatory)
Date: November 13, 1998 /s/ Daniel Sanford
--------------------------------------
Daniel Sanford
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
Exhibit 10.1 Appendixes A and B to Providian Financial Corporation Stock
Ownership Plan, as amended on October 21, 1998
Exhibit 27.1 Financial Data Schedule
PROVIDIAN FINANCIAL CORPORATION STOCK OWNERSHIP PLAN
Amended and Restated October 21, 1998
Effective June 1, 1999
Terms for Participation by Non-Employee Directors
1. Eligibility. Each Non-Employee Director shall be granted Nonrestricted
Stock and Restricted Stock in accordance with the terms and conditions contained
in this Appendix. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Plan.
2. Participation Elections. Each Non-Employee Director may elect to receive
shares of Nonrestricted Stock under the Plan in lieu of payment of a portion or
all of his or her annual retainer. Such an election may be for any dollar or
percentage amount equal to at least 25% of the Non-Employee Director's annual
retainer. The election must be made prior to the beginning of the annual June 1
to May 31 Board cycle (the "Board Cycle"). Any amount of the annual retainer not
elected to be received in Nonrestricted Stock shall be paid in cash.
3. Grants of Nonrestricted Stock. On a quarterly basis during a Board
Cycle, each participating Non-Employee Director shall be granted a number of
shares of Nonrestricted Stock having a fair market value, determined by
averaging the high and low per share trading prices of the Common Stock on the
New York Stock Exchange ("NYSE") on the date of grant ("Fair Market Value"),
equal to 25% of the amount of the annual retainer elected to be received in
Nonrestricted Stock for such Board Cycle, rounded down to the nearest full
share. The date of grant shall be the first day of each quarter of the Board
Cycle on which the Common Stock is traded on the NYSE. For this purpose, a
quarter of the Board Cycle shall be the period of three months commencing each
June 1, September 1, December 1 and March 1.
4. Grants of Matching Restricted Stock. Each Non-Employee Director
receiving a grant of Nonrestricted Stock hereunder shall also be granted, on the
date of grant of the Nonrestricted Stock, a number of shares of Restricted Stock
having a Fair Market Value equal to one-sixteenth (1/16) of the Non-Employee
Director's annual retainer for the full Board Cycle with respect to which the
Nonrestricted Stock is granted, rounded down to the nearest full share.
5. Corresponding Shares. For purposes of the Plan, a number of shares of
Nonrestricted Stock granted under paragraph 3 equal to the number of Restricted
Shares granted on the same date under paragraph 4 shall be deemed to be
"corresponding shares" as referred to in Sections 7.a, 8.c and 9.c of the Plan.
Any additional shares of Nonrestricted Stock granted at such time shall not be
corresponding shares.
6. Restrictions. Shares of Restricted Stock and corresponding shares of
Nonrestricted Stock granted hereunder shall be subject to the restrictions and
other applicable limitations set forth in the Plan. For such purposes, the
Restricted Period applicable to fifty percent (50%) of the shares under each
grant of Restricted Stock shall be three (3) years from the first day of the
Board Cycle to which the election to receive shares of Nonrestricted Stock
corresponds (the "Vesting Commencement Date"). The Restricted Period for the
remaining fifty percent (50%) of the shares under each grant of Restricted Stock
shall be six (6) years from the Vesting Commencement Date.
7. Other Terms. Shares of Nonrestricted Stock and Restricted Stock
granted hereunder to Non-Employee Directors shall otherwise be subject to the
terms of the Plan applicable to Non-Employee Directors or to Participants
generally (other than provisions specifically applying to Employee
Participants).
PROVIDIAN FINANCIAL CORPORATION STOCK OWNERSHIP PLAN
Amended and Restated October 21, 1998
Effective January 1, 1999
Terms for Participation by Non-Employee Directors of
Providian National Bank and Providian Bank
1. Eligibility. Each Non-Employee Director of Providian National Bank and
Providian Bank who is not also an employee of Providian Financial Corporation
("Providian"), Providian National Bank, Providian Bank or any other affiliate of
Providian (a "Non-Employee Bank Director") shall be granted Nonrestricted Stock
and Restricted Stock in accordance with the terms and conditions contained in
this Appendix. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Plan.
2. Participation Elections. Each Non-Employee Bank Director may elect to
receive shares of Nonrestricted Stock under the Plan in lieu of payment of a
portion or all of his or her annual retainer, excluding any committee chair
retainer. Such an election may be for any percentage of the Non-Employee Bank
Director's annual retainer equal to or greater than 25% of such annual retainer,
up to a maximum which shall initially be 50% and may be changed from time to
time with the approval of the Chief Executive Officer of Providian. The election
must be made prior to the beginning of the annual calendar year Board cycle (the
"Board Cycle"). Any amount of the annual retainer not elected to be received in
Nonrestricted Stock shall be paid in cash.
3. Grants of Nonrestricted Stock. On a quarterly basis during a Board
Cycle, each participating Non-Employee Bank Director shall be granted a number
of shares of Nonrestricted Stock having a fair market value, determined by
averaging the high and low per share trading prices of the Common Stock on the
New York Stock Exchange ("NYSE") on the date of grant ("Fair Market Value"),
equal to 25% of the amount of the annual retainer elected to be received in
Nonrestricted Stock for such Board Cycle, rounded down to the nearest full
share. The date of grant shall be the first day of each quarter of the Board
Cycle on which the Common Stock is traded on the NYSE. For this purpose, a
quarter of the Board Cycle shall be the period of three months commencing each
January 1, April 1, July 1 and October 1.
4. Grants of Matching Restricted Stock. Each Non-Employee Bank Director
receiving a grant of Nonrestricted Stock hereunder shall also be granted, on the
date of grant of the Nonrestricted Stock, a number of shares of Restricted Stock
having a Fair Market Value equal to one-sixteenth (1/16) of the Non-Employee
Bank Director's annual retainer for the full Board Cycle with respect to which
the Nonrestricted Stock is granted, rounded down to the nearest full share.
5. Corresponding Shares. For purposes of the Plan, a number of shares of
Nonrestricted Stock granted under paragraph 3 equal to the number of Restricted
Shares granted on the same date under paragraph 4 shall be deemed to be
"corresponding shares" as referred to in Sections 7.a, 8.c and 9.c of the Plan.
Any additional shares of Nonrestricted Stock granted at such time shall not be
corresponding shares.
6. Restrictions. Shares of Restricted Stock and corresponding shares of
Nonrestricted Stock granted hereunder shall be subject to the restrictions and
other applicable limitations set forth in the Plan. For such purposes, the
Restricted Period applicable to fifty percent (50%) of the shares under each
grant of Restricted Stock shall be three (3) years from the first day of the
Board Cycle to which the election to receive shares of Nonrestricted Stock
corresponds (the "Vesting Commencement Date"). The Restricted Period for the
remaining fifty percent (50%) of the shares under each grant of Restricted Stock
shall be six (6) years from the Vesting Commencement Date.
7. Other Terms. Shares of Nonrestricted Stock and Restricted Stock granted
hereunder to Non-Employee Bank Directors shall otherwise be subject to the terms
of the Plan applicable to Non-Employee Directors or to Participants generally
(other than provisions specifically applying to Employee Participants).
<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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 142,975
<SECURITIES> 274,069
<RECEIVABLES> 4,985,429
<ALLOWANCES> 409,077
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 75,664
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 6,055,677
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 716,602
<TOTAL-LIABILITY-AND-EQUITY> 6,055,677
<SALES> 0
<TOTAL-REVENUES> 1,435,035
<CGS> 0
<TOTAL-COSTS> 581,484
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 343,724
<INTEREST-EXPENSE> 177,437
<INCOME-PRETAX> 196,737
<INCOME-TAX> 130,858
<INCOME-CONTINUING> 201,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 201,532
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.08
<FN>
<F1 Non-classified balance sheet>
<F2 PP&E shown net>
</FN>
</TABLE>
