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 June 30, 1999
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 July 30, 1999, there were 141,798,475 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
June 30, 1999
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....................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................30
Item 4. Other Information...........................................31
Item 6. Exhibits and Reports on Form 8-K............................32
Signatures....................................................................33
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Condensed Consolidated Statements of Financial Condition (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
June 30 December 31
(Dollars in thousands, except share data) 1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 207,754 $ 176,348
Federal funds sold 769,125 297,869
Investment securities:
Available-for-sale 167,536 114,858
Held-to-maturity 181,171 318,817
Loans receivable, less allowance for credit losses of $675,224 at
June 30, 1999 and $451,245 at December 31, 1998 7,468,981 5,282,014
Premises and equipment, net 109,292 82,858
Interest receivable 72,063 51,801
Due from securitizations 365,611 454,374
Deferred taxes 415,974 306,234
Other assets 192,089 146,042
----------- -----------
Total assets $ 9,949,596 $ 7,231,215
=========== ===========
Liabilities:
Deposits:
Non-interest bearing $ 49,363 $ 48,220
Interest bearing 5,948,217 4,624,078
----------- -----------
5,997,580 4,672,298
Short-term borrowings 858,778 472,500
Long-term borrowings 1,029,305 399,757
Deferred fee revenue 442,328 334,617
Accrued expenses and other liabilities 448,910 388,856
----------- -----------
Total liabilities 8,776,901 6,268,028
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: 800,000,000
shares; issued and outstanding: June 30, 1999 - 141,784,004 shares;
December 31, 1998 - 141,732,008 shares) 954 954
Additional paid-in capital 946 -
Retained earnings 1,100,325 866,005
Cumulative other comprehensive income (502) (320)
Common stock held in treasury - at cost: (June 30, 1999 - 1,335,976
shares; December 31, 1998 - 1,405,972 shares) (89,028) (63,452)
------------ ------------
Total shareholders' equity 1,012,695 803,187
------------ ------------
Total liabilities and shareholders' equity $ 9,949,596 $ 7,231,215
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Income (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
(Dollars in thousands, except per share data) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 358,449 $ 185,213 $ 637,574 $ 355,283
Investment securities 14,480 9,007 26,971 15,514
--------- --------- --------- ---------
Total interest income 372,929 194,220 664,545 370,797
Interest expense:
Deposits 73,790 48,970 138,229 95,123
Borrowings 26,480 12,561 42,542 21,164
--------- --------- --------- ---------
Total interest expense 100,270 61,531 180,771 116,287
Net interest income 272,659 132,689 483,774 254,510
Provision for credit losses 255,222 117,851 437,295 175,507
--------- ---------- --------- ---------
Net interest income after provision
for credit losses 17,437 14,838 46,479 79,003
Non-interest income:
Servicing and securitizations 148,763 156,677 279,974 270,793
Credit product fee income 414,819 120,847 756,629 217,255
Other 7,876 485 12,111 664
--------- --------- --------- ---------
571,458 278,009 1,048,714 488,712
Non-interest expense:
Salaries and employee benefits 121,784 60,911 217,771 120,645
Solicitation 102,231 46,663 201,678 88,275
Occupancy, furniture and equipment 18,877 11,088 34,181 22,354
Data processing and communication 29,852 22,080 54,614 37,834
Other 105,096 48,183 186,702 101,870
--------- --------- --------- ---------
377,840 188,925 694,946 370,978
--------- --------- --------- ---------
Income before income taxes 211,055 103,922 400,247 196,737
Income tax expense 84,569 41,059 160,215 77,766
--------- --------- --------- ---------
Net Income $ 126,486 $ 62,863 $ 240,032 $ 118,971
========= ========= ========= =========
Earnings per share - basic $ 0.89 $ 0.44 $ 1.70 $ 0.84
========= ========= ========= =========
Earnings per share - assuming dilution $ 0.87 $ 0.43 $ 1.65 $ 0.82
========= ========= ========= =========
Cash dividends paid per share $ 0.05 $ 0.03 $ 0.10 $ 0.06
========= ========= ========= =========
Weighted average common shares outstanding - basic (000) 141,483 142,047 141,298 142,152
========== ========= ========= =========
Weighted average shares and assumed conversions (000) 145,546 145,169 145,623 144,992
========== ========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
Cumulative Common
Additional Other stock
Common Paid-In Retained Comprehensive Held in
(Dollars in thousands, except per share data) Stock Capital Earnings Income Treasury Total
------ ---------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 954 $ 4,217 $599,856 $ - $ (9,913) $ 595,114
Net Income 118,971 118,971
Cash dividend:
Common - $0.06 per share (9,521) (9,521)
Purchase of 535,800 common
shares for treasury 3,730 (24,436) (20,706)
Exercise of stock options and other awards (5,856) 8,094 2,238
Issuance of restricted and unrestricted
stock less forfeited shares 1,429 3,405 4,834
Deferred compensation related to
grant of restricted and unrestricted
stock less amortization of $1,842 (3,018) (3,018)
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 June 30, 1998 $ 954 $ 4,690 $ 709,306 $ - $(22,850) $ 692,100
====== ======= ========== ============= ======== ==========
Balance at December 31, 1998 $ 954 $ - $ 866,005 $ (320) $(63,452) $ 803,187
Comprehensive income:
Net Income 240,032 240,032
Other comprehensive income, net of
income tax:
Unrealized loss on securities net of
income taxes of $123 (191) (191)
Foreign currency translation adjustments
net of income taxes of ($6) 9 9
----------
Other comprehensive income (182)
----------
Comprehensive income 239,850
Cash dividend:
Common - $0.10 per share (14,178) (14,178)
Purchase of 933,459 common
shares for treasury 25,923 (97,120) (71,197)
Exercise of stock options and other awards (51,388) 8,466 62,515 19,593
Issuance of restricted and unrestricted
stock less forfeited shares (422) 9,029 8,607
Deferred compensation related to
grant of restricted and unrestricted
stock less amortization of $3,708 (4,896) (4,896)
Net tax effect from exercise of stock options
and issuance of restricted stock 31,729 31,729
====== ======= ========== ============= ======== ==========
Balance at June 30, 1999 $ 954 $ 946 $1,100,325 $ (502) $(89,028) $1,012,695
====== ======= ========== ============= ======== ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Condensed Consolidated Statements of Cash Flows (Unaudited)
Providian Financial Corporation and Subsidiaries
<CAPTION>
Six Months Ended
June 30
------------------------
(Dollars in thousands) 1999 1998
---------- ----------
<S> <C> <C>
Operating Activities:
Net Income $ 240,032 $ 118,971
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 437,295 175,507
Depreciation and amortization of premises and equipment 14,548 7,302
Amortization of net loan acquisition costs 26,604 19,741
Amortization of deferred compensation
related to restricted and unrestricted stock 3,708 1,816
Amortization of deferred fee revenue (254,104) (60,515)
Increase in deferred income tax benefit (109,623) (50,108)
Increase in deferred fee revenue 398,806 147,042
Increase in interest receivable (20,262) (6,387)
Net increase in other assets (72,578) (29,610)
Net increase in accrued expenses and other liabilities 54,794 66,508
---------- -----------
Net Cash Provided by Operating Activities 719,220 390,267
Investing Activities:
Net decrease (increase) in money market instrument investments 74,894 (299,480)
Net cash used for loan originations and principal
collections on loans receivable (3,066,363) (385,947)
Net increase in securitized loans 569,163 1,049,911
Portfolio acquisitions (127,119) (1,922,265)
Decrease in due from securitizations 88,763 204,900
Purchases of investment securities (76,042) (40,284)
Proceeds from maturities of investment securities 85,802 75
Increase in federal funds sold (471,256) (25,510)
Net purchases of premises and equipment (40,982) (18,076)
----------- -----------
Net Cash Used by Investing Activities (2,963,140) (1,436,676)
Financing Activities:
Net increase in deposits 1,325,282 518,384
Proceeds from issuance of term federal funds 1,258,778 450,000
Repayment of term federal funds (872,500) (180,000)
Decrease in notes payable to banks - (82,000)
Increase in long-term borrowings 629,548 399,717
Purchase of treasury stock (71,197) (20,706)
Put warrant premium - 1,325
Dividends paid (14,178) (9,521)
Proceeds from exercise of stock options 19,593 2,238
----------- -----------
Net Cash Provided by Financing Activities 2,275,326 1,079,437
----------- -----------
Net Decrease in Cash and Cash Equivalents 31,406 33,028
Cash and cash equivalents at beginning of period 176,348 112,522
----------- -----------
Cash and cash equivalents at end of period $ 207,754 $ 145,550
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 1999 (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 membership services. 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 and six month
periods ended June 30, 1999 are not necessarily indicative of the results for
the year ended December 31, 1999. The notes to the financial statements
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 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 1999 presentation.
Note 2 - Earnings Per Share
The following table sets forth the computation of both the basic and
assumed conversion methods of earnings per share.
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
(In thousands, except per share data) 1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Income available to common stockholders $ 126,486 $ 62,863 $ 240,032 $ 118,971
========== ========== ========== ==========
Weighted average shares outstanding--basic 141,483 142,047 141,298 142,152
Effect of dilutive securities
Restricted stock issued--non vested 508 560 581 533
Employee stock options 3,555 2,562 3,744 2,307
---------- ---------- ---------- ----------
Dilutive potential common shares 4,063 3,122 4,325 2,840
---------- ---------- ---------- ----------
Adjusted weighted average shares and assumed
conversions 145,546 145,169 145,623 144,992
========== ========== ========== ==========
Earnings per share--basic $ 0.89 $ 0.44 $ 1.70 $ 0.84
========== ========== ========== ==========
Earnings per share--assuming dilution $ 0.87 $ 0.43 $ 1.65 $ 0.82
========== ========== ========== ==========
</TABLE>
<PAGE>
Note 3 - Loans Receivable and Allowance for Credit Losses
The following is a summary of the Company's loans receivable:
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
Credit card and line of credit loans $ 7,244,124 $ 5,129,835
Home loans 914,834 606,657
Other 6,021 4,614
------------- -------------
8,164,979 5,741,106
Allowance for credit losses (675,224) (451,245)
Net deferred origination fees (20,774) (7,847)
-------------- --------------
$ 7,468,981 $ 5,282,014
============== ==============
</TABLE>
The activity in the allowance for credit losses for the six months
ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
(Dollars in thousands) 1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of period $ 451,245 $ 145,312
Provision for credit losses 437,295 175,507
Reserve acquired 14,310 178,959
Charge-offs (265,788) (155,915)
Recoveries 38,162 11,926
---------- ----------
Net charge-offs (227,626) (143,989)
---------- ----------
Balance at end of period $ 675,224 $ 355,789
========== ==========
</TABLE>
Note 4 - Senior and Subordinated Bank Notes
During the first six months of 1999, the Company, through one of its
banking subsidiaries, issued an additional $630 million of senior bank notes
through a program that was established in 1998. The total notes outstanding
under this program as of June 30, 1999 was $1 billion.
Note 5 - Shareholders' Equity
The Company is party to an agreement to purchase, on a forward basis,
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 the Company's 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 Company will receive the net differential. 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 Company will pay an agreed upon
premium amount. As of June 30, 1999, the agreement covered 318,913 shares of the
Company's common stock at a forward price of $129.06 per share. The agreement
has been extended through June 2000, but may be settled earlier. During the six
months ended June 30, 1999, settlements from this forward purchase agreement
resulted in the Company receiving 248,319 shares of its common stock and paying
premium amounts of $1.1 million which were recorded as adjustments to additional
paid in capital.
Note 6 - Comprehensive Income
The components of accumulated other comprehensive income, net of related
tax, at June 30, 1999 and December 31, 1998 are as follows:
Cumulative
Unrealized Foreign other
Loss on Currency Comprehensive
Securities Translation Income
(Dollars in thousands) ---------- ----------- -------------
Beginning balance, December 31, 1998 $ (320) $ - $ (320)
Current year other comprehensive income (191) 9 (182)
------- ------- -------
Ending balance, June 30, 1999 $ (511) $ 9 $ (502)
======= ======= =======
<PAGE>
Note 7 - Commitments and Contingencies
The Company is commonly subject to various pending and threatened legal
actions arising from the conduct of its normal business activities. 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.
Since May 1999, following media coverage highlighting certain of the
Company's sales and collections practices, a number of lawsuits have been filed
against the Company and, in some cases, against certain of the Company's
subsidiaries by current and former customers of the Company's banking
subsidiaries. An action is also pending in which the plaintiffs allege, in
general, that the Company and certain of its officers made false and misleading
statements in violation of the federal securities laws. In addition, the San
Francisco District Attorney's office confirmed that it had commenced an
investigation into the Company's sales and collections practices, including the
marketing of certain fee-based products and the posting of customer payments.
The remedies available to the District Attorney's Office include, but are not
limited to, damages, penalties, fines and injunctive relief. The Company is
cooperating fully with the District Attorney's Office in its investigation. The
investigation and the actions are at a very early stage. An informed assessment
of the ultimate outcome or potential liability associated with these matters is
not feasible at this time. Due to the uncertainties of litigation, there can be
no assurance that the Company will prevail on all claims; however, management
believes that the Company has substantive defenses and intends to defend the
actions vigorously.
In response to customer concerns, the Company introduced an enhanced
customer satisfaction program. Under this program, the Company announced that it
will reverse late fees that customers feel have been wrongly charged, allow an
extra two days to receive payments from customers before assessing a late
charge, review all customer offers to insure that they are clear from a
customer's perspective, and cancel any add-on products, including Credit
Protection, if customers feel they were misled or are not getting appropriate
value, and refund the fee for such products for up to a full year. In addition,
the Company established an 800 customer service line for customers who feel they
have not been satisfied through the Company's normal service centers, and
engaged an independent third party to examine payment crediting processes.
In the course of implementing the enhanced customer satisfaction program,
the Company discovered a programming error that had resulted, over a period of
months, in the billing of erroneous late fees related to specific weekend days.
These errors have been corrected, and steps have been initiated to provide
refunds to affected customers.
Note 8 - Stock Ownership Plan
In May 1999, the Company's Board of Directors approved grants of stock
options to certain non-officer employees under the Company's newly adopted 1999
Non-Officer Equity Incentive Plan. Under the Plan, the non-officer employees
received options exercisable for varying numbers of the Company's stock based on
their length of employment or other factors. Options covering a total of
1,031,650 shares of the Company's stock were granted in July 1999. Additional
grants will be made in January 2000 and July 2000 to certain other employees who
complete a minimum of one year of service and satisfy other conditions.
<PAGE>
Note 9 - Segment Information
The operations of the Company consist of two primary segments: Credit Card
Loan and Home Loan. The Credit Card Loan segment represents consumer lending
products, including unsecured, secured and partially secured credit cards, and
includes non-credit card unsecured revolving lines of credit. Credit Card Loan
customer relationships are initiated primarily through direct marketing or
portfolio acquisitions from other financial institutions. The Home Loan segment
represents home equity loans, home equity lines of credit and other home loans
made to individuals targeted by the Company's home loan product marketing
programs. Membership services revenue, which is received from both Credit Card
Loan and Home Loan customers, is included in the respective segment summary
financial information.
The Company's securitized loans are not considered loans owned by the
Company and therefore are not shown on the statement of financial condition. It
is, however, the Company's practice to analyze its financial performance on a
managed loan portfolio basis. Segment information is presented below on the
Company's managed loan portfolios.
The following is a summary of the Company's segment activity on a managed
loan basis for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Credit Home
(Dollars in thousands) Card Loan Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Revenue $ 913,855 37,082 6,938 $ 957,875
Profit or loss $ 233,781 5,612 (6,389) $ 233,004
Assets $ 14,825,101 1,414,834 26,232 $ 16,266,167
Three Months Ended June 30, 1998
Revenue $ 507,895 18,048 -- $ 525,943
Profit or loss $ 102,462 3,426 -- $ 105,888
Assets $ 10,476,474 1,018,498 -- $ 11,494,972
Six Months Ended June 30, 1999
Revenue $ 1,722,201 62,311 10,136 $ 1,794,648
Profit or loss $ 464,827 1,381 (30,029) $ 436,179
Assets $ 14,825,101 1,414,834 26,232 $ 16,266,167
Six Months Ended June 30, 1998
Revenue $ 929,766 36,184 -- $ 965,950
Profit or loss $ 195,993 6,810 -- $ 202,803
Assets $ 10,476,474 1,018,498 -- $ 11,494,972
</TABLE>
The impact of securitizations on the Company's consolidated statements of
income is to reduce net interest income and the provision for credit losses, and
to increase non-interest income. The following is a reconciliation of the
Company's segment activity on a managed basis to the consolidated statements of
income of the Company for the periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Ended June 30 Six months Ended June 30
(Dollars in thousands) 1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Total segment profits $ 233,004 $ 105,888 $ 436,179 $ 202,803
Corporate and other (21,949) (1,966) (35,932) (6,066)
-------------------------- --------------------------
Income before income taxes $ 211,055 $ 103,922 $ 400,247 $ 196,737
========================== ==========================
</TABLE>
<PAGE>
Note 10 - Business Combination
On February 18, 1999, the Company acquired the assets of GetSmart.com and
assumed certain related liabilities. GetSmart.com is an online referral service
for consumer borrowers which provides loan information and lender connections
through proprietary search and application technology. The purchase price was
$32.1 million, paid in cash, plus $1.5 million in transaction costs, and the
Company assumed liabilities of $4.4 million.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of GetSmart.com have been included in the Company's
consolidated financial statements from the date of acquisition.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Providian Financial Corporation (the "Company") is a leading provider of
consumer lending products, including credit cards, home loans, secured credit
cards, and membership services. In addition, the Company offers various deposit
products. The Company offers its products primarily through its banking
subsidiaries, Providian National Bank, a national bank, and Providian Bank, a
Utah industrial loan corporation. The Company's products are offered to a broad
spectrum of consumers. Credit card products range from gold and platinum cards
with high credit lines to lower line classic and secured cards designed for
consumers underserved by traditional financial institutions. The primary factors
affecting the profitability of the Company's consumer lending business are
growth in the number of customer accounts and outstanding loan balances, net
interest spread on loans, fee revenue, credit usage, credit quality
(delinquencies and credit losses), level of solicitation and marketing expenses,
and account servicing efficiency.
Forward-Looking Information
Certain statements contained herein include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. Forward-looking statements
include expressions of "belief," "anticipation," or "expectations" of
management, statements as to industry trends or future results of operations of
the Company, and other statements which are not historical fact. Forward-looking
statements are based on certain assumptions by management and are subject to
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These risks and uncertainties
include, but are not limited to, competition, delinquencies, credit losses,
vendor relationships, funding costs and availability, general economic
conditions, government policy and regulations, risks related to growth, product
development, acquisitions and operations, litigation and Year 2000 readiness.
These and other risks and uncertainties are described in detail in the Company's
1998 Annual Report on Form 10-K under the heading "Cautionary Statements."
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
update any forward-looking statements.
Earnings Summary
Net income for the three months ended June 30, 1999 was $126.5 million, an
increase of 101% over net income of $62.9 million for the three months ended
June 30, 1998. Net income for the six months ended June 30, 1999 was $240.0
million, an increase of 102% over net income of $119.0 million for the six
months ended June 30, 1998. This increase was primarily attributable to
continued growth in customer accounts and loans outstanding and strong growth in
fee revenue.
In May 1999, following extensive media coverage highlighting certain of the
Company's sales and collections practices, the Company introduced an enhanced
customer satisfaction program. Under this program, the Company announced that it
will reverse late fees that customers feel have been wrongly charged, allow an
extra two days to receive payments from customers before assessing a late
charge, review all customer offers to insure that they are clear from a
customer's perspective, and cancel any add-on products, including Credit
Protection, if customers feel they were misled or are not getting appropriate
value, and refund the fee for such products for up to a full year. In addition,
the Company established an 800-customer service line for customers who feel they
have not been satisfied through the Company's normal service centers, and
engaged an independent third party to examine payment-crediting processes.
In the course of implementing the enhanced customer satisfaction program,
the Company discovered a programming error that had resulted, over a period of
months, in the billing of erroneous late fees related to specific weekend days.
These errors have been corrected, and steps have been initiated to provide
refunds to affected customers. The Company recorded a one-time charge of $20
million to cover the estimated cost of such refunds.
The Company continued to strengthen net interest margins while relying less
on low introductory rates to attract customers. As of June 30, 1999, managed
loans, which include on-balance sheet and securitized loans, increased by $4.7
billion, or 41%, over June 30, 1998. This growth was achieved through increases
in the Company's loan originations (particularly loans made under lower line
credit card products) combined with strategic acquisitions of credit card
portfolios and activation of existing customer accounts. The Company continues
to evaluate acquisitions on an opportunistic basis as competitors exit the
credit card market. While the acquisitions environment may provide many
opportunities, the focus of the Company's acquisition strategy will continue to
be guided by its return driven approach.
The Company's managed net interest margin on loans increased to 12.39% in
the second quarter of 1999 from 11.46% for the same period in 1998, reflecting
growth in higher yield portfolios and the impact of repricing programs. The
managed net credit loss rate for the second quarter of 1999 decreased to 7.16%
from 7.56% for the same period in 1998, reflecting the improved credit loss
rates on our core and acquired portfolios. The dollar contribution to managed
revenue from non-interest income in the second quarter increased more than 127%
over the same period in 1998 to $494.7 million, due to increased revenue from
credit card activity, loan performance fees and membership services. The Company
reinvested a portion of the increased managed revenue to strengthen loan loss
reserves, increase marketing investment and build infrastructure, through the
expansion of the employee base and product support systems. Year over year,
non-interest expense increased $189 million during the second quarter of 1999 to
$377.8 million, reflecting expenses associated with servicing a greater number
of customers, increased marketing activity and the $20 million charge described
above with respect to a customer billing error correction.
The Company's return on average assets continued to improve, increasing to
5.36% for the second quarter of 1999. The Company's market focus is to seek out
profitable consumer segments and apply its risk adjusted, return driven approach
to targeting and pricing. The Company believes this strategy has been
responsible for its continued overall superior financial performance. The
Company continued to strengthen its balance sheet during the second quarter of
1999 with improved profitability, combined with a high level of capital
retention, and was able to increase its return on equity to 52.19% for the
second quarter of 1999 from 37.91% for the same period in 1998.
Managed Consumer Loan Portfolio and the Impact of Securitization
The Company securitizes unsecured credit cards, home equity lines of credit
and secured and partially secured credit card receivables. For additional
discussion of the Company's securitization activities, see "--Funding and
Liquidity." Securitized assets sold to external investors are not considered
assets of the Company and therefore are not shown on the statement of financial
condition. It is, however, the Company's practice to analyze its financial
performance on a managed loan portfolio basis. In order to do so, the Company's
income statement and statement of financial condition are adjusted to add back
the effect of securitizations. The following table summarizes the Company's
managed loan portfolio:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in thousands) 1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Period-End Balances:
On-balance sheet consumer loans $ 8,164,979 $ 4,703,917
Securitized consumer 8,074,956 6,791,054
----------- -----------
Total managed consumer loan portfolio $16,239,935 $11,494,971
=========== ===========
Average Balances:
On-balance sheet consumer loans $ 7,785,664 $ 4,398,017 $ 7,038,259 $ 4,190,478
Securitized consumer loans 7,542,062 6,860,743 7,522,365 6,710,255
----------- ----------- ----------- -----------
Total average managed consumer loan portfolio $15,327,726 $11,258,760 $14,560,624 $10,900,733
=========== =========== =========== ===========
Operating Data and Ratios:
Reported:
Average earning assets $ 8,894,598 $ 5,021,452 $ 8,067,704 $ 4,730,898
Return on average assets 5.36% 4.48% 5.55% 4.41%
Net interest margin (1) 12.26% 10.57% 11.99% 10.76%
Managed:
Average earning assets $16,436,660 $11,882,195 $15,590,069 $11,441,153
Return on average assets 2.98% 1.92% 2.98% 1.88%
Net interest margin (1) 12.08% 10.79% 11.95% 10.68%
(1) Net interest margin is equal to net interest income divided by average
earning assets.
</TABLE>
Financial Statement Impact
Securitizations are treated as sales under GAAP. As a result, the
securitized loans are removed from the balance sheet in exchange for cash
proceeds and other consideration. In certain cases, the Company has retained a
subordinated interest in the pool of assets included in a securitization, with a
right to receive its allocated share of collections after payment to third party
investors. Such retained interests are recorded at fair value and are included
in "Due from securitization" on the Company's statement of financial condition.
The Company, at the time it enters into a securitization, recognizes an
"interest-only strip receivable" asset, available for sale, equal to the present
value of the projected excess servicing income related to the securitized loans.
During the revolving period of a securitization, an additional interest-only
strip receivable is recognized each month, as additional receivables are
transferred to investors in respect of their share of principal collections and
losses on previously securitized loans.
The Company services the accounts underlying the securitized loans and
earns a monthly servicing fee, which is generally offset by the servicing costs
incurred by the Company. Accordingly, servicing assets have not been recognized
in connection with the Company's securitizations. The finance charge and fee
revenue generated by the securitized loans in excess of interest paid to
investors, related credit losses, servicing fees, credit enhancement costs and
other transaction expenses is referred to as "excess servicing income." Revenue
resulting from excess servicing income is recognized each month first as a
reduction of the interest-only strip receivable and then, to the extent the
amount received exceeds the related component of the interest only strip
receivable (which was recorded at present value), as servicing and
securitizations income.
The effect of this accounting 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 June 30, 1999 and 1998
this accounting treatment had the effect of: reducing net interest income by
$223.6 million and $187.9 million; reducing the provision for credit losses by
$146.8 million and $127.6 million; and increasing non-interest income by $76.8
million and $60.3 million. For the six months ended June 30, 1999, this
accounting treatment had the effect of: reducing net interest income by $447.4
million and $356.2 million; reducing the provision for credit losses by $309.6
million and $247.3 million; and increasing non-interest income by $137.8 million
and $108.9 million. Because credit losses on the securitized loans are reflected
as a reduction in servicing and securitizations income rather than a reduction
of reserves for credit losses, the Company's provision for credit losses is
lower than would be the case had such loans not been securitized.
When loans are securitized, the Company retains a "seller's interest"
generally equal to the total amount of the pool of assets included in the
securitization less the investors' portion of those assets. As the amount of the
loans in the securitized pool fluctuates due to customer payments, purchases,
cash advances and credit losses, the amount of the seller's interest will vary.
The seller's interest is classified on the Company's statement of financial
condition as loans receivable at par less associated allowance for credit
losses. Periodically, the Company may elect to transfer new loan receivables
into a securitized pool in order to maintain the seller's interest above an
agreed-upon minimum balance.
Risk Adjusted Revenue and Return
One measure of product profitability that incorporates revenue and the most
significant costs inherent in consumer loan risk analysis is risk adjusted
revenue, which is net interest income plus fee income less net credit losses.
The Company uses risk adjusted revenue as a measure of loan portfolio
profitability, consistent with its goal of matching the revenue base of customer
accounts with the risk undertaken. Risk adjusted revenue may also be expressed
as a percentage of average consumer loans, in which case it is referred to as
risk adjusted return.
Managed risk adjusted revenue and return for the three months ended June
30, 1999 were $695.2 million and 18.14%, compared to $327.5 million and 11.63%
for the three months ended June 30, 1998. For the six months ended June 30, 1999
risk adjusted revenue and return were $1,271.2 million and 17.46%, compared to
$603.9 million and 11.08% for the six months ended June 30, 1998. The increase
during the second quarter of 1999 is a result of increased yields on portfolios
priced according to customer risk, declining use of introductory rates on new
accounts and strong growth in fee revenue per customer.
The components of risk adjusted revenue are discussed in more detail in
subsequent sections of this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Net Interest Income and Margin
Net interest income is interest earned from loan and investment portfolios
less interest expense on deposits and borrowings. Managed net interest income
includes interest earned from on-balance sheet and securitized portfolios less
interest expense on deposits and borrowings and the coupon interest paid to
securitization investors.
Managed net interest income for the three months ended June 30, 1999 was
$496.2 million, compared to $320.6 million for the same period in 1998, an
increase of $175.6 million or 55%. Managed net interest margin on average
managed loans increased to 12.39% for the three months ended June 30, 1999, from
11.46% for the same period in 1998. For the six months ended June 30, 1999,
managed net interest income was $931.1 million, compared to $610.7 million for
the same period in 1998, an increase of $320.4 million or 52%. Managed net
interest margin on average managed loans increased to 12.33% for the six months
ended June 30, 1999, from 11.29% for the same period in 1998. The increase in
managed net interest income and margin reflects an increase in average managed
loans, which increased approximately $4.1 billion for the three months ended
June 30 1999, combined with higher finance charge yields related to an increase
in the number of accounts for lower line credit card products, which generate
higher overall finance charge rates and fee income, consistent with the
Company's risk adjusted approach to pricing.
Statement of Average Balances, Income and Expense, Yields and Rates
The following table provides an analysis of interest income, interest
expense, net interest spread, and average balances for the three and six months
ended June 30, 1999 and 1998. Interest income and interest expense margins are
presented as a percentage of average earning assets, which include
interest-earning consumer loan portfolios and investments held for liquidity
purposes.
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
------------ ---------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning assets
Consumer loans $ 7,785,664 $ 358,449 18.42% $ 4,398,017 $ 185,213 16.85%
Interest-earning cash 162,947 1,796 4.41% 22,095 299 5.41%
Federal funds sold 573,618 6,920 4.83% 220,394 3,042 5.52%
Investment securities 372,369 5,764 6.19% 380,946 5,666 5.95%
------------ --------- -------- ----------- --------- ----------
Total interest-earning assets 8,894,598 $ 372,929 16.77% 5,021,452 $ 194,220 15.47%
Allowance for loan losses (617,980) (300,638)
Other assets 1,153,420 894,863
------------ -----------
Total assets $ 9,430,038 $ 5,615,677
============ ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 5,580,966 $ 73,790 5.29% $ 3,588,554 $ 48,970 5.46%
Borrowings 1,804,499 26,480 5.87% 826,600 12,561 6.08%
----------- --------- ------- ----------- --------- ----------
Total interest-bearing liabilities 7,385,465 $ 100,270 5.43% 4,415,154 $ 61,531 5.57%
Other liabilities 915,127 377,171
------------ -----------
Total liabilities 8,300,592 4,792,325
Capital securities 160,000 160,000
Equity 969,446 663,352
------------ -----------
Total liabilities and equity $ 9,430,038 $ 5,615,677
============ ===========
NET INTEREST SPREAD: 11.34% 9.90%
======= ==========
Interest income to
average interest-earning assets 16.77% 15.47%
Interest expense to
average interest-earning assets 4.51% 4.90%
-------- ----------
Net interest margin 12.26% 10.57%
======== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
------------ ---------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning assets
Consumer loans $ 7,038,259 $ 637,574 18.12% $ 4,190,478 $ 355,283 16.96%
Interest-earning cash 129,522 2,971 4.59% 31,477 855 5.43%
Federal funds sold 526,572 12,623 4.79% 215,936 5,945 5.51%
Investment securities 373,351 11,377 6.09% 293,007 8,714 5.95%
------------ ---------- -------- ----------- --------- ----------
Total interest-earning assets 8,067,704 $ 664,545 16.47% 4,730,898 $ 370,797 15.68%
Allowance for loan losses (564,443) (266,193)
Other assets 1,139,154 927,135
------------ -----------
Total assets $ 8,642,415 $ 5,391,840
============ ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 5,256,773 $ 138,229 5.26% $ 3,507,344 $ 95,124 5.42%
Borrowings 1,445,954 42,542 5.88% 707,600 21,163 5.98%
------------ ---------- -------- ----------- --------- -----------
Total interest-bearing liabilities 6,702,727 $ 180,771 5.39% 4,214,944 $ 116,287 5.52%
Other liabilities 860,484 374,725
------------ -----------
Total liabilities 7,563,211 4,589,669
Capital securities 160,000 160,000
Equity 919,204 642,171
------------- -----------
Total liabilities and equity $ 8,642,415 $ 5,391,840
============= ===========
NET INTEREST SPREAD: 11.08% 10.16%
======== ===========
Interest income to
average interest-earning assets 16.47% 15.68%
Interest expense to
average interest-earning assets 4.48% 4.92%
--------- -----------
Net interest margin 11.99% 10.76%
========= ===========
</TABLE>
Interest Volume and Rate Variance Analysis
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. Net interest income is also affected by changes in
the volume of interest-earning assets and interest-bearing liabilities. The
following table sets forth the dollar amount of the increase (decrease) in
interest income and interest expense resulting from changes in the volume and
rates:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1999 vs. 1998 1999 vs. 1998
-----------------------------------------------------------------------------------------------
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 $ 173,236 $ 154,542 $ 18,694 $ 282,291 $ 256,478 $ 25,813
Federal funds sold 3,878 4,303 (425) 6,678 7,547 (869)
Other securities 1,595 1,433 162 4,779 4,721 58
-------------- -------------- -------------- ------------ -------------- --------------
Total interest income 178,709 160,278 18,431 293,748 268,746 25,002
Interest Expense:
Deposits 24,820 26,390 (1,570) 43,105 45,995 (2,890)
Borrowings 13,919 14,367 (448) 21,379 21,738 (359)
-------------- -------------- -------------- ------------ -------------- --------------
Total interest expense 38,739 40,757 (2,018) 64,484 67,733 (3,249)
-------------- -------------- -------------- ------------ -------------- --------------
Net interest income $ 139,970 $ 119,521 $ 20,449 $ 229,264 $ 201,013 $ 28,251
============== ============== ============== ============ ============== ==============
(1) The changes due to both volume and rates have been allocated in proportion
to the relationship of the absolute dollar amounts of the change in each. The
changes in interest income and expense are calculated independently for each
line in the schedule.
</TABLE>
Non-Interest Income
Non-interest income consists primarily of servicing and securitization
income and credit product fee income. Total non-interest income increased
105.6%, or $293.4 million, to $571.5 million for the second quarter of 1999 over
the same period in 1998. This increase is attributable to increased credit
product fee income realized from membership services and increased late,
overlimit, annual membership and processing fees.
Servicing and Securitization Income
As of June 30, 1999, securitizations outstanding provided $8 billion in
funding, representing 45% of total managed funding, compared with $6.8 billion,
or 54%, as of June 30, 1998. The decrease in securitizations outstanding as a
percentage of total managed funding as of June 30, 1999 was due to the Company's
efforts to diversify its funding sources and increase deposit funding. A more
detailed discussion of the Company's securitization activities is set forth
under "--Funding and Liquidity."
Because excess servicing income on securitized loans essentially represents
a recharacterization of net interest income and credit product fee income less
the provision for loan losses and servicing expense, excess servicing income
will vary based upon the same factors. Thus, changes in net credit losses (see
"--Asset Quality, Net Credit Losses") and changes in interest rates (to the
extent that the receivables and interest payable to investors are based upon
floating rates) will cause excess servicing income to vary (see
"--Asset/Liability Risk Management").
Servicing and securitization income totaled $148.8 million for the quarter
ended June 30, 1999 as compared to $156.7 million for the quarter ended June 30,
1998. For the six months ended June 30, 1999, servicing and securitization
income was $280.0 million compared to $270.8 million for the same period in
1998. Excess servicing revenue on securitized loans remained stable with
increasing finance charge and fee yields being offset by increases in credit
losses related to the securitization of acquired portfolios. For the quarter
ended June 30, 1999, the year over year decline in servicing and securitization
income results from a reduction in interest earning securitization principal
funding accounts maintained in the prior year to fund the repayment of trusts
that matured in June 1998.
Credit Product Fee Income
For the three months ended June 30, 1999 and 1998, credit product fee
income increased to $414.8 million from $120.8 million, reflecting account
growth, loan receivable growth, increased sales of membership services and
increases in late fee rates. Fee revenue realized from securitized loans is not
included in credit product fee income but is instead recorded as part of
servicing and securitization income. While the Company anticipates continued
significant growth in credit product fee income during 1999, there can be no
assurance that the historic rate of growth reflected in the Company's second
quarter 1999 and in previous periods will continue.
Credit product fee income includes activity fees, loan performance fees and
membership services revenues. Strong growth in new customers, membership
services revenue and activity fees contributed to an increase in credit product
fee income over the first quarter of 1999, offsetting a modest decline in loan
performance fees. Activity fees, which include interchange income and cash
advance, annual membership and processing fees, totaled $199.9 million and $83.8
million for the three months ended June 30, 1999 and 1998. For the six months
ended June 30, 1999 and 1998 activity fees totaled $352.0 million and $140.5
million. Activity fees have increased as a result of increases in customer
accounts that resulted in increased annual membership, cash advance and purchase
activity fees. Loan performance fees include late, returned check and overlimit
charges. For the three months ended June 30, 1999 and 1998 loan performance fees
totaled $87.0 million and $24.3 million, reflecting account growth and late fee
rate increases. For the six months ended June 30, 1999 and 1998 loan performance
fees totaled $182.8 million and $44.5 million. Membership services revenue
results from the sale of Credit Protection, Home Protection, Providian Health
Advantage, DrivePro and PricePro(1) products. The Company recognizes membership
services revenue ratably over the term of the product, net of an allowance for
estimated refunds, beginning after the end of the free or money-back guarantee
period, if any. For the three months ended June 30, 1999 and 1998, membership
services revenue totaled $127.9 million and $12.8 million, reflecting increased
penetration rates for sales of these products and increases in the customer base
of the Company's lower line credit card product offerings, which generate higher
levels of membership services revenue. For the six months ended June 30, 1999
and 1998 membership services revenue totaled $221.8 million and $32.3 million.
Non-Interest Expense
Non-interest expense includes loan solicitation costs, such as printing,
postage, telemarketing, list processing and credit bureau costs paid to third
parties in connection with direct marketing account solicitation efforts. In
accordance with GAAP, the Company has capitalized only the direct costs
associated with successful account acquisition efforts, after offsetting
up-front processing fees. Capitalized loan origination costs are amortized over
the privilege period (currently one year) for credit card loans or the estimated
life of the loans for home equity lines of credit loans, unless the loans are
securitized, in which case the costs are taken as an expense prior to the
securitization. The majority of loan origination costs are expensed as incurred.
For the three months ended June 30, 1999 and 1998, loan origination costs were
$102.2 million and $46.7 million, reflecting increased direct mail volumes and
other marketing initiatives. In the three months ended June 30, 1999 and 1998,
the Company amortized loan origination costs of $15.4 million and $9.9 million.
For the six months ended June 30, 1999 and 1998, overall loan origination costs
were $201.7 million and $88.3 million while amortized loan origination costs
were $26.6 million and $19.7 million.
(1) Credit Protection, Home Protection, Providian Health Advantage,
DrivePro and PricePro are registered service marks of Providian Financial.
<PAGE>
Non-interest expense also includes salary and benefit expenses, such as
staffing costs associated with marketing, customer service, collections, and
administration. Other non-interest expense includes third-party data processing
and communication costs, occupancy expenses, and other operational expenses,
such as collection costs, fraud losses, and bankcard association assessments.
The following table presents non-interest expense for the three and six months
ended June 30, 1999 and 1998:
<TABLE>
Three months Ended June 30 Six months Ended June 30
---------------------------------- ----------------------------------
(Dollars in thousands) 1999 1998 1999 1998
-------------------------------------------------- ---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Non-interest Expense:
Salaries and employee benefits $ 121,784 $ 60,911 $ 217,771 $ 120,645
Solicitation 102,231 46,663 201,678 88,275
Occupancy, furniture and equipment 18,877 11,088 34,181 22,354
Data processing and communications 29,852 22,080 54,614 37,834
Other 105,096 48,183 186,702 101,870
---------------- ----------------- ----------------- ----------------
Total $377,840 $188,925 $694,946 $370,978
================ ================= ================= ================
</TABLE>
Impact of 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 the Company's banking
subsidiaries, the Company launched a Year 2000 project in November 1996. The
Company's Year 2000 project consists of five phases: (1) planning, in which the
Year 2000 project team defines the approach to addressing the Year 2000 issue;
(2) inventory, in which the Company's vendors, hardware, internally developed
systems and third party-provided software are inventoried and critical systems
and critical vendors identified; (3) assessment, in which Year 2000 readiness of
the Company's systems is assessed; (4) modification, in which affected systems
are replaced, repaired, upgraded, or retired; and (5) testing, in which final
testing is performed for Year 2000 compliance.
The Company is currently in conformity with its banking regulators' Year
2000 requirements. The planning, inventory, and assessment phases are 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 were substantially complete as of March 31,
1999, and infrastructure upgrades were complete as of 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 was substantially completed in December 1998, while testing of
third party-provided critical systems was substantially completed as of March
31, 1999. Final testing of all systems was completed July 31, 1999.
The Company 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 the Company's
critical vendors represented to the Company that their systems and products
would be Year 2000 compliant by June 30, 1999. The Company has selectively
conducted tests of its critical vendors and other third parties and determined
that substantially all of such tested vendors and third parties have taken
corrective actions and have completed testing as of June 30, 1999. The Company
is currently monitoring the progress of certain utilities and telecommunication
service providers. The majority of these service providers have represented to
the Company that their systems will be Year 2000 compliant by the end of the
third quarter of 1999.
Year 2000 issues could result in significant disruption to the Company's
operations (including loan origination and servicing), its ability to obtain and
provide funds, and its financial and accounting systems. Such disruptions 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. There can be no assurance that remediation efforts of the Company or
of third party vendors and suppliers have addressed all risks of such
disruption. Disruptions that could result from the Company's failure to correct
its critical systems or the failure of third parties on which the Company relies
to correct their systems have been addressed in the Company's Year 2000
contingency plans and business resumption and disaster recovery plans. There can
be no assurance, however, that such contingency plans will fully mitigate Year
2000 failures or problems.
The Company's total Year 2000 project costs are expected to be
approximately $13.5 million, and the Company has incurred $10.1 million in Year
2000 project expenses through June 30, 1999. 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 Company's
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.
Income Taxes
The Company recognized income tax expense of $84.6 million and $41.1
million for the three months ended June 30, 1999 and 1998. The Company's
effective tax rate increased to 40.07% for the three months ended June 30, 1999
from 39.51% for the same period in 1998.
Asset Quality
The Company's delinquencies and net credit losses reflect, among other
factors, the quality of loans, the average age of the Company's loan receivables
(generally referred to as "seasoning"), the success of the Company's collection
efforts, and general economic conditions. The quality of loans is subject to the
targeting and underwriting criteria used, account management, seasoning, and
demographic and other factors.
The level of credit losses directly affects earnings when reserves are
established through recognition of provisions for credit losses, which are
generally dependent on historical levels of credit losses and current trends. As
new portfolios of consumer loans are originated or acquired, management uses
historical credit loss and delinquency analyses of similar, more seasoned loan
portfolios and other qualitative factors to establish reserves for future credit
losses (see "--Allowance and Provision for Credit Losses"). As net credit losses
are experienced, the previously established reserve is used to absorb the 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. Accounts of bankrupt credit card
customers are charged off upon notification of bankruptcy. Accounts of deceased
credit card customers are charged off upon determination of uncollectibility.
Home loans are reviewed when a loss of all or part of the principal balance of
the loan is anticipated, and an allowance for credit losses is established in
the amount by which the book value of the loan exceeds the estimated net
realizable value of the underlying collateral. Anticipated losses on home loans
are charged off no later than 180 days after payments on such loans become
delinquent. At the time a loan is charged off, accrued but unpaid finance charge
and fee income is reversed against current earnings but is maintained on the
customer's record in the event of a future recovery. Once a loan is charged off,
the Company's policy is to continue to pursue collection of principal, interest,
and accrued fee income, to the extent legally permissible. Any subsequent
collections on previously charged-off loans will be recognized as recoveries.
Delinquencies
The following table presents the delinquency trends of the Company's
on-balance sheet and managed consumer loan portfolio as of June 30, 1999 and
1998. An account is contractually delinquent if the minimum payment is not
received by the next billing date. Total delinquencies on managed loans were
4.7% as of June 30, 1999 compared to 4.9% as of June 30, 1998, and 4.9% as of
March 31, 1999. The decrease in delinquencies over the second quarter of 1998
reflects improving trends in the Company's gold, platinum and acquired
portfolios offset by seasoning in its low line product portfolio.
<TABLE>
<CAPTION>
June 30
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
% of % of
Total Total
(Dollars in thousands) Loans Loans Loans Loans
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Reported:
Loans outstanding $ 8,164,979 100.00% $ 4,703,917 100.00%
Loans delinquent:
30 - 59 days 158,234 1.94% 97,953 2.08%
60 - 89 days 101,321 1.24% 59,866 1.27%
90 or more days 186,591 2.28% 125,012 2.66%
--------------- -------------- --------------- ---------------
Total $ 446,146 5.46% $ 282,831 6.01%
=============== ============== =============== ===============
Managed:
Loans outstanding $16,239,935 100.00% $11,494,971 100.00%
Loans delinquent:
30 - 59 days 276,929 1.71% 197,108 1.72%
60 - 89 days 171,009 1.05% 122,841 1.07%
90 or more days 314,772 1.94% 242,933 2.11%
--------------- -------------- --------------- ---------------
Total $ 762,710 4.70% $ 562,882 4.90%
=============== ============== =============== ===============
</TABLE>
Net Credit Losses
Net credit losses for consumer loans include the principal amount of losses
from customers unwilling or unable to pay their existing loan balances
(including charged-off bankrupt and deceased customer accounts), less current
period recoveries. Principal amounts include cash advances, purchases, and
certain financed membership services revenue and exclude accrued finance charge
and other fee income, which is charged against the related income at the time of
credit loss recognition. Losses for cardholder accounts related to fraudulent
activity are included in other non-interest expenses.
The annualized managed net credit loss rate decreased to 7.16% for the
second quarter of 1999, compared to 7.56% for the same period in 1998,
reflecting an improved credit loss rate on acquired portfolios. The managed net
credit loss rates for the first six months of 1999 and 1998 were 7.38% and
7.18%. The Company's pricing for finance charge and fee income incorporates an
expected higher credit loss rate when appropriate, consistent with the Company's
efforts to generate income using a risk adjusted return approach.
The following table presents the Company's net credit losses and credit
loss rates for consumer loans for the periods indicated and is presented both on
a financial statement reporting basis and a managed portfolio basis:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Reported:
Average loans outstanding $ 7,785,664 $ 4,398,017 $ 7,038,259 $ 4,190,478
Net charge-offs $ 127,653 $ 85,094 $ 227,626 $ 143,989
Net charge-offs as a percentage
of average loans outstanding 6.56% 7.74% 6.47% 6.87%
Managed:
Average loans outstanding $15,327,726 $11,258,760 $14,560,624 $10,900,733
Net charge-offs $ 274,436 $ 212,696 $ 537,195 $ 391,214
Net charge-offs as a percentage
of average loans outstanding 7.16% 7.56% 7.38% 7.18%
</TABLE>
Allowance and Provision for Credit Losses
The Company maintains the allowance for credit losses at a level believed
to be adequate to absorb future credit losses, net of recoveries, inherent in
the existing on-balance sheet portfolio. The allowance for credit losses is
maintained for on-balance sheet loans only (see "--Managed Consumer Loan
Portfolio and the Impact of Securitization"). The entire allowance is allocated
to designated portfolios or pools of the Company's on-balance sheet loans.
The following table sets forth the activity in the allowance for credit
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 547,655 $ 249,440 $ 451,245 $ 145,312
Provision for credit losses 255,222 117,851 437,295 175,507
Reserve acquired - 73,592 14,310 178,959
Charge-offs (150,282) (91,495) (265,788) (155,915)
Recoveries 22,629 6,401 38,162 11,926
-------------- -------------- -------------- --------------
Net charge-offs (127,653) (85,094) (227,626) (143,989)
-------------- -------------- -------------- --------------
Balance at end of period $ 675,224 $ 355,789 $ 675,224 $ 355,789
============== ============== ============== ==============
Allowance for credit losses to loans at period-end 8.27% 7.56%
</TABLE>
The allowance for credit losses increased to $675.2 million, or 8.27% of
on-balance sheet loans, as of June 30, 1999, from $451.2 million, or 7.86% of
on-balance sheet loans, as of December 31, 1998. The increase in the allowance
for credit losses as a percentage of on-balance sheet loans reflects an increase
in loans under lower line credit card products, which are generally expected to
experience higher credit loss rates (see " -Risk Adjusted Return and Revenue").
Funding and Liquidity
The Company funds its assets through a diversified mix of funding products
designed to appeal to a broad range of investors. It is the goal of the Company
to generate funding at the lowest cost possible consistent with ensuring prudent
liquidity and interest rate risk management.
The primary goal of liquidity management at the Company is to ensure that
funding will be available to support Company operations in varying business
environments. The Company employs multiple strategies to maintain a strong
liquidity position: diversification of funding sources; dispersion of
maturities; maintenance of committed credit facilities; and maintenance of a
prudent investment portfolio and cash balances.
The Company's approach to funding its assets is to seek diversified
distribution channels for a variety of products. Products offered include retail
and institutional deposits, money market accounts, term federal funds, public
and private asset securitizations and bank notes. Distribution channels include
direct phone and mail, brokerage and investment banking relationships and the
internet.
The Company offers a wide range of maturity terms for its funding products
(from one week to thirty 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. Maturities are managed by the types of funding sources employed
and by the rates offered on different products. The Company strives to maintain
a balanced distribution of maturities, avoiding undue concentration in any one
period. The Company monitors existing funding maturities and loan growth
projections to ensure that prudent amounts of backup liquidity are available to
support the maturities, if necessary.
The following table summarizes the contractual maturity of deposits at the
Company as of June 30, 1999 and 1998.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
-------------------------------------------------------------------------------------------
Direct Other Total Direct Other Total
(Dollars in thousands) Deposits Deposits Deposits Deposits Deposits Deposits
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Three months or less $ 477,670 $ 246,273 $ 723,943 $ 295,621 $ 235,773 $ 531,394
Over three months through 12 months 1,245,115 691,940 1,937,055 749,287 361,705 1,110,992
Over one year through five years 1,056,075 1,191,236 2,247,311 521,947 580,550 1,102,497
Over five years - 15,000 15,000 - - -
Deposits without contractual maturity 1,005,779 68,492 1,074,271 921,111 65,156 986,267
-------------- -------------- -------------- -------------- -------------- --------------
Total Deposits $ 3,784,639 $ 2,212,941 $ 5,997,580 $ 2,487,966 $ 1,243,184 $ 3,731,150
============== ============== ============== ============== ============== ==============
</TABLE>
Deposits increased to $6.0 billion as of June 30, 1999 from $4.7 billion as
of December 31, 1998. This increase is attributable to the Company's strategic
decision to increase deposit funding and the strong demand for FDIC-insured
deposits.
During the first six months of 1999, the Company, through one of its
banking subsidiaries, issued $630 million senior bank notes, increasing
long-term borrowings to a total of approximately $1.0 billion as of June 30,
1999 from $400 million as of December 31, 1998. The following table shows the
Company's unsecured funding availability and outstandings as of June 30, 1999.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------
Effective/ Outstanding, Final
(Dollars or dollar equivalents in thousands) Issue Date Availability (1) Net Maturity
----------- ---------------- ------------ ---------
<S> <C> <C> <C> <C>
Senior and subordinated Bank Note program (2) 2/98 $4,000,000 $1,029,305 2/13
Short-term credit facilities (two 364 day facilities) Various 175,000 -- Various
Long-term credit facility 1/99 1,000,000 -- 1/03
Providian Financial shelf registration 6/98 2,000,000 -- --
Capital Securities 2/97 160,000 160,000 2/27
(1) All funding sources are revolving except for the Providian Financial
shelf registration and the Capital Securities. Funding availability is
subject to market conditions.
(2) Includes availability to issue up to $500 million of subordinated bank
notes, none outstanding as of June 30, 1999.
</TABLE>
On April 26, 1999, the Company entered into a new revolving credit facility
to finance the Company's expansion into the United Kingdom. The UK revolving
credit facility, in the amount of (pound)25 million ($40.3 million equivalent
based on the exchange rate at closing) has an expiration date of April 25, 2000.
On April 27, 1999, the Company borrowed (pound)10 million ($16.2 million) under
this facility.
The Company's securitizations are diversified across the public and private
securitization markets and across maturity terms. The primary objectives of
securitization are to diversify funding sources and to obtain efficient all-in
cost of funds, including the cost of capital. The securitized loans are pooled
to provide cash flow for securities sold to investors using legal structures
that generally provide for an interest only (revolving) period and a principal
repayment (amortization or accumulation) period. Under the terms of the
securitizations, once the amortization or accumulation period commences,
payments on the securitized loans are distributed or accumulated for payment to
the securitization investors and the Company's on-balance sheet portion of the
securitized pool of assets will increase.
During the second quarter of 1999, the Company completed two term
securitizations totaling approximately $1.1 billion. In April 1999, the Company
issued, through a trust, $500 million in certificates with an estimated term of
60 months backed by home equity loan receivables. In June 1999, through the
Providian Master Trust, the Company issued approximately $619 million in
certificates with a term of 60 months backed by credit card receivables.
For diversification and flexibility, in addition to publicly issued term
securities, the Company uses commercial paper-based conduit facilities and other
variable funding programs to securitize loan receivables. The conduit facilities
and variable funding programs are generally renewable annually. Balances
securitized under conduit and variable funding facilities totaled $2.3 billion
as of June 30, 1999.
The Company's term securitizations are expected to amortize over the
periods indicated below, based on currently outstanding securitized loans as of
June 30, 1999:
Amount
Amortizing
Year (Dollars in millions)
----------------------------------- ----------------------------------
1999 $ 256
2000 979
2001 1,045
2002 1,300
2003 1,387
2004 652
The Company believes that it can attract deposits, borrow funds from other
sources, and issue additional asset-backed securities to replace securitization
funding based on the amortization schedule summarized above, although no
assurances can be given to that effect.
Capital Adequacy
Each of the Company's banking subsidiaries is subject to capital adequacy
guidelines as defined by its primary federal regulator. Core capital (Tier 1)
consists principally of shareholder's equity less goodwill. Total risk-based
capital (Tier 1 + Tier 2) includes a portion of the reserve for credit losses
and other capital components. Based on these classifications of capital, the
capital adequacy regulations establish three capital adequacy ratios that are
used to measure whether a financial institution is "well capitalized" or
"adequately capitalized":
<TABLE>
<CAPTION>
Well Adequately
Capitalized Capitalized
Capital Ratio Calculation Ratios Ratios
---------------------- ------------------------------------------- ---------------- -------------------
<S> <C> <C> <C>
Total Risk-Based (Tier 1 + Tier 2)/Total Risk-Based Assets => 10% => 8% < 10%
Tier 1 Tier 1/Total Risk-Based Assets => 6% => 4% < 6%
Leverage Tier 1/Adjusted average assets => 5% => 4% < 5%
</TABLE>
At June 30, 1999, each of the Company's banking subsidiaries was "well
capitalized" in all regulatory capital ratio categories, as set forth below:
<TABLE>
<CAPTION>
Providian
National Providian
Capital Ratio Bank Bank
---------------------- ---------------- ---------------
<S> <C> <C>
Total Risk-Based 10.25% 10.88%
Tier 1 8.89% 9.55%
Leverage 10.00% 7.22%
</TABLE>
In accordance with the banking regulators' risk-based capital standards,
the amount of risk-based capital that must be maintained for assets transferred
with recourse will not exceed the maximum amount of recourse for which a
regulated entity is contractually liable under the recourse agreement. This
rule, known as the low level recourse rule, applies to transactions accounted
for as sales under generally accepted accounting principles in which a bank
contractually limits its risk of loss or recourse exposure to less than the full
effective minimum risk-based capital requirement for the assets transferred. Low
level recourse transactions arise when a bank securitizes assets and uses
contractual cash flows (such as interest-only strip receivables and spread
accounts), retained subordinated interests, or other assets as credit
enhancements. The Company's banking subsidiaries are required to hold risk-based
capital equivalent to the maximum recourse exposure on the assets transferred,
on a net-of-tax basis, not to exceed the amount of risk-based capital that would
be required if the low level recourse rule did not apply.
Asset/Liability Risk Management
The business of the Company and the composition of its balance sheet
consist primarily of investments in interest-earning assets (loans receivable
and investment securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). As a result, the Company's earnings are
subject to risk resulting from interest rate fluctuations to the extent that
there is a difference between the amount of interest-earning assets and the
amount of interest-bearing liabilities that mature, reprice, or prepay/withdraw
in a specific period.
The Company's receivables generally yield either a variable Annual
Percentage Rate ("APR"), indexed to the prime rate, or a fixed APR, set
independently of market interest rates. The interest rates on the Company's
liabilities are generally indexed to LIBOR or are fixed rates based on United
States Treasury Bond rates. These characteristics of the Company's receivables
and liabilities expose the Company to two types of interest rate risk: (a)
repricing risk, which results from differences between the timing of rate
changes and the timing of cash flows, which could impact net interest income if
liabilities reprice more often than assets, and (b) basis risk, which arises
from changing rate relationships between yield curves and markets, which could
impact net interest income derived from variable APR receivables if the spread
between the prime rate and LIBOR compresses or expands.
The Company's fixed APR credit card receivables have no stated maturity or
repricing period. However, the Company's credit card receivables may be repriced
by the Company upon providing the required prior notice to the customer, which
is generally no more than 30 days.
The principal objective of the Company's asset/liability risk management
activities is to monitor and control the Company's exposure to adverse effects
resulting from movements of interest rates over time. The Company measures and
manages interest rate risk individually for each banking subsidiary and on a
consolidated basis, including both on- and off-balance sheet assets and
liabilities in its measurement and management. To measure exposure to interest
rate fluctuation, the Company uses net interest income ("NII") simulation
analysis and the market value of portfolio equity ("MVPE") method as its primary
quantitative tools.
The following table presents the estimated effects of positive and negative
parallel shifts in interest rates as calculated at June 30, 1999 and takes into
consideration the Company's current hedging activity:
<TABLE>
<CAPTION>
June 30, 1999 (1)
---------------------------
Change in Interest Rates Percentage Change In
---------------------------
(In Basis Points) NII (2) MVPE (3)
----------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
+200 (2.4)% (8.4)%
Flat 0% 0%
-200 3.4% 10.8%
</TABLE>
(1) The information shown is presented on a consolidated, managed
asset/liability basis, giving effect to securitizations and related
funding.
(2) The percentage change in this column represents NII for 12 months in a
stable interest rate environment versus the NII in the specified rate
scenarios.
(3) The percentage change in this column represents the MVPE in a
stable interest rate environment versus the MVPE in the specified rate
scenarios. MVPE is defined as the present value of expected net cash flows
from existing assets, minus the present value of expected net cash flows from
existing liabilities, plus the present value of expected net cash flows from
existing off-balance sheet transactions.
The table above does not necessarily indicate the effect of general
interest rate movements on the Company's net interest income, because the
repricing of certain categories of assets and liabilities is subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities assumed to mature or otherwise reprice within a
certain period may in fact mature or reprice at different times and at different
volumes.
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 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 liabilities, the
Company uses variable rate liabilities to fund a portion of its fixed rate
credit card assets.
The Company uses derivative financial instruments, including interest rate
swap and cap agreements, with indices that correlate to managed assets or
liabilities, to modify its indicated net interest sensitivity to levels deemed
appropriate based on the Company's risk tolerance. The objective in using these
hedges is to reduce interest rate risk by more closely aligning the repricing
characteristics of the Company's assets and liabilities.
All hedging transactions are over-the-counter interest rate swap and cap
transactions executed with highly rated United States and international banks
under standard Master Agreements of the International Swap and Derivatives
Association, Inc. and hedge identified interest rate risks both for accounting
and tax purposes. The Company does not trade in derivatives or use derivatives
to speculate on interest rates or as an investment vehicle. The following table
presents the notional amounts of interest rate swap and cap agreements purchased
for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest rate swap agreements:
Beginning Balance $ 635,500 $ 955,500 $ 635,500 $ 955,500
Additions 15,000 66,667 15,000 166,667
Maturities 15,000 886,667 15,000 986,667
-------------- -------------- -------------- --------------
Ending Balance $ 635,500 $ 135,500 $ 635,500 $ 135,500
============== ============== ============== ==============
Interest rate caps:
Beginning Balance $ 669,099 $ 709,470 $ 670,960 $ 922,220
Additions 12,250 332,500 62,250 332,500
Maturities 33,640 350,000 85,501 562,750
-------------- -------------- -------------- --------------
Ending Balance $ 647,709 $ 691,970 $ 647,709 $ 691,970
============== ============== ============== ==============
</TABLE>
Notional amounts of interest rate swaps outstanding have increased to
better match the changing mix of the Company's assets and liabilities. As market
conditions or the Company's asset/liability mix change, the Company may increase
or decrease the notional amount of swaps and caps outstanding in order to manage
the Company's interest rate risk profile.
The Company manages credit risk arising from derivative transactions
through an ongoing credit review, approval, and monitoring process. "Credit
risk" for these derivative transactions is defined as the risk that a loss will
occur as the result of a derivative counterparty defaulting on a contract when
the contract is in a favorable economic position to the Company. The Company may
enter into master netting, market settlement, or collateralization agreements
with swap counterparties to reduce the exposure to credit risk with the
individual counterparty. The Company establishes credit risk limits for each
counterparty based on total net credit exposure to such counterparty. The
Company monitors exposure to counterparty credit risk through sensitivity
testing. Probable worst-case scenarios are considered to determine the maximum
credit risk exposure for derivatives associated with a particular counterparty.
If counterparty credit risk is determined to exceed the pre-established limit,
then action is taken to limit the Company's exposure with that counterparty.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Beginning in May 1999, the Company was the subject of media coverage
concerning complaints made by some customers of the Company's banking
subsidiaries regarding certain sales and collections practices. Following the
initial media coverage, the San Francisco District Attorney's office confirmed
that it had commenced an investigation into the Company's sales and collections
practices, including the marketing of certain fee-based products and the posting
of customer payments. The remedies available to the District Attorney's Office
include, but are not limited to, damages, penalties, fines and injunctive
relief. The Company is cooperating fully with the District Attorney's Office in
its investigation.
Since May 1999, a number of lawsuits have been filed against the Company
and, in some cases, against certain of the Company's subsidiaries by current and
former customers of the Company's banking subsidiaries. A consolidated putative
class action lawsuit (In re Providian Credit Card Litigation) (the "Consolidated
Action") was filed on August 3, 1999 in California state court in San Francisco
against the Company, Providian National Bank ("PNB") and certain other
subsidiaries, and seeks unspecified damages, including actual and punitive
damages, attorney's fees and injunctive relief. The complaint alleges unfair and
deceptive business practices, including failure to credit payments in a timely
fashion, which resulted in the imposition of fees, adding products and charging
fees without customer authorization, changing rates and terms without proper
notice or authorization, and misleading or deceptive sales practices. One
additional action pending in Alameda County, California, is due to be combined
with the Consolidated Action by stipulation of the parties.
As of August 13, 1999, four similar putative class actions were pending in
state courts and seven were pending in federal courts. One state case was filed
in Alameda County, California and one in San Mateo County, California; a
petition is pending to coordinate both these actions with the Consolidated
Action. In addition, one putative class action was filed in Cook County,
Illinois. The Company's motion to dismiss this action is pending. Another was
filed in Bullock County, Alabama and has been removed to the United States
District Court for the Middle District of Alabama. Plaintiff's motion to remand
is pending. The remaining putative class actions are pending in federal courts
in the Northern District of California, the Eastern District of Pennsylvania,
and the District of Massachusetts. These federal actions are the subject of a
motion pending before the Judicial Panel on Multidistrict Litigation ("MDL") to
transfer and coordinate the actions in a single district court. If the Alabama
action mentioned above remains in federal court, the Company will seek to have
it included it in the MDL proceedings.
These other state and federal actions contain substantially the same
allegations as those alleged in the Consolidated Action; certain of the actions
also allege one or more of the following: that the account agreement with
customers contained unconscionable terms and fees, that statements sent to
customers failed to include Credit Protection and other add-on fees in the
calculation of the annual percentage rate disclosed in such agreements, refusal
to honor cancellation requests, improper obtaining of credit reports, breached
promises to raise credit limits, breached promises of high credit limits, and
unlawful tying of Credit Protection to credit card and other products.
A putative class action (In re Providian Securities Litigation), which is a
consolidation of complaints filed in the United States District Court for the
Eastern District of New York in June 1999, alleges, in general, that the Company
and certain of its officers made false and misleading statements concerning the
Company's future prospects and financial results in violation of the federal
securities laws. The putative class, which is alleged to have acquired the
Company's stock between January 15, 1999 and May 26, 1999, seeks damages in an
unspecified amount, in addition to pre-judgment and post-judgment interest,
costs and attorneys fees. As of August 13, 1999, the consolidated complaint had
not been filed.
The investigation and actions described above are at a very early stage. No
specific measure of damages has been demanded and, in most cases, the Company's
response is not yet due. An informed assessment of the ultimate outcome or
potential liability associated with these matters is not feasible at this time.
Due to the uncertainties of litigation, there can be no assurance that the
Company will prevail on all claims; however, management believes that the
Company has substantive defenses and intends to defend the actions vigorously.
In addition, the Company is commonly subject to various other pending and
threatened legal actions arising from the conduct of its normal business
activities. In the opinion of the Company, any liability that is likely to arise
with respect to these additional actions will not have a material adverse effect
on the consolidated financial condition or results of operations of the company.
Item 4. Submission of Matters to a Vote of Security holders.
(a) The 1999 Annual Meeting of Stockholders was held on May 11, 1999.
(b) The following directors were elected at such meeting:
Christina L. Darwall
Ruth M. Owades
John L. Weinberg
The following directors continued their term of office after such
meeting:
Shailesh J. Mehta James V. Elliott
F. Warren McFarlan Lyle Everingham
Larry D. Thompson J. David Grissom
(c) The following matters were voted upon at such meeting:
Election of Directors Votes For Votes Withheld
--------- --------------
Christina L. Darwall 124,357,848 834,551
Ruth M. Owades 124,333,984 858,415
John L. Weinberg 122,962,481 2,229,918
<TABLE>
<CAPTION>
Item Votes For Votes Against Abstain
--------- ------------- -------
<S> <C> <C> <C> <C>
Approval of an amendment to the
Company's Certificate of Incorporation 114,856,049 9,987,311 349,039
to increase the number of authorized
shares of common stock
Ratification of the selection of Ernst
& Young LLP as independent auditors of 124,823,898 62,072 306,429
the Company for 1999
No other matter was voted upon at such meeting.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 10.1 1997 Stock Option Plan UK Sub-Plan and First Amendment to
the Providian Financial Corporation 1997 Stock Option
Plan (as amended and restated June 4, 1997), adopted
May 11, 1999.
Exhibit 10.2 Stock Ownership Plan UK Sub-Plan and First Amendment to
the Providian Financial Corporation Stock Ownership Plan
(as amended and restated June 23, 1998), adopted
May 11, 1999.
Exhibit 10.3 1997 Employee Stock Purchase Plan UK Sub-Plan and First
Amendment to the Providian Financial Corporation 1997
Employee Stock Purchase Plan, adopted June 29, 1999.
Exhibit 12.1 Computation of Earnings to Fixed Charges and Ratio of
Earning to Combined Fixed Charges and Preferred Stock
Dividend Requirements.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on May 19, 1999 with respect to
its Medium Term Note Program.
(e) Ratio of Earnings to Fixed Charges and Ratio of Earning to Combined
Fixed Charges and Preferred Stock Dividend Requirements
<TABLE>
<CAPTION>
Six Months
Ended
June 30 Year Ended December 31
-------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits 9.47 10.88 14.20 5.93 4.90 5.17
Including interest on deposits 3.16 2.93 2.66 2.34 2.34 2.69
EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK: (1)
Excluding interest on deposits 9.47 10.88 13.28 5.19 4.32 4.40
Including interest on deposits 3.16 2.93 2.63 2.25 2.24 2.51
(1) Preferred stock dividend requirements are adjusted to represent a pretax
earnings equivalent.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providian Financial Corporation
-------------------------------
(Registrant)
Date: August 16, 1999 /s/ David J. Petrini
--------------------
David J. Petrini
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Signatory)
Date: August 16, 1999 /s/ Daniel Sanford
------------------
Daniel Sanford
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
Exhibit 10.1 1997 Stock Option Plan UK Sub-Plan and First Amendment to the
Providian Financial Corporation 1997 Stock Option Plan (as
amended and restated June 4, 1997), adopted May 11, 1999
Exhibit 10.2 Stock Ownership Plan UK Sub-Plan and First Amendment to the
Providian Financial Corporation Stock Ownership Plan (as amended
and restated June 23, 1998), adopted May 11, 1999
Exhibit 10.3 1997 Employee Stock Purchase Plan UK Sub-Plan and First Amendment
to the Providian Financial Corporation 1997 Employee Stock
Purchase Plan, adopted June 29, 1999
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividend
Requirements
Exhibit 27.1 Financial Data Schedule
PROVIDIAN FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
UK SUB-PLAN
and
FIRST AMENDMENT TO THE
PROVIDIAN FINANCIAL CORPORATION
1997 STOCK OPTION PLAN
(As Amended and Restated June 4, 1997)
As adopted on May 11, 1999
1. Article 1: Background and Purpose
1.1 The Providian Financial Corporation 1997 Stock Option Plan ("Plan") as
amended and restated on June 4, 1997 was adopted and is maintained by
Providian Financial Corporation ("Company").
1.2 This document constitutes the additional provisions (the "UK Sub-Plan")
that are to be read in conjunction with the Plan and are applicable to
those Participants under the Plan who are liable to Schedule E income tax
in the United Kingdom. This UK Sub-Plan was adopted by the Company on May
11, 1999, as an amendment to the Plan.
1.3 The purpose of this UK Sub-Plan is to advance the interest of the Company
by enabling it and its operating companies to attract and retain the best
available personnel for positions of substantial responsibility in the
United Kingdom and to provide key directors and employees of the Company
and its operating companies, in the United Kingdom, with an opportunity for
investment in the Company; thereby giving them an additional incentive to
increase their efforts on behalf of the long term success of the Company
and its operating companies.
2. Article 2: Definition and Construction
2.1 All terms used in this UK Sub-Plan shall have the meaning ascribed to them
in the Plan, and if not defined in the Plan, shall be given their normal
and ordinary meaning except that:
(a) "Employee" shall mean an individual who is a full-time or part-time
employee of the Company or a subsidiary, including an employee who is
also a member of the Board, who in any such case is liable to Schedule
E income tax in the United Kingdom.
(b) "NQSOs" shall mean a United Kingdom share option scheme which has not
received the approval of the Inland Revenue for the purposes of
Section 185 Income and Corporation Taxes Act 1988.
(c) "UK Sub-Plan" shall mean the provisions contained herein to be known
as the Providian Financial Corporation 1997 Stock Option Plan UK
Sub-Plan, as the same may be amended from time to time.
2.2 Any references to the ISOs in the Plan shall be ignored for the purposes of
this UK Sub-Plan.
3. Article 3: Incorporation of Plan
This UK Sub-Plan shall be ancillary and secondary to the Plan, and the
provisions of this UK Sub-Plan shall be applicable to any Participant who has or
shall have a liability to United Kingdom Schedule E income tax in respect of his
or her Option, in which case the provisions of this UK Sub-Plan shall equally
apply as well as the provisions of the Plan under which the Option was granted.
For the avoidance of doubt, this UK Sub-Plan does not apply to any Participants
who do not have a United Kingdom Schedule E income tax liability in respect of
their Option.
4. Article 4: Withholding
4.1 A Participant shall indemnify and keep indemnified, the Company and any
subsidiaries of the Company (collectively the "Group"), on demand in
respect of any income tax or primary Class I National Insurance
contribution for which any such company is liable to account to the Inland
Revenue under the Pay-As-You-Earn ("PAYE") system and for which it would
not have been liable to account but for the Participant's participation in
the Plan (save to the extent that any such company has already recovered
any such income tax or National Insurance contribution by deduction under
the PAYE system).
4.2 Any company in the Group shall be entitled, if it wishes, to deduct and
retain any amount to which it is entitled under this Article 4 from any
payment which is due from it to the Participant.
4.3 The Company (in its own right and as trustee for any other company in the
Group) shall have a lien over any Shares, whether fully or partly paid,
which have been issued, or are to be issued, to a Participant as security
for an amount to which any company in the Group is entitled under this
Article 4 from the Participant. The Company shall be entitled to register
in the names of such nominee for the Participant as the Company shall
direct such number of shares to be issued upon exercise of the Option as
the Company determines will have sufficient value, after taking into
account any expenses of sale, to cover any amount under this Article 4,
such shares (the "Indemnity Shares") to be held by the nominee on the
following basis:
4.3.1 if the Participant makes full payment of any sum due under this
Article 4 within 30 days of written demand therefor being made by
the Company, the Indemnity Shares shall be re-registered in the
Participant's name; and
4.3.2 if the Participant does not make payment as specified above, then
the nominee shall be authorised and instructed to sell such
number of the Indemnity Shares as the Company may direct be sold
and shall account to (a) the relevant company for the proceeds of
sale up to the amount required to satisfy the Participant's
liability under this Article 4 and (b) the Participant for any
balance of any said proceeds after deducting any expenses of
sale.
PROVIDIAN FINANCIAL CORPORATION
STOCK OWNERSHIP PLAN
UK SUB-PLAN
and
FIRST AMENDMENT TO THE
PROVIDIAN FINANCIAL CORPORATION
STOCK OWNERSHIP PLAN
(As Amended and Restated June 23, 1998)
As adopted on May 11, 1999
1 Article 1: Background and Purpose
1.1 The Providian Financial Corporation Stock Ownership Plan ("Plan") amended
and restated on June 23, 1998 was adopted and is maintained by Providian
Financial Corporation (the "Company").
1.2 This document constitutes the additional provisions (the "UK Sub-Plan")
that are to be read in conjunction with the Plan and are applicable to
those Participants under the Plan who are liable to income tax in the
United Kingdom. This UK Sub-Plan was adopted by Providian on May 11, 1999
as an amendment to the Plan.
1.3 The purpose of this UK Sub-Plan is to promote the growth and profitability
of the Company and its subsidiaries (the Company and its subsidiaries are
hereinafter collectively referred to as the "Group") by encouraging
selected Employees, Consultants and Non-Employee Directors working in the
United Kingdom for the Company, to acquire and retain a proprietary
interest in the Company. Such proprietary interest should increase the
personal interest and special efforts of such persons in providing for the
continued success and progress of the business of the Company, and in
particular its United Kingdom operations, as well as providing an
enhancement to attract and retain competent Employees, Consultants and
Non-Employee Directors to the Company's United Kingdom business.
2. Article 2: Definition and Construction
All terms used in this UK Sub-Plan shall have the meaning ascribed to them in
the Plan, and if not defined in the Plan, shall be given their normal and
ordinary meaning except that:
(a) "Consultant" shall mean any person, including an advisor, engaged by
the Company to render consulting services and who is compensated for
such services, who in any such case is liable to income tax in the
United Kingdom.
(b) "Employee" shall mean an individual who is a full-time or part-time
employee of the Company, including an employee who is also a member of
the Board, who in any such case is liable to Schedule E income tax in
the United Kingdom.
(c) "Non-Employee Director" shall mean a member of either (i) the Board of
Directors or (ii) a Subsidiary Board of Directors who is not also an
Employee, which in any such case is liable to income tax in the United
Kingdom.
(d) "UK Sub-Plan" shall mean the provisions contained herein to be known
as the Providian Financial Corporation Stock Ownership Plan UK
Sub-Plan, as the same may be amended from time to time.
3. Article 3: Incorporation of Plan
This UK Sub-Plan shall be ancillary and secondary to the Plan, and the
provisions of this UK Sub-Plan shall be applicable to any Participant who has or
shall have a liability to United Kingdom income tax in respect of his or her
award of Nonrestricted Stock and/or Restricted Stock, in which case the
provisions of this UK Sub-Plan shall equally apply as well as the provisions of
the Plan under which such award was made. For the avoidance of doubt, this UK
Sub-Plan does not apply to any Participants who do not have a United Kingdom
income tax liability in respect of their award of Nonrestricted Stock and/or
Restricted Stock.
4. Article 4: Restricted Period
The Restricted Period when defined by the passage of time shall not exceed a
period of five years from the date the Restricted Stock is awarded unless the
Committee expressly determines otherwise.
5. Article 5: Withholding
5.1 A Participant shall indemnify and keep indemnified, the Company, on demand
in respect of any income tax or primary Class I National Insurance
contribution for which any company in the Group is liable to account to the
Inland Revenue under the Pay-As-You-Earn ("PAYE") system and for which it
would not have been liable to account but for the Participant's
participation in the Plan (save to the extent that any such company has
already recovered any such income tax or National Insurance contribution by
deduction under the PAYE system).
5.2 Any company in the Group shall be entitled, if it wishes, to deduct and
retain any amount to which it is entitled under this Article 5 from any
payment which is due from it to the Participant.
5.3 Providian (in its own right and as trustee for any other company in the
Group) shall have a lien over any shares of Common Stock, whether fully or
partly paid, which have been issued, or are to be issued, to a Participant
as security for an amount to which any company in the Group is entitled
under this Article 5 from the Participant. The Providian shall be entitled
to register in the names of such nominee for the Participant as Providian
shall direct such number of shares to be awarded to the Participant as
Providian determines will have sufficient value, after taking into account
any expenses of sale, to cover any amount under this Article 5, such shares
(the "Indemnity Shares") to be held by the nominee on the following basis:
5.3.1 if the Participant makes full payment of any sum due under this
Article 4 within 30 days of written demand therefor being made by
Providian, the Indemnity Shares shall be re-registered in the
Participant's name; and
5.3.2 if the Participant does not make payment as specified above, then
the nominee shall be authorised and instructed to sell such
number of the Indemnity Shares as Providian may direct be sold
and shall account to (a) the relevant company for the proceeds of
sale up to the amount required to satisfy the Participant's
liability under this Article 4 and (b) the Participant for any
balance of any said proceeds after deducting any expenses of
sale.
5.4 For the avoidance of doubt, this Article 5 shall apply in addition to the
provisions of Article 16 of the Plan.
PROVIDIAN FINANCIAL CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
UK SUB-PLAN
and
FIRST AMENDMENT TO THE
PROVIDIAN FINANCIAL CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
As adopted on June 29, 1999
1. Article 1: Background and Purpose
1.1 The Providian Financial Corporation 1997 Employee Stock Purchase Plan ("the
Plan") was adopted on August 7, 1997, and is maintained by Providian
Financial Corporation (the "Company").
1.2 This document constitutes the additional provisions (the "UK Sub-Plan")
that are to be read in conjunction with the Plan and are applicable to
those eligible employees under the Plan who are liable to income tax in the
United Kingdom. This UK Sub-Plan is hereby adopted by the Company on
June 29, 1999 as an amendment to the Plan.
1.3 The purpose of this UK Sub-Plan is to advance the interests of the Company
by enabling it and its Affiliates to attract and retain the best employees
for positions of responsibility in the United Kingdom, and to provide them
with an opportunity for investment in the Company; thereby giving them an
additional incentive to increase their efforts on behalf of the long term
success of the Company and its Affiliates.
2. Article 2: Definition and Construction
All terms used in this UK Sub-Plan shall have the meaning ascribed to them in
the Plan, and if not defined in the Plan, shall be given their normal and
ordinary meaning except that "UK Sub-Plan" shall mean the provisions contained
herein to be known as the Providian Financial Corporation 1997 Employee Stock
Purchase Plan UK Sub-Plan, as the same may be amended from time to time.
3. Article 3: Incorporation of Plan
This UK Sub-Plan shall be ancillary and secondary to the Plan, and the
provisions of this UK Sub-Plan shall be applicable to any eligible employee who
has or shall have a liability to United Kingdom income tax in respect of
remuneration received or receivable from the Company, in which case the
provisions of this UK Sub-Plan shall apply as well as the provisions of the
Plan. For the avoidance of doubt, this UK Sub-Plan does not apply to any
eligible employees who do not have a United Kingdom income tax liability in
respect of remuneration received or receivable from the Company.
4. Article 4: Withholding
4.1 An eligible employee shall indemnify and keep indemnified, the Company and
any Affiliate, on demand in respect of any income tax or primary Class I
National Insurance contribution for which the Company or any Affiliate is
liable to account to the Inland Revenue under the Pay-As-You-Earn ("PAYE")
system and for which it would not have been liable to account but for the
eligible employee's participation in the Plan (save to the extent that any
such company has already recovered any such income tax or National
Insurance contribution by deduction under the PAYE system).
4.2 The Company or any Affiliate shall be entitled, if it wishes, to deduct and
retain any amount to which it is entitled under this Article 4 from any
payment which is due from it to the eligible employee.
4.3 The Company (in its own right and as trustee for any Affiliate) shall have
a lien over any shares of Common Stock, whether fully or partly paid, which
have been issued, or are to be issued, to an eligible employee as security
for an amount to which the Company or Affiliate is entitled under this
Article 4 from the eligible employee. The Company shall be entitled to
register in the names of such nominee for the eligible employee as the
Company shall direct such number of shares of Common Stock to be awarded to
the Participant as the Company determines will have sufficient value, after
taking into account any expenses of sale, to cover any amount under this
Article 4, such shares (the "Indemnity Shares") to be held by the nominee
on the following basis:
4.3.1 if the eligible employee makes full payment of any sum due under
this Article 4 within 30 days of written demand therefor being
made by the Company, the Indemnity Shares shall be re-registered
in the eligible employee's name; and
4.3.2 if the eligible employee does not make payment as specified
above, then the nominee shall be authorised and instructed to
sell such number of the Indemnity Shares as the Company may
direct be sold and shall account to (a) the relevant company for
the proceeds of sale up to the amount required to satisfy the
eligible employee's liability under this Article 4 and (b) the
eligible employee for any balance of any said proceeds after
deducting any expenses of sale.
5. Article 5: Basis of participation in the Plan
5.1 Notwithstanding any other provision of the Plan:
5.1.1 the Plan shall not form part of any contract of employment
between the Company or any Affiliate and an eligible employee;
5.1.2 the benefit to an eligible employee of participation in the Plan
shall not form any part of his remuneration or count as his
remuneration for any purpose; and
5.1.3 if an eligible employee ceases to be employed by the Company or
any Affiliate, he shall not be entitled to compensation for the
loss of any right or benefit or prospective right or benefit
under the Plan whether by way of damages for unfair dismissal,
wrongful dismissal, breach of contract or otherwise.
5.2 It is a condition of participation in the Plan (which is voluntary) that
the eligible employee agrees and accepts:
5.2.1 the provisions of Article 5.1; and
5.2.2 that the eligible employee shall not be entitled to compensation
for the loss of any value or prospective value or of any right or
benefit or prospective right or benefit in respect of any
Offering made or to be made under this Plan;
and by accepting any Offering, an eligible employee shall be deemed to have
agreed to the terms of the Plan including the terms of this UK Sub-Plan.
In Witness Hereof, this UK Sub-Plan is executed and adopted on behalf of
the Company by the undersigned duly authorized officer on the date specified
above.
PROVIDIAN FINANCIAL CORPORATION
By: /s/ Shailesh Mehta
---------------------------
Shailesh Mehta
Chief Executive Officer
<TABLE>
PROVIDIAN FINANCIAL CORP.
Select Financial Data
<CAPTION>
Six Months
Ended
June 30 Year Ended December 31
----------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995 1994
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
a. Ratio of Earnings to Fixed Charges
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $400,247 $490,563 $311,300 $257,251 $214,863 $175,203
Fixed charges 185,469 254,006 187,843 192,536 160,183 103,926
---------- -------- -------- -------- -------- --------
Earnings, for computation purposes $585,716 $744,569 $499,143 $449,787 $375,046 $279,129
========== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest on borrowings $ 42,542 $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Interest on deposits 138,229 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of
the interest factor 4,698 6,740 4,733 2,967 2,300 2,267
---------- -------- -------- -------- -------- --------
Fixed charges, including interest on deposits,
for computation purposes $185,469 $254,006 $187,843 $192,536 $160,183 $103,926
========== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges, including
interest on deposits 3.16 2.93 2.66 2.34 2.34 2.69
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $400,247 $490,563 $311,300 $257,251 $214,863 $175,203
Fixed charges 47,240 49,671 23,591 52,175 55,032 42,006
---------- -------- -------- -------- -------- --------
Earnings, for computation purposes $447,487 $540,234 $334,891 $309,426 $269,895 $217,209
========== ======== ======== ======== ======== ========
FIXED CHARGES:
Interest on borrowings $ 42,542 $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Portion of rents representative of the
interest factor 4,698 6,740 4,733 2,967 2,300 2,267
---------- -------- -------- -------- -------- -------
Fixed charges, excluding interest on deposits,
for computation purposes $ 47,240 $ 49,671 $ 23,591 $ 52,175 $ 55,032 $ 42,006
========== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges, excluding
interest on deposits 9.47 10.88 14.20 5.93 4.90 5.17
b. Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $400,247 $490,563 $311,300 $257,251 $214,863 $175,203
Fixed charges 185,469 254,006 187,843 192,536 160,183 103,926
---------- -------- -------- -------- -------- --------
Earnings, for computation purposes $585,716 $744,569 $499,143 $449,787 $375,046 $279,129
========== ======== ======== ======== ======== ========
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings $ 42,542 $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Interest on deposits 138,229 204,335 164,252 140,361 105,151 61,920
Portion of rents representative of the
interest factor 4,698 6,740 4,733 2,967 2,300 2,267
---------- -------- -------- -------- -------- --------
Fixed charges, including interest on deposits,
for computation purposes 185,469 254,006 187,843 192,536 160,183 103,926
Preferred stock dividend requirements - - 1,636 7,397 7,397 7,397
---------- -------- -------- -------- -------- --------
Fixed charges and preferred stock dividend
requirements, including interest on deposits,
for computation purposes $185,469 $254,006 $189,479 $199,932 $167,580 $111,322
========== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges and preferred
stock dividend requirements, including interest
on deposits 3.16 2.93 2.63 2.25 2.24 2.51
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $400,247 $490,563 $311,300 $257,251 $214,863 $175,203
Fixed charges 47,240 49,671 23,591 52,175 55,032 42,006
---------- -------- -------- -------- -------- --------
Earnings, for computation purposes $447,487 $540,234 $334,891 $309,426 $269,895 $217,209
========== ======== ======== ======== ======== ========
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings $ 42,542 $ 42,931 $ 18,858 $ 49,208 $ 52,732 $ 39,739
Portion of rents representative of the
interest factor 4,698 6,740 4,733 2,967 2,300 2,267
---------- -------- -------- -------- -------- --------
Fixed charges, excluding interest on deposits,
for computation purposes 47,240 49,671 23,591 52,175 55,032 42,006
Preferred stock dividend requirements - - 1,636 7,397 7,397 7,397
---------- -------- -------- -------- -------- --------
Fixed charges and preferred stock dividend
requirements, excluding interest on deposits,
for computation purposes $ 47,240 $ 49,671 $ 25,227 $ 59,571 $ 62,429 $ 49,402
========== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges and
preferred stock dividend requirements,
excluding interest on deposits 9.47 10.88 13.28 5.19 4.32 4.40
</TABLE>
<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 SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 207,754
<SECURITIES> 348,707
<RECEIVABLES> 8,144,205
<ALLOWANCES> 675,224
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 109,292
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 9,949,596
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 1,011,741
<TOTAL-LIABILITY-AND-EQUITY> 9,949,596
<SALES> 0
<TOTAL-REVENUES> 1,713,259
<CGS> 0
<TOTAL-COSTS> 694,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 437,295
<INTEREST-EXPENSE> 180,771
<INCOME-PRETAX> 400,247
<INCOME-TAX> 160,215
<INCOME-CONTINUING> 240,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 240,032
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.65
<FN>
<F1> Non-classified balance sheet
<F2> PP&E shown net
</FN>
</TABLE>
